CIRC mulls lifting ceiling on payouts for life policies

Move could help reboot premium growth as investors look elsewhere for higher returns

PUBLISHED : Wednesday, 24 April, 2013, 12:00am
UPDATED : Wednesday, 24 April, 2013, 5:16am

Beijing plans to allow life insurers to pay higher returns on some policies, according to an insider.

That may make the products more attractive to investors frustrated with government limits on bank deposit rates.

The China Insurance Regulatory Commission might scrap the 2.5 per cent maximum rate on fixed-return policies in a trial starting as early as next month, the source said, speaking anonymously. The new rules might prompt insurers to increase their reserves for payouts by about 20 billion yuan (HK$24.9 billion), the person said.

Premium growth has slowed as mainland savers, seeking higher returns, turn to riskier investments such as wealth management products.

Removing the limit on returns may revitalise revenue growth while also channelling savings away from less-regulated investments in the shadow banking sector.

One concern was that allowing higher returns might cause more clients to end their existing policies, the person said.

The forecast for higher reserve needs comes from the regulator's base-case scenario, which predicts redemptions will increase by less than half by value from the present level, according to the person.

That scenario estimates that returns on policies will rise to close to the five-year bank deposit rate of 4.75 per cent.

Offering higher returns may also crimp profits in the industry. China Life Insurance, the country's biggest insurer, reported a 40 per cent slump in profit last year as it recognised losses on investments in shares.

China Life raised 38 billion yuan in subordinated bonds last year, boosting its solvency ratio, a regulatory indicator that gauges capital adequacy and the ability to settle claims, to 236 per cent at year's end. Ping An Insurance, the second-biggest insurer, plans to sell 26 billion yuan of convertible bonds, raising enough capital to support two to three years of expansion. To prevent insurers from offering excessive returns, regulators would keep a rule stating that companies might forecast a maximum 3.5 per cent gain on their investments when calculating the level of reserves they needed, the person said.

Life policies with fixed benefits and premiums accounted for about 15 per cent of outstanding contracts, the person said.

The trials also included a new kind of life policy that involved investments in infrastructure and real estate, which would also be exempt from the limit on returns, the person said.

To offer the product, insurers must have solvency ratios of at least 150 per cent, the person said.

The CIRC has also drafted rules that remove limits on how much agents can get in commissions, according to the person.