China insurance price war looms as rate cap goes

Beijing's scrapping of the interest rate cap on life insurance policies is expected to trigger a price war because of intensified competition, reducing the value of new business for mainland insurers, analysts said.

As a step towards interest rate liberalisation under the country's financial reforms, the China Insurance Regulatory Commission announced the removal of the 2.5 per cent cap on predetermined rates for standard life insurance products with effect from August 5, meaning that insurers can offer higher returns to policyholders.

The 2.5 per cent ceiling on the returns offered by dividend-type and universal-type life insurance products remains unchanged.

The relaxation of predetermined rates would have a negative impact on the insurance industry, said Li Yamin, an analyst at Ping An Securities.

"The move may trigger a price war and cause withdrawals from insurance," she said, and mainland insurers' liquidity could come under pressure as a result.

Life insurance policies issued before August 5 were subject to an upper limit of a 2.5 per cent predetermined rate that made returns offered by such policies less competitive than other investment tools.

Analysts expect policyholders to be more keen to withdraw from existing insurance policies and seek higher returns from newly issued policies, pressing insurers to cut prices and diversify products in an effort to keep existing clients.