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Beleaguered insurers given a sweetener
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China’s insurance regulator last week allowed life insurers to set interest rates on some guaranteed life insurance products for the first time in more than a decade.
The China Insurance Regulatory Commission removed a 2.5 percent pre-determined interest rate cap on what insurers could offer on “standard” life insurance products.
Such products typically include such policies as long-term life insurance or one-year term accident and healthcare products.
To minimize risk, the regulator set a 3.5 percent cap on the discount rate used for determining statutory insurance reserves — the amount of assets firms must hold against future insurance claims. Insurers that offer interest rates above 3.5 percent may risk missing solvency requirements, and they will have to register the products with the regulator.
Analysts have long blamed that the 2.5 percent cap, in place for 14 years and lower than the current one-year deposit rate, for hindering development of the life insurance industry. Life insurance products have been losing business to deposit and wealth-management products carrying higher returns.
The proportion of standard life insurance policies in China’s life insurance sector declined from 44 percent in 2002 to 9.2 percent in 2012, and growth in premium income from life insurance products slowed from nearly 20 percent in the past decade to single digits in the past three years.
Still, the public may not see the effects of regulatory easing any time soon.
“China’s recent life insurance pricing reforms are a significant step for the industry toward more sustainable long-term growth,” said Standard & Poor’s credit analyst Connie Wong. “We believe the implications of the removal of the pricing interest rate cap are likely to be limited on the growth and performance of China’s life insurance industry over the next two years.”
She said that products affected by the change comprise only 10 percent of the life insurance market in terms of premiums, and insurers under administrative and solvency pressures are not likely to set their rates much higher than 3.5 percent.
Qiu Binbin, a member of the marketing staff at Taikang Life Insurance Co, said new products will start to be introduced in the next four to six months, and most large insurers are likely to keep their prices intact due to financial pressure.
“It’s not wise for policyholders to surrender their policies,” Qiu said. “Besides, the new regulation also increases the risk management requirements for insurers. Consumers should be cautious about any apparently cheap products.”
Consumers’ preference
For the whole industry, deregulating pricing may encourage some insurers to launch more protection-type products over time, but it may not completely change consumers’ preference for “participating” life insurance policies that share investment returns from the company.
“Chinese life insurers are increasingly placing more emphasis on margin improvement than on market share,” said Fitch Ratings. “This should continue, especially if greater flexibility with pricing can generate regular-premium, non- participating products that gain traction with customers.”
The report added, “However, participating products dominate the Chinese life insurance market because customers can often obtain higher returns. This may not change significantly.”
A 2.5 percent cap still applies on investment-related products, but policyholders can get higher returns from sharing the profits. These products are easy to sell but provide only small margin for the insurers.
Life insurance premium income rose 9 percent in the first six months to 624.3 billion yuan (US$102 billion), compared with almost zero growth a year earlier, according to the China Insurance Regulatory Commission. The gain was mainly powered by a surge in June sales of investment-related products.
According to Moody’s Investors Service, the outlook for China’s life insurance sector is currently stable, but heavy reliance on low-margin investment-related products and unwillingness to reform could usher in a negative outlook for the next two years.
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