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.
Olivia Chung is
a senior Asia times Online reporter.
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