The Asia-Pacific insurance sector’s net ratings outlook is “somewhat negative” and pressure is expected to grow if a China-led regional slump worsens, according to Standard & Poor’s (S&P).

“Insurers’ investment performance has dipped and become more volatile, while mounting competition has cut profit margins,” the ratings agency says.

“Furthermore, business prospects for the insurance sector will worsen if the region’s economies and insurers’ investment performance deteriorate more significantly than what we expect.”

S&P declined to comment on prospects for Australian insurers in particular when contacted by insuranceNEWS.com.au.

A relaxation in Chinese regulatory requirements has seen that country’s insurers take on riskier investments in search of higher yields.

“For most of the rated entities, [merger and acquisition] activities did not have major negative rating implications,” S&P says.

“However, some of the non-rated insurers are aggressively buying assets of lower credit quality. The ratings on some targets were actually negatively affected in these transactions.”

The region’s reinsurers, facing fierce competition, can expect modest earnings compared with their global counterparts.

“Smaller regional reinsurers could be more susceptible to performance volatility, especially if they are less diversified than global players due to their size,” S&P says.

“Weakening prices will continue to affect operating performance well into [this year] and possibly erode capitalisation.”