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Premium income from life insurance products in China has grown fast in recent years with premium income from investment-oriented insurance seeing the biggest growth. While noticing that market vitality has been activated, regulators are also aware of potential risks of some businesses and companies beneath prosperity of the market.
Shanghai Securities News exclusively learnt yesterday that the China Insurance Regulatory Commission (SIRC) issued an urgent circular, requiring life insurance companies to submit business data of universal life insurance during January and June. The data mainly includes premium incomes and insurance products under expected duration so that the SIRC can know their asset-liability matching and interest spread. Risk on mismatch of asset and liability, liquidity risk and risk on interest spread loss are among the top ten potential risks of the industry that the SIRC is now focusing on.
Might as well prevent risk on interest spread loss
Implementation of circular on regulating life insurance products with short and medium-term duration in late March this year marked that regulators started to normalize the high-cost insurance business with short and medium-term duration. But in the opinions of insiders, the issuance of the urgent circular on universal life insurance data means that the above-mentioned regulation of the SIRC enters practical operation stage.
In fact, it is learnt that the insurance products involved in the circular are not only limited to those (universal life insurance) with duration less than five years. Insurance life companies are required to report data on universal life insurance in terms of expected duration within 3 years, 3-5 years, 5-10 years and 10 years, including corresponding premium incomes, full product names, category of insurances, settlement interest rate in recent months, corresponding return on investment of universal life insurance accounts, corresponding major asset allocation variety of universal life insurance accounts (reporting by liquidity, fixed income, equity, real estate and other financial types).
It is obvious that regulators are resolute in finding out the actual situation of universal life insurance this time. It is disclosed by insiders that as required, relevant data reports submitted by life insurance companies should be stamped by corporate seals and signed by the companies’ chairmen or general managers. Regulators will circularize those companies that fail to submit reports in required period.
Based on analysis of insiders, besides the products with short and medium-term duration, investigation on the whole universal life insurance market might be associated with prevention of risk on interest spread loss. “Viewed from investment environment, under the downward interest rate and fluctuation of capital market, life insurance companies are usually inclined to raise assumed interest rate to attract clients and improve products’ competitiveness, but this further enhances rigid liability cost and worsens risk on interest spread loss. Although the settlement interest rate of universal life insurance can be adjusted, the adjustment potential is quite limited as life insurance companies need to cater to marketing and reduce cancellation of insurance.”
Risk on interest spread loss is one of the top ten potential risks of the industry that the SIRC is now focusing on. It is learnt that regulators will inspect risk on interest spread loss of existing business and prevention against risk on interest rate spread. Specifically, they will mainly inspect gains of capital utilization, liability cost and current interest spread loss of insurance institutions; and check whether insurance institutions have established system or management process preventing risk on interest spread loss, whether they consider earnings matching in terms of asset and liability management, whether liability party timely adjusts liability cost according to change in market interest rate, and whether they take corresponding measures when there is interest spread loss.
Unit-linked insurance likely to substitute universal insurance
The reporter learnt from insiders that as the regulators stick to a strong stance, a great number of life insurance companies that have relied heavily on universal insurance with short and medium-term duration have begun to make transition. Yet the process is tough. It posts them a great challenge to adjust business structure and reduce risk preference while meeting huge demands for cash for payments in due and cancellation of insurance in advance.
Reporters learnt from talks with the insiders that some life insurance companies have been transforming their business to unit-linked insurance plan to seek for new breakthroughs in premium income. One of the reasons is that the SIRC has excluded unit-linked insurance plan and insurance with variable annuity from products with short and medium-term duration.
However, the market may doubt that unit-linked insurance will bring large-scale incomes to insurance companies as universal insurance did. as investors will hold different attitudes towards the two products given that investors of unit-linked insurance have to take full responsible for profit and loss, and investors of universal insurance are guaranteed with minimum income.
An insider from a life insurance company told the reporter that unit-linked insurance may still gain favor from some investors. On the one hand, insurance companies have seen brand taking effects and investment ability being accepted by the market after several years of sales experience in universal insurance. On the other hand, they will do some changes to unit-linked insurance; by changes, the insider means that life insurance companies may dissimilate or shorten the investment horizon of unit-linked insurance.
In terms of conformity with regulations and operability, unit-linked insurance can surely substitute universal insurance with short and medium-term duration. “But once the duration of unit-linked insurance is shortened, it will be a great challenge for insurance companies in investment management. They may have to adjust positions frequently in short period. For insurance companies, the shorter duration their insurance products have, the more completed their liquidity management will be. They’d better not to take the challenge if they are not capable enough,” a person from a life insurance company indicated.
(APD/XH FINACE)
