China's insurers look to looser shackles

By Olivia Chung

HONG KONG - China's top insurance regulator, concerned at a slowdown in growth of life insurance premiums, is considering lifting its restriction on interest rates payable to life insurance policies.

Premium growth for China Life Insurance, the mainland's biggest life insurer by premiums, slowed last year to 7%, rising in value to 196.6 billion yuan from 183.8 billion yuan a year earlier. The firm's premium revenue rose 14% in 2006.

The China Insurance Regulatory Commission (CIRC) imposes a 2.5% ceiling on guaranteed interest rates payable to premiums of life insurance policies. The rate compares poorly with the 4.14% rate for one-year savings in banks.

To help boost life insurers' premium income and encourage greater competition among insurers, the CIRC has set liberalization of the interest rate for premiums as a goal for this year, according to a March 14 circular to relevant authorities and insurance companies. Lifting the interest rate restriction would help domestic insurers be more competitive in selling policies, a spokesman of the CIRC said.

"Our aim is to push ahead with market mechanisms to let interest rates be decided by market forces, by improving related regulations and providing support measures," he said.

A long-delayed market-oriented reform for assumed interest rates on life insurance policies will have "a concrete breakthrough" this year, with "a pilot scheme" likely to be introduced. "This will be a big improvement in China's life insurance market and good for the healthy development of the industry," he said. China Life has already been running its own test scheme for about a year, with positive results.

The maximum interest rate life insurers can guarantee on their policies is set by the government. A 2.5% cap on guaranteed rates was introduced in June, 1999, before which most policies promised returns of between 4% and 6.5%.

The 2.5% rate remained attractive bank so long as interest on savings remained less than 2%. That ceased to be the case after October, 2004, when the People's Bank of China (PBoC) raised the rate on one-year deposits to 2.25% from 1.98%, its first rate rise in nine years.

Further increases in the savings interest rate followed as the government sought to curb inflation and restrain economic growth, driving the one-year benchmark deposit rate to 4.14% by the end of 2007 from 2.52% 12 months earlier.

Some consumers in consequence have moved away from life insurance investments. One Shanghai resident, named Cai, was unhappy with the 2.5% guaranteed rates on his policies as he watched the country's stock markets surge in value over the past two years. The 30-year-old last September pulled out what money he could from 20-year life insurance policies he had bought for himself and his wife two years earlier, though payment lapses and the early withdrawal left him with only half his investment.

He then invested the cash in shares, just in time to catch the market peak. The yuan-denominated A-share market has tumbled more than 30% from since October, while Cai's own investment has halved in value.

"We hoped for higher returns than we got on the insurance policies. Now half of my money has gone." If he is to return to insurance polices for their now better returns, "I need to pay for the policies from scratch,'' he said.

The idea of removing interest rate controls on insurance policy premiums was put forward late in 2004, but implementation was delayed as life insurers were unable to guarantee higher investment returns amid the then falling stock market, which did not pick up until the following year.

A senior insurance agent in Beijing said present market conditions are ripe for insurers to collaborate with the government to offer higher interest rates that their policies can carry.

"Since the end of 2005, China's stock markets have been on an upward spiral, boosting insurers' investments in the stock market, so the conditions are in place for the liberalization of assumed interest rates," said she, who asked not to be named.

Chinese life insurers also need to increase the competitiveness of their products in the face of increasing competition from overseas players gaining wider access in keeping with the country's World Trade Organization commitments, she said.

The mainland insurance market has grown at an average 18.2% in the past five years. Insurance assets reached 2.9 trillion yuan (US$4.1 billion) at the end of last year with premiums of 703.6 billion yuan. At the end of 2007, 43 insurers from 15 countries or regions had established a foothold in the mainland insurance industry.

Relaxation of interest rate controls on life insurance policies would not have a negative impact on insurers' sales or profits, according to a BNP Paribas Securities (Asia) Ltd research note.

"China's life insurance market is committed to market-oriented practices," the note said. "The most critical factors behind the business value-added services of Chinese insurers are not promised returns but changes in consumer tastes and the capital market. In fact, more than 90% of life insurance products offering investment value are based on floating interest rates. In other words, if the insurers want to protect their profits, they could reduce the floating interest rates to offset the loss which might be brought by the rise of assumed interest rates."

China Life Insurance last March quietly liberalized assumed interest rates on life insurance policies in some rural areas by offering assumed interest rates at 3.3%. Its pilot scheme was launched in the rural areas of northern Hebei province, central Henan province and coastal Jiangsu province. A company official, who preferred to remain anonymous, said the response to the scheme was positive.

The three branches of China Life Insurance completed their annual premium target of 160 billion yuan in March to September. Of the three provinces, Hebei branch recorded premiums of 200 million yuan in the seven months.