[BEIJING] China plans to allow life insurers to pay higher returns on some policies that may make them more attractive for investors stymied by government limits on bank deposit rates.
The China Insurance Regulatory Commission may scrap the 2.5 per cent maximum rate on fixed-return policies in a trial starting as early as next month, according to a person, who asked not to be identified because the matter isn’t public. The new rules may prompt insurers to increase their reserves for payouts by about 20 billion yuan (S$4.1 billion), the person said.
Premium growth has slowed as Chinese savers, seeking higher returns, turn to riskier investments such as wealth management products. Removing the limit on returns may revitalise revenue growth while also channelling savings away from less-regulated investments known as shadow banking.
The regulator’s Beijing-based press office didn’t immediately reply to a fax seeking comment.
One concern for the regulator is that allowing higher returns may cause more clients to end their current policies, the person said. The forecast for higher reserve needs comes from the regulator’s base-case scenario, which predicts redemptions will increase by less than 50 per cent by value from the current level, according to the person.
That scenario estimates that returns on policies will rise to close to the five-year bank deposit rate of 4.75 per cent, the person said.
Offering higher returns may also crimp profits in the industry. China Life Insurance, the country’s biggest, reported a 40 per cent slump in profit last year as it recognised losses on investments in shares.
China Life raised 38 billion yuan in subordinated bonds in 2012, boosting its solvency ratio, a regulatory indicator that gauges capital adequacy and the ability to settle claims, to 236 per cent as of Dec 31. Ping An Insurance, the second-biggest Chinese insurer, plans to sell 26 billion yuan sale of convertible bonds, raising enough capital to support two to three years of expansion.
To prevent insurers from offering excessive returns, regulators will keep a rule stating that companies may forecast a maximum 3.5 per cent gain on their investments when calculating the level of reserves they need, the person said.
Insurers that offer returns on policies of more than 3.5 per cent will need regulatory approval and must set aside additional reserves, the person said. Such reserves would be reflected in the companies’ solvency ratios, the person said.
Life policies with fixed benefits and premiums account for about 15 per cent of outstanding contracts, the person said. Total premiums rose 4 per cent to 996 billion yuan in 2012 after a 9 per cent slump in 2011, according to data from the regulator. That compares with average growth of 30 per cent a year in the previous three decades.
The trials also include a new kind of life policy that includes investments in infrastructure and real estate, which will also be exempt from the limit on returns, the person said, without elaborating. To offer the product insurers must have solvency ratios of at least 150 per cent, the person said.
The CIRC has also drafted rules that remove limits on how much agents can get in commissions. – Bloomberg