"Solvency II" Phase 2 Impact Gradually Emerges, Insurance Funds Face No Systematic Deleveraging Pressure

Recent market reports suggest that “small and medium insurance companies are reducing their holdings due to new solvency regulations, causing market volatility.”

In response, an industry insider told the Daily Economic News that attributing the short-term market fluctuations mainly to “insurance capital reduction” is not sufficient. On one hand, the full implementation of the second phase of the “Solvency II” regime will indeed have a significant impact on insurance companies’ investment behaviors, but this impact is fundamentally structural and gradual, rather than triggering a passive reduction in holdings in the short term. On the other hand, the idea that “reductions by small and medium insurers lead to market declines” is more likely an exaggerated interpretation of localized phenomena, and does not have overall explanatory power.

“There are also reduction phenomena, but their scale is limited, so there’s no reason to believe they are causing the stock market to fall,” said an investment professional from an insurance company. A securities analyst also noted that for large and medium-sized insurers, which hold over 70% of the funds and have implemented the new regulations by the end of 2025, the actual pressure to reduce holdings is not significant.

The full implementation of the second phase of “Solvency II” has been gradually reflected over the past few years

Recently, market volatility in stocks and bonds has intensified, drawing attention to the behavior of insurance funds as key incremental capital.

Regarding the rumors about the impact of the “Solvency II” regulatory rules coming into effect, Ge Yuxiang, an analyst at China Securities, pointed out that the transition period for “Solvency II” has been extended to the end of 2025, with no new regulations fully implemented in 2026. The draft for the third phase of “Solvency II” is currently under internal regulatory testing, with a general trend toward easing restrictions.

In March 2012, the former China Insurance Regulatory Commission launched the construction of China’s risk-based solvency system (“Solvency II”). In 2016, the first phase of “Solvency II” was officially implemented. By the end of 2021, the China Banking and Insurance Regulatory Commission issued the “Insurance Company Solvency Regulatory Rules (II),” which clarified that from the first quarter of 2022, the second phase of “Solvency II” would be enforced, with insurance companies required to fully comply by 2025 at the latest.

Professor Zhu Junsheng, a postdoctoral researcher in applied economics at Peking University, told the Daily Economic News that overall, the full implementation of the second phase of “Solvency II” will indeed have an important impact on insurance companies’ investment behaviors, but this impact is essentially a structural and gradual adjustment, not a short-term trigger for passive reduction.

Zhu Junsheng believes that the new regulations aim to strengthen capital constraints related to interest rate risk, equity risk, and credit risk, primarily guiding insurers to return to asset-liability matching (ALM) principles and shifting investment focus from “scale-driven” to “prudence-driven” management. In terms of specific allocations, it is not simply about reducing equity assets but about shifting equity investments from high-volatility, trading-oriented assets to low-volatility, dividend-yielding, income-oriented assets; simultaneously, it emphasizes increased allocation to long-term fixed income assets and imposes higher risk penetration and capital constraints on alternative investments.

More importantly, since 2022, the “Solvency II” phase two has entered a continuous digestion stage with a transition period, and its effects have been gradually reflected over the past few years, rather than being concentrated at this moment.

Small and medium-sized companies have limited capital, and large and medium insurers face little actual pressure to reduce holdings

Zhu Junsheng also stated that the rumors that “small and medium insurance companies reduced holdings at the end of Q1 due to solvency pressures, causing market fluctuations” should be viewed with caution.

“From the actual situation, some small and medium insurers with marginal solvency pressures, high equity positions, or liquidity constraints may indeed adjust their asset structures temporarily, but this is an individual behavior and not industry-wide. It’s also unlikely to form a systemic reduction force,” he explained. Overall, insurance funds remain predominantly long-term allocation funds, with continuous inflows from liabilities, which determines their main strategy of stable incremental investment rather than high-frequency trading. Meanwhile, the overall size of small and medium insurers is limited, and their marginal rebalancing actions have a relatively small impact on the market.

Ge Yuxiang also told reporters that objectively, some small and medium insurers may face certain performance fulfillment pressures, but considering that the “Solvency II” introduces counter-cyclical adjustments to stock investment risk factors, it reduces insurers’ impulse to chase gains and sell in panic. For large and medium insurers that have already implemented the new standards by the end of 2025 and hold over 70% of the funds, the actual pressure to reduce holdings is not significant.

According to data from the Financial Regulatory Authority, by the end of 2025, the total balance of insurance companies’ fund utilization will reach 38.5 trillion yuan, a 15.7% increase from 2024. Among these, the balance of equity funds invested in stocks and funds is about 5.7 trillion yuan, up approximately 39% year-on-year, an increase of about 1.6 trillion yuan compared to the previous year. This growth includes new capital inflows and gains from the appreciation of equity assets. According to estimates by China Securities, about two-thirds of this increase is due to market value fluctuations, and one-third is due to active rebalancing. Under a neutral assumption for 2026, the total incremental stock and fund capital is estimated at about 713.3 billion yuan.