Top 10 Keywords: Review of the Insurance Industry in 2023: The Challenges Are Not Ending, and the Dawn is Dawning

The challenges are not over, and the dawn is emerging.

2023 is a year full of opportunities and challenges for the insurance industry.

The Central Financial Work Conference requires "giving full play to the functions of the insurance industry as an economic shock absorber and social stabilizer", and the industry will firmly adhere to this positioning and serve the real economy and social and people's livelihood with high-quality development.

There are joys and worries in the development of the industry. The good news is that the insurance business has achieved double-digit growth, which is rare in recent years, and the new model of "insurance + service" has been continuously explored, and the industry has more fulcrums. With the implementation of a number of new regulations and new accounting standards, the insurance industry is moving forward under pressure, and long-termism and passing through the cycle have become high-frequency words.

At the end of the year, the Securities Times reporter would like to summarize the insurance industry in 2023 with ten key words.

1

New accounting standards

In the first quarterly report of listed insurance companies in 2023, the indicator of "insurance service income" appeared for the first time, which means that the Chinese version of IFRS17 (New Insurance Contract Standard) has begun to be implemented. In addition, apart from Ping An, the other four major A-share listed insurance companies have also implemented IIFRS9 (New Financial Instruments Standard) for the first time this year.

The implementation of the two new standards has led to significant changes in the presentation and disclosure of financial statements of listed insurance companies. In particular, IFRS17 requires that only income related to insurance services be recognized, the investment component of premiums is excluded, and the revenue recognition cycle matches the duration of insurance services in the insurance revenue section. The implementation of the new standard aims to make the financial reports of insurance companies simpler and more transparent, as well as more consistent and comparable with other industries.

On the whole, the implementation of the new standards will cause the operating income of insurance companies, especially life insurance companies, to shrink, and at the same time, net profit and net assets will fluctuate. Judging from the response in the first year of implementation, the balance sheets of listed insurance companies remained basically stable, the overall profit growth was positive, and the impact on life insurance operating income was relatively large.

A number of financial leaders of listed insurance companies said that the implementation of the new accounting standards will have an impact on the presentation of the company's financial results, but it will not shake the company's business logic. However, the two new standards put forward new requirements for the internal management, financial accounting, and performance appraisal of insurance companies, which are conducive to more stable operation and high-quality development of insurance companies.

2

Predetermined interest rate of 3% era

In 2023, the scheduled interest rate of the life insurance industry will enter a new cycle, and the "3.5% era" of ten years will come to an end, and the "3% era" will arrive.

Effective 1 August 2023, the predetermined interest rate cap for traditional life insurance products will be reduced from 3.5% to 3%. Before the boots landed, since April this year, due to the expectation of a scheduled interest rate cut, the 3.5% interest rate of insurance products ushered in a wave of sales upsurge. This has led to double-digit growth in new premium income for life insurers, which is rare in recent years.

After the predetermined interest rate is lowered, the sales of insurance products will be reduced to a certain extent in the short term, but in the long run, it will be conducive to the steady operation of the industry and provide customers with more solid protection. At the same time, from a horizontal perspective, after the scheduled interest rate is reduced to 3%, insurance products are also one of the few products in the market with certain returns, and they are still uniquely attractive.

The reduction of the scheduled interest rate is an inevitable requirement for the life insurance industry to reduce the cost of liabilities under the trend of rising interest rate spread loss risk. This year, the regulatory authorities have convened life insurance companies for many times to discuss and investigate, and provided window guidance to promote the reduction of debt costs and improve the quality of debt.

The industry expects that the trend of long-term interest rates in the mainland is "easy to fall and difficult to rise". In the low interest rate environment, the life insurance industry realizes that it needs to pay attention to and prepare for the risk of interest rate loss as early as possible, and needs to take multiple measures at the same time. Reducing the scheduled interest rate today is only one of the measures, and there is still room for future reduction of the scheduled interest rate, which requires optimizing the business structure and increasing the proportion of non-guaranteed income business. In addition, the life insurance industry should also promote cost reduction and efficiency improvement, and reduce the overall cost of debt.

3

The integration of newspapers and banks is implemented

In August this year, the State Administration of Financial Supervision and Administration issued the "Notice on Regulating Insurance Products through Bank Agency Channels", which made it clear that the cost assumptions should be prudently and reasonably determined when designing insurance products sold through banks; in mid-October, the State Administration of Financial Supervision and Administration issued the "Notice on Strengthening Management and Promoting the Steady and Healthy Development of Life Insurance Business", which once again required all life insurance companies to implement their management and control responsibilities and strictly implement the "integration of reporting and banking". On October 20, the relevant person in charge of the State Administration of Financial Supervision said that it would "fully implement the 'integration of newspapers and banks', and pay close attention to the 'integration of newspapers and banks' of individual agency channels and brokerage agency channels".

The so-called "integration of reporting and banking" means that the scope of handling fees and usage rules actually used by insurance companies when selling products need to be consistent with those reported to the regulatory authorities. In short, the amount of product handling fee should be executed according to how much is reported, and it is not possible to "say one thing and do another".

Industry observers believe that the full implementation of the "integration of newspapers and banks" and the space for reducing costs will not only have a positive impact on business promotion, but also further change the market pattern in the long run. This is also an important measure to optimize the cost of life insurance liabilities.

4

Returns on investments have fallen

The sharp fluctuations in the capital market have driven the return on investment of insurance funds to continue to decline, which has become the focus of the insurance industry in recent years. In the first three quarters of 2023, the annualized financial rate of return of 27.5 trillion yuan of insurance funds was 2.92%, and the annualized comprehensive rate of return was 3.28%. Among them, the annualized financial return rarely fell below 3%.

The rate of return on investment of insurance funds has experienced many fluctuations. Among them, it was below 5% for three consecutive years from 2010 to 2012, and even lower to 1.99% in 2008. But more often than not, yields are above 5%, reaching more than 12% in 2007.

After many market cycles, insurance companies have been proven to have a good ability to obtain absolute returns and long-term stable performance among various investment institutions. However, some people in the industry believe that in the long-term low interest rate environment, insurance companies need to further improve the stability of income and strengthen the asset-liability matching mechanism.

In order to guide the long-term and steady investment of insurance funds, on October 30, the Ministry of Finance issued the "Notice on Guiding the Long-term and Steady Investment of Insurance Funds and Strengthening the Long-term Assessment of State-owned Commercial Insurance Companies", adjusting the "return on net assets" of the operating efficiency indicators from "current year indicators" to "3-year cycle indicators + current year indicators". This move is conducive to guiding the long-term and stable operation of insurance companies, and is also conducive to better playing the role of medium and long-term funds as market stabilizers and economic development boosters.

5

The wave of bond issuance is coming

The scale of debt financing of insurance companies increased significantly during the year. Wind data shows that since the beginning of this year, insurance companies have issued a total of more than 100 billion yuan of bonds, a significant increase of four times year-on-year. At the time of bond issuance, most of the insurers' entity ratings and bond ratings were good, with 17 of the 21 companies having AAA ratings and bond ratings.

The bonds issued by insurance companies this year are mainly capital supplementary bonds and perpetual bonds, of which the issuance of perpetual bonds by insurance companies is the first time this year.

The issuance of bonds by insurance companies is mainly due to the need for capital replenishment. In 2022, the C-ROSS II rules came into effect, and the identification of core capital of life insurance companies became stricter, and the solvency of insurance companies, especially the core solvency, declined sharply. Debt financing is welcomed by insurance companies due to its advantages of fewer constraints, short issuance cycle and low issuance cost. In addition to capital replenishment needs, some insurance companies also issue bonds for development needs.

Some analysts said that the demand for debt financing of insurance companies may continue to expand in the next two years, but most companies still have strong liquidity and solvency.

6

Progress in risk management

Risk disposal and resolution in the insurance industry is one of the main topics surrounding the industry in recent years, and in 2023, insurance companies such as Tomorrow and Evergrande will achieve phased results in risk disposal.

Among them, the disposal method is close to market-oriented restructuring is Yi'an Property Insurance. BYD was approved to acquire 100% of the equity of Yi'an Property Insurance, the company was renamed "Shenzhen BYD Property Insurance Co., Ltd.", and was later approved to increase its capital by 3 billion yuan and add car insurance business. The industry expects this nascent auto-based insurance company to get on the right track as soon as possible.

In terms of other insurance companies, Tianan Life Insurance, China Life Insurance and Evergrande Life Insurance have also made disposal progress, setting up Zhonghui Life Insurance, Ruizhong Life Insurance and Harbour Life Insurance respectively to undertake the policy liabilities, effective assets and institutional outlets of these three problematic insurance companies. Xintai Life Insurance has also increased its capital and shares, and the shareholders of four new Zhejiang state-owned enterprises will hold a total of 51% of the shares, while the deposit insurance fund and the insurance protection fund have previously invested in the insurance company. In addition, Shenergy Property Insurance, with a registered capital of 10 billion yuan, has been approved for establishment or participated in the disposal of Tianan Property Insurance.

Industry insiders believe that the joint efforts of all parties to take the above measures against these insurance companies ensure that insurance services are not interrupted and maintain market stability to the greatest extent.

Equally concerned is the fact that these disposals "cost" a lot. According to the statistics of the "Securities Times" reporter, from the beginning of the disposal of Anbang risks, in order to deal with the risks of insurance companies, nearly 100 billion yuan of insurance security funds have been used, state-owned insurance companies have contributed 35.1 billion yuan, local state-owned enterprises have contributed more than 29 billion yuan, and the Central Huijin and Deposit Insurance Funds have contributed a total of more than 28 billion yuan. In the downward phase of the overall cycle of the industry, it is crucial for the newly established insurance companies to start stably and operate healthily. At the same time, there are still several small and medium-sized insurance companies with risk problems to be solved.

The Central Financial Work Conference called for "timely handling of the risks of small and medium-sized financial institutions". Li Yunze, director of the State Administration of Financial Regulation, once mentioned that the first is to adhere to the prudent and orderly, the second is to classify and implement precise policies, and the third is to deepen both the symptoms and the root causes. In the future, how to carry out the risk reduction of small and medium-sized insurance companies in a more market-oriented way, and at the same time promote the "one company, one policy", taking into account "stability and accuracy", will test the regulatory authorities and local governments and other relevant parties.

7

New regulations for pension insurance companies

China's first regulatory measures for professional pension insurance companies were officially introduced. Under the requirements of doing a good job in "pension finance", the new regulations regulate the only institution with "pension insurance" in the market, and will have a far-reaching impact on business development.

In December 2023, the State Administration of Financial Supervision issued the "Interim Measures for the Supervision and Administration of Pension Insurance Companies" (hereinafter referred to as the "Measures"), which clearly requires pension insurance companies to take the path of professional development, actively participate in the construction of a multi-level and multi-pillar pension insurance system, focus on the main business of pension, innovate pension financial products and services, and meet the diversified pension needs of the people.

The Measures further clarify that pension insurance companies should mainly engage in pension-related businesses, including pension insurance, commercial pensions, pension fund management, etc., and shall not be entrusted with the management of insurance funds and the development of insurance asset management products.

According to the measures, in addition to divesting the asset management business, pension insurance companies should also stop short-term health insurance business. The Measures also require isolation for the management of pension funds. The "Measures" also clearly stipulate that if the business scope of the pension insurance company exceeds the above provisions, it shall complete the change of business scope within three years from the date of issuance of the "Measures".

8

Insurance sales classification and grading

In 2023, substantial progress will be made in the construction of the long-awaited hierarchical management system for insurance agents.

Following the issuance of the Measures for the Administration of Insurance Sales Behavior by the State Administration of Financial Supervision in September this year and clarifying the product classification and sales personnel classification, the Insurance Association of China also issued the "Sales Ability Qualification Standards for Individual Insurance Agents (Life Insurance) (Discussion Draft)" for some insurance companies.

According to data from regulatory authorities, the number of agents in the life insurance market was about 5.217 million as of the end of June 2022, while data from industry exchanges showed that as of July 2023, the number of agents of life insurance companies had dropped to 2.93 million.

Industry insiders said that the series of new policies will promote insurance companies to establish product classification and channel classification systems that match customer needs, guide the industry to promote the supply-side transformation based on customer needs, accelerate the high-quality transformation of channels, and take the lead in high-quality channel transformation Insurance companies will benefit more.

9

20 years of insurance asset management

Since the establishment of PICC Asset Management and China Life Asset Management in 2003, China's insurance asset management industry will celebrate its 20th anniversary in 2023.

Over the past 20 years, the insurance asset management industry has experienced a development process from scratch, from small to large, and from weak to strong. In the past 20 years, the number of insurance asset management companies in mainland China has increased to 34, and the scale of assets under management has increased to 25 trillion yuan. Insurance asset management institutions play an important role in maintaining and increasing the value of insurance assets, supporting the real economy, serving national strategies, and ensuring people's livelihood.

In 2023, insurance asset management will usher in several business breakthroughs, providing more starting points for serving the real economy. Five insurance asset management companies have been approved to pilot the asset securitization (ABS) and real estate investment trusts (REITs) business of the exchange, and the first batch of insurance asset management ABS products have been launched, which is conducive to insurance asset management to play a greater role in the era of stock assets. At the end of November, Chinese Life and Xinhua Insurance announced that they would each invest 25 billion yuan to set up a private securities fund, becoming the first case of insurance funds investing in private securities funds, which will help play the role of long-term funds as a stabilizer of the capital market.

Standing at a new starting point in the past 20 years, insurance asset management is also facing new situations and challenges. The Central Financial Work Conference requires the financial sector to provide high-quality services for economic and social development, the complex market environment requires higher investment capabilities, and insurance asset management needs to benchmark against the table, continuously improve long-term investment, prudent investment and value investment capabilities, and explore coordinated development with other asset management institutions, while adhering to the bottom line of compliance and risk.

10

Systemically important insurers

Following the system important banks, the assessment and identification mechanism for systemically important insurance companies will be officially implemented in 2023.

In October 2023, the People's Bank of China and the State Administration of Financial Supervision officially issued the Measures for the Assessment of Systemically Important Insurance Companies, which will come into effect on January 1, 2024. The purpose of this new regulation is to identify systemically important insurance companies in mainland China and carry out differentiated supervision of systemically important insurance companies to reduce the possibility of major risks and prevent systemic risks.

Systemically important insurers are assessed every two years. The top 10 insurers in terms of consolidated assets and those that have been rated as systemically important insurers in the previous year are included in the assessment. The first "entrants" will include most of the current insurance group companies.

Editor-in-charge: Gui Yanmin

Proofreading: Wang Chaoquan