Unlisted insurers to be hit hard by clampdown on flexible, but ‘risky’, universal life products
Essentially current accounts offering a high rate of interest, insurers have been using cash generated from the products to invest in listed companies
China’s planned tightening of the universal life insurance product market will be a heavy blow to newly emerged unlisted insurers, many of whom have expanded rapidly through the aggressive sales of the products.
But the new rules are unlikely to hurt the earnings of publicly-listed insurers.
China Insurance Regulatory Commission (CIRC) published two public consultation documents late last month on curbing universal life insurance products, mainland media Caixin reported last week.
Of the proposed new rules, the life products cannot be surrendered within the first three years without charging penalties, and insurance products and annuities with a guaranteed rate of higher than 3 per cent and 3.45 per cent, respectively, will need regulator approval, Caixin reported.
“They [the documents] set very strict rules on such products. They basically reject all similar products with an duration of less than three years...making them very hard to sell....the premium growth in universal life policies may slow down hugely, as a result,” Tang Bolun and Huang Jie, analysts at CICC wrote in a research report.
The proposed rules are positive for listed life insurance players, however, who rely little on universal life policy sales, and so competition from aggressive unlisted insurers is expected to ease as a result, they said.
Universal life insurance products, for investment and life insurance purposes, offer guaranteed minimum rates of return for buyers.
They are called “universal” as invested sums are flexible, and can be withdraw anytime, according to definition given by CIRC.
Tao Hui, an insurance agent with China Life Insurance, based in the southwest city Chongqing, said it offers one universal life policy with a guaranteed return rate of 2.5 per cent and a minimum investment of 10,000 yuan a year, while some smaller rivals offer more than 3.5 per cent minimum rates.
“You can view it as a current account offering a high rate of interest, from which you can withdraw money anytime you want,” Tao said.
Jerry Li Wenbing, an analyst at China Merchants Securities Hong Kong, said such products help insurers achieve premium growth, but they don’t actually generate a lot of new business value, owing to their high cost.
“Some insurers sell them as wealth management products, and then use the cash to invest in listed company shares,” he said.
Anbang Life Insurance and Baoneng Group’s Qianhai Foresea Life Insurance were among those to have benefitted most from universal life insurance sales, and both have also become well-known for their share buying, particularly in the country’s largest property developer China Vanke, as well as a series of acquisitions overseas.
Anbang’s universal life policy promises interest rates of at least 3.5 a year and it paid an annualised 5 per rate in November last year, the Wall Street Journal reported in January.
Surprisingly, fact sheets on its life insurance product offers cannot now be found on its website.
The latest CIRC data shows that from January to July, the mainland insurance market saw premiums from standard life insurance contracts grow 48.17 per cent to 1.55 trillion yuan, while premiums from investment products – a strong reflection of income from universal life policies – jumped 116.15 per cent year on year to 927.6 billion yuan, even though the regulator already tightened its policies on their sale once in March.
Anbang’s premiums from investment products reached 186.9 billion yuan, a 271 per cent year rise on the previous year. Evergrande Life Insurance’s investment premiums swelled 705 per cent to 23 billion yuan while that for Qianhai Life surged 228 per cent to 50.1 billion yuan, according to calculation by SWS Research.
If insurers use cash collected from universal life products to buy shares in listed companies, they have to issue the products continuously to maintain cash levels, because many buyers surrender them within three years, Li from CMS said.
“Any downturn in those robust sales could lead to cash flow risk,” Li said. “That cash is a liability rather than asset.
“If investment targets such as Vanke failed to deliver expected dividends or if their share prices plunged sharply, insurers would struggle to deliver guaranteed rates to buyers,” Li added.
He said the new rules now planned could force some unlisted insurers to transform their business models, but they will not affect listed insurers as much, as universal life policies make up little of their overall business.
Su Peike, chief researcher at the University of International Business and Economics’ Public Policy Research Center in Beijing, does think the crackdown on universal life products is necessary.
“The safety and security of capital is a priority of insurers, but universal life policies have become a financing tool for those seeking higher returns, who are putting risk ahead of safety,” Su said.
“The [new] regulations are especially necessary, as economic growth is slowing,” he added.
Under the accommodative monetary environment, he said, investors should not expect returns on investment to be high.