China’s life insurance premiums set to slow amid regulator’s crackdown

The universal life insurance business is seen as the major source of capital for unlisted insurers buying A shares aggressively

PUBLISHED : Sunday, 22 January, 2017, 7:10pm
UPDATED : Sunday, 22 January, 2017, 9:40pm

The growth of life insurance premiums in the mainland is set to stall this year as regulators crack down on the aggressive sales of universal life policies, market watchers said.

A decline in insurers’ investment returns was also cited by analysts as a cause for the predicted slowdown.

According to data from the China Insurance Regulatory Commission (CIRC), mainland premium incomes reached 3.1 trillion yuan in 2016, a year-on-year rise of 27.5 per cent.

Guo Zhenhua, head of the insurance department at Shanghai University of International Business and Economics, said growth could slump by almost half to as low as 15 per cent in 2017.

“Life insurance premiums, with a heavy reliance on investment-grade products, would slump amid tighter industry scrutiny, lower investment returns and economic slowdown this year,” Guo said, predicting that growth would be no more than 20 per cent this year.

The insurance regulator has already clamped down on the universal life products offered by insurance units under Baoneng Group and Evergrande Group. They were among at least six insurers that recently faced penalties after their aggressive takeover attempts of listed companies attracted the scrutiny of financial regulators last year.

It is unlikely that we will see last year’s surge continuing this year, but the growth could be more sustainable and stable this year
Sally Yim, insurance analyst, Moody’s

Universal life products are essentially high-yield wealth management products and usually promise short-term gains. Aggressive insurers have been rapidly expanding this part of their business to shore up their premiums, pouring money into equity markets to meet the high returns they’ve promised to investors.

Sally Yim, an insurance analyst at Moody’s, said she expects CIRC to keep a sharp eye on insurers appearing to make speculative or risky investments in listed companies as well as those engaging in aggressive product sales.

“Popular universal life insurance products in China are de facto short-term wealth management ones with limited insurance protection coverage which means no, or minimal, penalties for retail investors in early surrender in the first two years,” she said. “Such high cash value products are rare in other markets.

“Insurers are exposed to the risks of a stampede for early surrender if returns fail expectations. They could also face liquidity risks due to an assets-liabilities mismatch, where they’re selling short-term products but investing in long-term assets.”

She forecasts that life premiums may slow to 20 per cent this year due to the crackdown. Life insurance products are still competitive when compared with bank savings amid China’s low-interest environment.

“It is unlikely that we will see last year’s surge continuing this year, but the growth could be more sustainable and stable this year,” she said.

Premium incomes of mainland life insurers rose 33.1 percent to 1.66 trillion yuan in the first 11 months of last year, while those of property insurers gained 8.7 percent to 777 billion yuan, the most recent data shows.

Clampdown on insurers stock buying weighs on market outlook

China’s insurance premiums have shown a steady average annual increase of 16.8 per cent since 2011. China overtook Japan as the world’s second largest insurance market by premium in 2016, having jumped from sixth, surpassing Germany, France and Britain within three years. The US still takes the top spot.

Despite the increase in insurance premium incomes, the profits of insurance firms have been on the decline, dragged down by falling investment returns in a low interest rate environment and a stock market downturn.

Zhong Ming, an insurance professor at Shanghai University of Finance and Economics, said despite the expected slowdown in growth of universal life products, the industry still enjoys strong potential in areas such as health care and pension insurance.

“It is necessary to further increase awareness of the necessity of insurance as a way to seek shelter rather than a path to profits in China, just like what the regulator has emphasised in attempting to steer the sector back to its core fundamentals,” she said.

CIRC Chairman Xiang Junbo has vowed to intensify efforts to police the industry and to return it to its core mission of providing long-term security.

The industry’s net assets grew to 1.76 trillion yuan as of the end of November, having more than tripled from 2011’s 556.6 billion yuan.