Economics & Finance / Finance & Investment / Insurance & Risk Management

Chinese Insurance Firms Navigate Bumpy Transition to New Accounting Standards in 2026

Starting from 2026, China’s insurance industry will fully implement the new accounting standards, a sweeping reform that has brought unprecedented operational and financial challenges to insurance companies, especially small and medium-sized ones (SMEs). Against the backdrop of a prolonged market interest rate decline, the transition has amplified discrepancies caused by actuarial assumptions, with insurers now required to calculate six sets of parallel data for liability reserves, including for statutory requirements, embedded value, old and new accounting standards, and both old and new solvency metrics, creating huge operational burdens. The core of the transition lies in the adjustment of the discount rate curve, the "backbone" of insurance financial statements, with its front, middle and back ends all set to move downward. The front-end curve will switch from the 750-day moving average Treasury bond yield curve to the current yield curve; the middle-end adopts a new calculation method; and the long-term ultimate interest rate, previously set at 4.5%, is expected to be cut to 4.2% or even 4.0%. A mere 1 basis point change in the curve can trigger hundreds of millions of yuan in fluctuations in insurers’ profits and balance sheets, leading to a sharp drop in net assets: non-listed life insurers that implemented the new standards in 2024 saw their combined net assets plummet by nearly 49% (36.6 billion yuan). For SMEs with weak capital strength and a high proportion of long-term businesses, the pressure on net assets is even more pronounced, prompting financial regulators to allow eligible struggling SMEs and problematic insurers to postpone the implementation of the new standards. To smooth the industry’s impact, regulators are formulating detailed rules for the discount rate curve and have conducted multiple industry tests, with a key measure being the increase of the front-end curve premium to around 100 basis points (30-40 basis points higher than the industry average). Premiums act as a critical "adjustment knob" to offset the decline in the basic curve, reducing the additional provision of liability reserves and easing net asset pressure. Industry experts have proposed optimizing the premium system by raising liquidity premiums, retaining counter-cyclical premiums in light of China’s market characteristics, and exploring the introduction of equity premiums to reflect the returns of insurers’ equity investments. However, a 100-basis-point premium has sparked controversy, with actuarial experts warning it may overestimate the Contract Service Margin (CSM) and front-load future profits, creating long-term operational risks for insurers that fail to meet the implied investment return targets. Some experts also suggest differentiated premium adjustments for SMEs, such as lowering front-end premiums and raising back-end premiums to mitigate the impact of the ultimate interest rate cut. Asset and liability restructuring under the new standards has also reshaped insurers’ balance sheets: HTM and LR assets are reclassified into FVOCI, leading to fair value measurement-driven floating gains in total assets, but the sharp increase in liability reserves (driven by discount rate changes and policy grouping) has resulted in a net asset decline as liability growth outpaces asset growth, as exemplified by a mid-sized life insurer whose net assets fell after the transition despite an 8.6 billion yuan rise in total assets. The transition is far from a one-time system switch, as the long-term parallel operation of old and new accounting standards has become the new normal for the industry. Insurers face soaring operational costs due to the coexistence of two financial systems, and the new standards have weakened or eliminated several expense accounts directly linked to business operations, posing new demands for accounting supervision. Additionally, the alignment between the new accounting standards and the solvency regulatory system remains a pressing issue: listed insurers still base dividend distribution on the old standards, as the new standards have amplified net profit volatility with unrealized floating gains that cannot be directly used for dividends without undermining capital strength and solvency. Regulators are now testing a reconstructed solvency assessment system under the new accounting framework, aiming to maintain overall industry solvency stability by drawing on the new accounting reserve valuation methods and adopting scientific capital classification, while replacing the 750-day curve with the current Treasury bond yield curve for solvency reserve assessment. For the insurance industry, the transition to the new accounting standards is a protracted "underwater project". While regulators are taking measures to balance market reality and industry stability, unifying actuarial methodologies and compressing operational flexibility for insurers, the industry still needs to address long-term challenges