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. Li said the withdrawal rate would increase significantly in the first few years after the interest rate cap was removed. Ping An Securities estimates that prices of insurance polices will be cut by 30 per cent when the predetermined rate is set at 3.5 per cent, while the value of new business, a measure of the present value of future business, will decline by 60 to 70 per cent. Shao Zhiqin, an analyst with Guosen Securities, expects the impact on big insurers such as China Life to be more significant as they have a larger share of the traditional life insurance market. Smaller insurers could take the chance to boost their share by offering more competitive prices, she said. Although big players might retain existing customers by offering more innovative products, policyholders would still consider withdrawal, as competition would increase the number of products available, Shao said. The expected increase in returns offered to policyholders would also cause a drop in embedded value, taking into account that investment returns remain weak and staff and other costs are rising, she said. Embedded value, a common valuation measure in the insurance industry, refers to the sum of adjusted net asset value and the present value of future profits. Guosen maintained cautious recommendation rating for Ping An Insurance and China Pacific Insurance, and was neutral for New China Life Insurance and China Life Insurance. Despite the potential negative impact on future business in the insurance industry, global rating agency Fitch Ratings said the move would encourage the mainland's life insurers to be more innovative. Diversification in insurance products could help boost the penetration rate of pension and health care insurance, Fitch said.