Increasing product diversity, and greater emphasis on margin improvement instead of market share, will support quality growth in the life insurance sector in 2014, Fitch Ratings said on Friday.

The removal of the interest rate cap on some guaranteed life products in August and the announcement of more reforms in November are aimed at encouraging insurers to provide more types of policies to strengthen social security.

Larger life insurance companies will be better placed to offer diversity than smaller ones, Fitch said.

In addition, greater product diversity could ease competition and help the insurers offer products that are more differentiated from those offered by banks, which will help avoid direct competition with banks.

Boosting more profitable regular-premium policies and products with risk-protection features have helped sustain the sector's premium growth.

Gross written premiums in the sector grew 8.5 percent in the nine months to the end of September, compared with full-year growth of 4.2 percent in 2012.

Fitch is maintaining its rating and sector outlooks at stable for the Chinese life insurance sector as it believes that rated insurers’ resilient market positions, and adequate capitalization and external funding capabilities will continue to support their steady credit profiles.

Continued earnings volatility and fierce competition among homogenous products are key rating constraints.

Chinese life insurers' profitability and capitalization remain vulnerable to potentially unfavorable movements in stock markets and deterioration in the quality of fixed-income securities in an economic slowdown in China.

A decision by the government in early 2013 to allow insurance holding companies in China to issue subordinated debt, subject to a cap of 50 percent of net assets, could weaken their capital base if insurers use capacity at the holding company level to issue subordinated debt to fund operating entities' business growth.

Significantly weakened capitalization on a sustained basis could lead to negative rating action.

China remains an under-penetrated market, particularly in risk protection, retirement and healthcare products in light of its ageing population. Increasing insurance penetration, which leads to higher underwriting profits, and less reliance on volatile investment income, could result in positive rating action.