Personal insurance products will follow a mechanism that links the predetermined interest rate to market interest rates and adjusts dynamically.

Industry insiders analyze that the future Chinese insurance market will be dominated by dividend insurance, so "high floating returns" will still exist in the future, but "high guaranteed returns" will be very difficult.

Starting from September 1st, the predetermined interest rate for ordinary personal insurance products will officially drop from 3.0% to 2.5%; starting from October 1st, the predetermined interest rate for dividend-type products will drop from 2.5% to 2.0%, and the minimum guaranteed interest rate for universal types will be reduced from 2% to 1.5%.

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On August 19th, the National Financial Regulatory Administration (hereinafter referred to as "NFRA") officially issued the "Notice on Improving the Pricing Mechanism of Personal Insurance Products" (hereinafter referred to as the "Notice"), which will gradually reduce the predetermined interest rates of traditional and new insurance products, guiding the industry to switch smoothly between old and new products.

It is worth noting that the "Notice" proposes to establish a mechanism that links the predetermined interest rate to market interest rates and dynamically adjusts, referring to long-term interest rates such as the 5-year loan market quotation rate (LPR), the benchmark interest rate for 5-year term deposits, and the yield to maturity of 10-year government bonds to determine the base value of the predetermined interest rate, which will be released by the Insurance Industry Association.

This is the first time the regulator has proposed to establish a mechanism that links the predetermined interest rate to market interest rates and dynamically adjusts.

The regulator emphasizes that the linkage and dynamic adjustment mechanism should be reported to the NFRA, and after reaching the triggering conditions, each company needs to adjust the product pricing in a timely manner according to market principles.

According to insiders, the regulator has held several meetings in recent years to discuss the issue of industry interest spread losses, always hoping to design a floating return mechanism linked to the overall environment, and this time it has finally been settled.

In the future, personal insurance products will follow a mechanism that links the predetermined interest rate to market interest rates and dynamically adjusts.

"The current document only announces the dynamic adjustment mechanism of the predetermined interest rate linked to market interest rates, and the specific rules have not yet been introduced, and it still depends on the rules.

At present, it may mainly target newly filed products," said an actuary from a medium-sized insurance company.

Regarding the concern of consumers about whether the interest rate of future insurance products can still be locked, according to an actuary from a large insurance company, it still depends on how each company switches.

A simpler approach is to keep the terms and premiums unchanged, and adjust the insured amount and cash value according to the latest predetermined interest rate, which can be understood as not locking the predetermined interest rate; another approach has a greater impact, that is, all products are taken off the shelves, new interest rate products are put on the shelves, and old products are taken off the shelves and cannot be purchased.

The specific application of which model still depends on the rules.

For the existing products that have been sold, there is no conclusion at present.

Alex, a North American actuary and the person in charge of Actuarial Vision, said frankly that in the near future, what needs to be faced is the reduction of the predetermined interest rate for personal insurance products from 3.0% to 2.5%, which may be one of the few opportunities to lock in long-term fixed returns in the next few years.

The future Chinese insurance market will be dominated by dividend insurance, so "high floating returns" will still exist in the future, but "high guaranteed returns" will be very difficult.

The NFRA stated that the "Notice" is to adapt to the changes in the market situation and strengthen the overall linkage of assets and liabilities.

The current industry interest spread loss is looming, and this time the regulator first proposed to establish a mechanism that links the predetermined interest rate to market interest rates and dynamically adjusts, which is also another measure to resolve the industry's interest spread loss.

"Starting from July, the company has been preparing for dividend insurance, and the focus in the future will be on dividend insurance products," said a senior manager of a medium-sized insurance company, "The adjustment of interest rates is beneficial to reduce investment pressure, but the operational pressure is still relatively heavy."

Another investment person in the industry said that in fact, the interest rate of insurance products has never been locked, and there has always been a ceiling, but many insurance companies, due to pressure from shareholders, have chosen profits in the short term, and this behavior will be curbed to some extent in the future.

Will the yield drop and the premium increase?

If the predetermined interest rate is linked to the market interest rate, from the consumer's perspective, can the predetermined interest rate of insurance products still be locked?

"According to the mechanism that links the predetermined interest rate to the market interest rate, the predetermined interest rate of future insurance products cannot be locked, which is also the reason why consumers are in a hurry to stock up on products during these rounds of interest rate cuts," said a senior broker.

According to insiders, this still depends on the specific rules of the dynamic adjustment mechanism of the predetermined interest rate linked to the market interest rate in the future, and how each company actually switches.

In this way, consumers are concerned about what impact the adjustment of the pricing interest rate has on the insurance premium itself?

According to an actuary from a large insurance company, as the pricing interest rate is adjusted, the product rate may increase, and the attractiveness of a single product may weaken.

Insurance companies need to reduce the cost of liabilities, form differentiated competitive advantages, and adapt supply and demand to find a new balance point between customers, channels, and companies.

According to a senior of a leading life insurance company, the adjustment of the pricing interest rate by the regulator is relatively beneficial for the insurance company's overall solvency risk control and overall operation in the next step, because its product pricing will be more conservative.

However, the current insurance industry's interest spread loss is looming, and in addition to reducing the predetermined interest rate, according to a person in charge of the actuary of a large insurance company, the regulator may adjust the cash value of insurance financial products in the future.

Whether the existing policies will be adjusted in the future is an important direction to solve the industry's problems.

At present, the experiment starts from the new business, but the ultimate goal may still be to adjust the existing policies.

In addition, for the previously popular increasing life insurance, the senior manager of the medium-sized insurance company said, "After being linked to the market interest rate, increasing life insurance and other ordinary insurance products will lose their competitiveness and will be on the same competitive level as other financial products, coupled with the 'unified reporting and filing' policy of the bank insurance channel, insurance companies are urgently looking for new growth points."

Another actuary from a foreign life insurance company said that at present, since the regulator has established a dynamic adjustment mechanism for pricing interest rates, it means that there is still room for the predetermined interest rate of insurance company products to decline in the future, and the product trend is also obvious.

This is also the reason why the company did not mainly sell 3.0% increasing life insurance during the 3.0% predetermined interest rate era, because it was worried that the interest rate would continue to fall, bringing pressure to the company's sustainable development.

Recently, many products on insurance agency platforms such as Ant Insurance and Huize have been taken off the shelves, but the regulator also strictly controls the occurrence of "speculating on the sale" phenomenon.

The "speculating on the sale" that appeared during the previous interest rate shift is mainly related to the returns and prices of insurance products.

The research institute of Dongwu Securities gave a set of forecast data, and according to the interest rate sensitivity, the order is life insurance annuity > critical illness > whole life > term life insurance.

The predetermined interest rate drops from 3.0% to 2.5%, and traditional (ordinary) annuity insurance, life insurance, term life insurance, whole life insurance, and critical illness insurance have different increases.

"Taking a 30-year-old male as an example, the insured amount is 1,000 yuan, and the payment period is 10 years.

The expenditure rate in the first five years is 50%, 30%, 20%, 5%, and 5% (no expenditure after the sixth year)."

Dongwu Securities analysis said that it calculated the impact when the traditional insurance predetermined interest rate was reduced from 3.0% to 2.5%, and found that the lower the predetermined interest rate, the greater the increase in gross premium.

When the predetermined interest rate was reduced from 3.5% to 3.0%, the corresponding gross premium increases for annuity insurance, life insurance, term life insurance, whole life insurance, and health insurance were 18.7%, 20.2%, 3.5%, 7.5%, and 17.1% respectively.

Short-term insurance and long-term insurance products with stronger protection functions are relatively less sensitive to interest rates.

Why link to market interest rates?

The "Notice" first proposed to establish a mechanism that links the predetermined interest rate to market interest rates and dynamically adjusts.

An analysis by a person close to the regulator said, "The impact of dynamic adjustment depends on two aspects, which not only helps insurance companies to adjust the cost of liabilities in a timely manner during the interest rate decline cycle, effectively dealing with the risk of interest spread loss; it also helps to improve the predetermined interest rate during the interest rate rise channel, and enhance the competitiveness of products."

Qiao Lijiao, Vice President and Chief Actuary of Renbao Life Insurance, said at the "2024 High-Quality Development Seminar on Personal Insurance" sponsored by Huibao World and others, that affected by the downward trend of interest rates, the return on the industry's asset side continues to decline, and the issue of interest spread loss has been related to the high-quality development and long-term stable operation of the life insurance industry.

In this market environment, the regulator has introduced a dynamic adjustment mechanism for product pricing in a timely manner, providing very necessary policy support for the industry to change its business strategy.

Qiao Lijiao believes that this mechanism is conducive to enhancing sensitivity to market interest rates, reducing the risk of the predetermined interest rate and actual investment returns being reversed, and improving the asset-liability management loop starting with products; secondly, it is conducive to responding more agilely to economic cycle fluctuations, maintaining product competitiveness; at the same time, it is conducive to reasonably guiding customer expectations, adjusting the predetermined interest rate according to market interest rates, and demonstrating the benefits of new product policies based on expected investment returns, guiding customers to focus on the protection function.

An actuary from a large insurance company revealed that by comparing the three market interest rates mentioned in the "Notice", the market interest rate changes frequently, and the downward trend is obvious recently.

In the past five years, the 5-year LPR has been reduced 9 times, and it was reduced to 3.85% last month.

The five major banks have reduced the 5-year deposit rate to 1.8%, and the yield of 10-year government bonds has declined to 2.2%.

At the same time, the predetermined interest rate changes less frequently and has a certain lag.

According to the calculation of the non-bank team of Dongwu Securities, the latest three market reference interest rates on the current day (August 2, 2024), the 5-year LPR is 3.85%, the benchmark interest rate for 5-year term deposits is 1.80%, and the yield to maturity of 10-year government bonds is 2.13%, with an arithmetic average of 2.59%, which is about 50bps (basis points) lower than the last pricing interest rate adjustment period in August 2023 (3.09%), close to this adjustment space.

The establishment of a long-term dynamic pricing mechanism this time helps life insurance companies to improve asset-liability management capabilities from the source.Data for the first quarter of 2024 shows that in the first quarter of this year, 76 life insurance companies' insurance business revenue reached approximately 1.35 trillion yuan, a year-on-year increase of 6.35%.

On the investment side, in the first quarter, the investment return rate of many life insurance companies hovered around 2%, and the comprehensive funding costs of some small and medium-sized life insurance companies were also higher than the current actual investment return rate level.

The document requires that from September 1, 2024, the upper limit of the predetermined interest rate for newly filed ordinary insurance products will be 2.5%, and the relevant liability reserve assessment interest rate will be executed at 2.5%; ordinary insurance products with a predetermined interest rate exceeding the upper limit will cease to be sold.

From October 1, 2024, the upper limit of the predetermined interest rate for newly filed dividend insurance products will be 2.0%, and the relevant liability reserve assessment interest rate will be executed at 2.0%; dividend insurance products with a predetermined interest rate exceeding the upper limit will cease to be sold.

The minimum guaranteed interest rate for newly filed universal insurance products will have an upper limit of 1.5%, and the relevant liability reserve assessment interest rate will be executed at 1.5%; universal insurance products with a minimum guaranteed interest rate exceeding the upper limit will cease to be sold.

At the same time, for dividend insurance products and universal insurance products, the regulatory authority emphasizes the need to balance the relationship between the predetermined interest rate or minimum guaranteed interest rate and the floating income, the demonstration benefits, and the dividend realization rate.

The demonstration interest rate should be set differently according to the characteristics of the account's asset allocation and the expected investment return rate.

In addition, the regulatory authority emphasizes that the linkage and dynamic adjustment mechanism should be reported to the General Administration of Banking and Insurance.

After reaching the triggering conditions, each company should adjust the product pricing in a timely manner according to the market-oriented principle.

At the same time, it is necessary to establish a product development management system that is compatible with the dynamic adjustment mechanism of the predetermined interest rate to ensure that the product development, switching, discontinuation, sales management, and customer service are carried out smoothly and orderly during the adjustment process of the predetermined interest rate.

The "Preparation" for Dividend Insurance Notice also emphasizes encouraging the development of long-term dividend insurance products.

In the future product layout, according to multiple sources, many insurance companies have been "preparing for battle" with new dividend insurance products since July, with "low guarantee and high floating" being the focus of many companies.

The notice clearly states that when demonstrating the benefits of the policy for dividend insurance products and universal insurance products, companies should highlight the insurance protection function of the product.

At the same time, it is necessary to strengthen the management of sales behavior and effectively protect the legitimate rights and interests of consumers.

Strengthen the classification and grading management of sales personnel, and orderly achieve the classification of sales personnel qualifications, product classification, and differentiated authorization.

Strengthen product appropriateness management, sell insurance products that are suitable for consumer needs, risk-bearing capacity, and payment capacity, and do not mislead floating income as guaranteed income.

According to an analysis by a senior executive of a small and medium-sized insurance company, as the pricing interest rate is reduced, the attractiveness of ordinary traditional insurance will decrease, and the advantages of dividend insurance will become more prominent, with more significant attractiveness and customer value.

In the down cycle, the guaranteed income can effectively provide a safe asset attribute; when the economy is rising, it can share excess investment returns, have the attribute of risk assets, and the floating income can offset the adverse effects of inflation, and is expected to become the mainstream product in the market.

The relative cost of the guaranteed interest rate of dividend insurance is low, and the risk of interest difference loss is relatively low.

Under the new accounting standards, it can stabilize profits and net assets, and the fluctuations in investment income and interest rates can be absorbed marginally, making profits and net assets more stable than under the old accounting standards.

Moreover, dividend insurance is more stable for the solvency adequacy ratio, and the capital is more economical.

In addition, the liability characteristics of dividend insurance can better promote the virtuous cycle of funds to capital and then to assets, and the sale of dividend insurance is more in line with the current overall financial environment.

The shift of products is also an effective way to solve the "interest difference loss".

Looking at the solutions in the foreign market, in the 1970s, American insurance companies issued a large number of policies with high guaranteed interest rates.

In the 1980s, as interest rates fell, the problem of interest difference loss began to emerge.

The United States solved the problem of interest difference loss by reducing the interest rate of traditional life insurance, vigorously developing investment-type annuity insurance products, meeting market demand to strengthen health insurance and other protection-type products, and at the same time increasing the diversified allocation of non-standard, alternative, and overseas assets on the investment side.

Looking at the Japanese experience, in the first ten years of the crisis period (1990-2000), the total premium income of the life insurance industry reached the highest value of 31 trillion yen in 1995 and then began to decline, falling to 27 trillion yen in 2000, the same as in 1990, and the life insurance industry did not grow for ten years.

In the second half of the crisis period (2000-2012), the Japanese life insurance industry stabilized the investment return rate, and the premium income began to grow slowly, with an average annual growth rate of only 4%.

According to a senior executive of the life insurance industry, combining the Japanese experience, the current low interest rate, low return, and low solvency cycle of China's life insurance industry, he believes that in the short term, it is impossible to change the situation of interest difference loss, and resolutely controlling the scale growth and looking for new products is the inevitable choice for the self-rescue of the current life insurance industry.