Chinese insurers forced to rein in financing via short-term policies

Regulator might introduce a new threshold that blocks some companies from issuing universal life insurance policies

PUBLISHED : Tuesday, 14 February, 2017, 9:16pm
UPDATED : Tuesday, 14 February, 2017, 11:00pm

Chinese insurers are reducing the issuance of short-term duration life insurance policies as the industry authority continues to crack down on the products to curb financial companies that use proceeds collected from policyholders to make aggressive takeover bids.

Hui Ka-yan, chairman of the property conglomerate Evergrande Group had emphasised in an internal meeting that his insurance unit Evergrande Life “should never be used as a financing platform for the group company”, mainland media reported on Tuesday.

Evergrande Life, which funded its parent company China Evergrande Group’s ownership raid on Vanke late last year, reported that its solvency ratio had plummeted to 109.68 per cent in the forth quarter, from 179.73 per cent, close to a regulatory bottom line of 100 per cent.

Hui said Evergrande Life should increase its premium income ratio to above 50 per cent of total income in 2017.

Dayton Wang, an analyst with Guotai Junan International, said the move meant Evergrande Life should “significantly bring down the issuance of short or medium duration insurance products” which may not pass the risk testing standard set by China’s insurance regulator and therefore couldn’t be rated as “premium income”, rather should be considered “deposit by policyholders”.

Riskier investment likely by China’s insurers

In the past few years Chinese insurers, particularly the unlisted ones, including Evergrande Life, have been actively promoting insurance policies below five-year duration, while promising annual returns as high as 8 to 9 per cent through bancassurance channels. To attract more clients, these products, called “universal life insurance policies”, have no penalty for early withdrawal.

Proceeds from these wealth management-like policies, in turn, were believed to have fuelled the overseas takeover sprees and mainland corporate raids by emerging insurance tycoons like Anbang and Baoneng.

Wang said the regulator had been introducing new rules since last September to clamp down on the issuance of short and medium term duration products, as they concern the risk triggered by duration mismatch of the liabilities and the investment.

The mainland China based 21st Century Business Herald quoted a source close to the China Insurance Regulatory Commission (CIRC) on Tuesday as saying the authority is studying a plan to install a threshold that could block some companies from issuing universal life insurance products.

The changes would be made to restrict the total amount of short-term duration insurance products, and CIRC may institute a bottom line for the duration term of insurance policies.

Leon Qi, Daiwa Capital Markets’ head of Greater China financials research, said China’s insurance regulator and securities regulator are “increasingly aware of the related-party transaction issues between some of the ‘platform insurers’ and their major shareholders”.

“We do expect further tightening on short-term universal product sales in the rest of it is the regulators’ priority to strengthen the implementation of all the corporate governance regulation on them, as well as make sure their product sales are not being overly aggressive in terms of both the duration mismatch and yield (implicit) guarantees,” he said.

The CIRC had suspended several companies, including Evergrande Life, from selling insurance policies online. It also had suspended Foresea Life, a unit under Baoneng Group which funded the parent company’s boardroom raid sagas, from issuing new universal life insurance policies.

According to rules issued by CIRC last September, insurers should impose reasonable penalties for early withdrawals on life insurance policies, and universal life insurance products with a guaranteed rate of higher than 3 per cent will need regulator approval.