When insurance is no longer "capital protected", the "policy" of the new middle class is in danger

"We must face a cruel fact: from the perspective of the development of the insurance industry, breaking the rigid payment is an inevitable trend. ”

Text / Ba Jiuling (WeChat public account: Wu Xiaobo channel)

In July last year, the parents of the minibus planned to buy a wealth management insurance, Chinese Life, fixed compound interest up to 3.5%, the income locked for life.

The minibus felt bored and persuaded parents to consider it, after all, there are really not many fixed income products with a yield of 3.5% nowadays.

As a result, the parents were angry, and the minibus that was beaten by the output of finance and economics had no power to fight back:

"Didn't you get the money back for the 'chic tomorrow' I bought in '97? Now that the stock market is losing money, and there is only a few dollars in the bank, this is capital preservation and financial management, do you understand?"

When insurance is no longer "principal-protected"

Warren Buffett famously said, "There are three most important principles of investment: the first is to preserve capital, the second is to preserve capital, and the third is to remember the first two." ”

In China, there are indeed many principal-guaranteed wealth management that guarantees income during drought and flood, and wealth management insurance is one of them.

However, in a recent article titled "Disposal of Problematic Insurance Enterprises" in Caixin Weekly, a seemingly innocuous sentence pushed the "capital protected" wealth management insurance to the center of public opinion:

“...... It is understood that the draft of the Insurance Law, which is in the process of being revised, proposes to add that 'if the assets of the insurance company being taken over are insufficient to pay off all debts, or if the insurance business is transferred in accordance with the law, the insurance contract may be reasonably modified with the approval of the State Council'. ”

What is a "change to the insurance contract"?

To put it simply, suppose you buy annuity insurance from an insurance company, and the annualized rate of return is 3.5%, and as a result, the insurance company goes bankrupt, and according to Article 92 of the Insurance Law, your policy will be taken over by another institution, and the rate of return on the policy remains unchanged. This is the source of legitimacy of the "rigid payment" of insurance.

After the "new regulations", the institution that takes over can modify the existing interest rate in accordance with the law, which means that the interest rate may become 1%, may become 0%, and may even lose part of the principal.

Some media said that the rigid payment of wealth management insurance will be broken. If the draft comes true, it means that after the promulgation of the New Asset Regulations in 2018 and the rigid redemption of bank wealth management products was broken, China's high-yield principal-guaranteed wealth management products will basically disappear.

Stock market funds are trapped, housing prices are falling, and when insurance is no longer "capital protected", are the assets of the new middle class still safe?

Of course, whether this news is true or not remains to be verified, and what constitutes a "reasonable" change is also vague, but we must face a cruel fact: from the perspective of the development of the insurance industry, breaking the rigid payment is an inevitable trend.

It's all about a technical term: spread loss.

Spread loss: the biggest risk in the insurance industry

Insurance can be simply divided into two categories: protection insurance and wealth management insurance.

The former includes critical illness insurance, accident insurance, medical insurance, etc., while the latter has annuity insurance, participating insurance, and savings insurance.

When you buy wealth management insurance, the insurance company will promise you a rate of return, which is a "predetermined interest rate". Unlike bank rates, which are subject to change, this rate, once determined, provides long-term or even lifetime fixed income.

The predetermined interest rate can be regarded as the liability of the insurance company, and then the channel commission, marketing expenses, operating expenses, etc., constitute the total financing cost of the insurance company.

So where does the money go?

From the investment structure of the insurance industry, it can be seen that in China, for example, 43% are bonds, 11% are bank deposits, and the rest are assets such as stocks, funds, unsecured bonds, real estate, and unlisted equity.

Therefore, insurance companies finance money from customers, and invest in high-yield, high-risk assets based on bonds and bank deposits, which has become the main profit model of insurance companies.

However, when market interest rates fall or capital markets weaken, the trouble comes: insurance companies will gradually lose money because they will not be able to cover the cost of debt, and because the predetermined interest rate is fixed, the losses will spread to the entire industry.

This is the spread loss in the insurance industry, and large-scale spread loss is the biggest risk in the insurance industry.

Ping An, China Life, and Pacific have all suffered from interest rate loss - known as the "spread loss pill" in history.

From 1993 to 1996, in order to compete with banks, the predetermined interest rates of major insurance companies remained at 7% to 10% for a long time, and the insurance industry also took a rocket.

However, since May 1996, the central bank has cut interest rates eight times, and the one-year interest rate of banks has been reduced from 9.18% all the way to 2.25%.

Unfortunately, China's insurance industry, which is in the ascendant, does not have the concept of interest rate loss, and bank interest rates have plummeted again and again, and most insurance companies mistakenly think that they are good opportunities to grab customers from banks, so they have launched many wealth management insurance products with interest rates of more than 8%.

Clearly, insurance companies are overestimating their capabilities. In addition, at that time, China's investment market was mixed, investment projects were sluggish, and at the same time, the regulatory restrictions on investment channels caused the real rate of return of insurance companies to remain below 5% all year round, far below the predetermined interest rate.

Even in the most prosperous years of 2000 and 2005, when the overall return on investment was only 4.3%, insurance companies had to swallow the "poison pill" of high predetermined interest rates in 1990.

It is impossible to know how big the spread loss of China's insurance industry as a whole is, but what we can estimate is that at a meeting held by the China Insurance Regulatory Commission in November 2009, Ma Mingzhe, the head of Ping An Group, inadvertently said: "Ping An's spread loss is about 80 billion yuan." ”

How to deal with the spread loss

In order to deal with the spread loss, the major insurance companies are looking for their own antidote.

For example, through new business to slowly digest the existing policy. There have even been reports of some insurance companies forcing employees and their families to surrender their policies. The most common is "time for space", that is, using long-term policies with low interest rates to dilute previous policies with high interest rates.

Japan's insurance industry has also faced the dilemma of interest rate spread loss, and it has started to break the "rigid exchange" in Asia.

In the 1990s, Japan's economic bubble burst, interest rates fell, the stock market and real estate plummeted, many banks went bankrupt, and the insurance industry was not spared.

During the bubble economy, Japan's insurance industry increased the proportion of securities investment from 40% to 60%, which exacerbated the risk, making the investment yield of the Japanese banking industry fall sharply from about 8% to 2% to 3% in ten years, unable to cover the cost of debt, the risk of interest rate loss broke out, and the "bankruptcy wave" of insurance companies followed, including Nissan Life, Toho Life and other large insurance companies with a long history.

At that time, Japan had three strategies:

First, the insurance company that took over the offer adjusted its product structure to reduce operational risks, and second, it issued more bonds to raise funds and make overseas investments in pursuit of higher returns. Third, the Insurance Business Law has been amended to provide that if an insurance company faces bankruptcy, it can lower the predetermined interest rate of existing insurance policies.

In other words, it is essentially a "debt restructuring" of the original customers. Under the pressure of spreads, this is a reluctant compromise between the insurer and the customer, and it is not the worst option.

Under the nest, there are still eggs. In this financial turmoil, a total of 7 insurance companies in Japan collapsed, but all the policies did not affect the payment of principal, and even made a profit. Compared with the explosion of the stock market and real estate, the characteristics of insurance in the financial crisis are revealed.

Breaking the rigid exchange, the general trend

Japan has taken the lead in breaking the "rigid redemption" of insurance, and the next one may be the rapid development of China's insurance industry.

Swiss Re Group Chief Economist Jenley Anderson estimates that China's primary premium income growth will reach 6% to 7% between 2024 and 2025, which is higher than China's GDP growth and three times the global growth. After three decades of development, China has become the second largest insurance market after the United States.

However, it is precisely because the early development is too "rough", according to the estimate of Caixin, China's insurance industry has accumulated 600 billion yuan of high-risk assets.

In the past, with the upward trend of China's economy, the insurance industry has invested in a lot of high-interest assets, and a large part of them have entered the real estate industry with high interest rates and large capital needs, and the investment methods have ranged from buying stocks to direct investment projects.

For example, in 2012, Yao Zhenhua established Qianhai Life Insurance and launched universal insurance, which skyrocketed in premiums, and then began to attack everywhere in the capital market. The most famous is the "Wanbao War" of that year, in which Qianhai became the largest shareholder by increasing its holdings in Vanke's scattered shares, and tried to control Vanke. It wasn't until Shenzhen state-owned assets came forward that Qianhai had to cash out at a high level, earning a total of more than 30 billion yuan before and after.

Today, however, as economic growth slows and investment yields fall, there will be more and more risky assets, and interest rate spreads will be more and more lossy.

At a predetermined interest rate of 3.5 to 4 per cent in the market, the true cost of financing for insurance companies is as high as 5 to 6 per cent. At present, the interest rate on 30-year treasury bonds has fallen below 2.5%, and the yield on large bank certificates of deposit is below 4%.

This means that it is the general trend to break the rigid exchange rate, and the fact that China has revised the signed contracts and changed the interest rate with reference to Japan may be on the table.

In the short term, there will inevitably be a large part of the industry's capital flow to equity assets with higher returns, but in the long run, it is good for insurance companies to unload the burden of history and travel lightly.

After all, China's insurance penetration rate is currently very low, which means a huge potential market. In 2021, the average Chinese held about 1.17 policies, which is 1/4 of the United States; the average premium per capita is 400 US dollars, which is 1/10 of the United States and 1/2 of the world average. With the low penetration rate and the "dividend" of an aging population, the development of China's insurance industry is still a part of China's modernization.

As Mr. Wu Xiaobo said:

A family without life insurance is hardly a modern family.

Can I still buy insurance in China?

The possibility of breaking the rigid payment in the future is good for insurance companies, but for ordinary people, it may be a little uncomfortable in their hearts: Is the insurance policy in my hand still saved? Can insurance still be bought? Regarding these two issues, combined with the views of people in the industry, there are three points worth exploring:

◎ First, when choosing wealth management products, we need to understand the company's asset management capabilities, risk control level, past investments, etc. in advance. On the other hand, only when the brand value is recognized by the majority of the people, the insurance company is willing to run its own business well, and the entire insurance industry will develop benignly.

◎ Second, you can be anxious, but you don't have to be overly anxious. Breaking the rigid exchange is not an overnight and arbitrary act in terms of legislation and implementation. Amending the law is a long-term process, and there is a strict process for real implementation. Generally speaking, the new law will "divide the old from the new", and the old products have old methods, according to the experience of various countries, unless there is a major crisis, it is rare to "use the knife" on the existing policy.

And even if there are major risks and insurance policies are in danger, the state's supervision is still very strict. Li Yunze, director of the State Administration of the Financial Regulatory Commission, revealed this year: "The total capital and provisions of the mainland's banking and insurance industry exceed 50 trillion yuan, and we also have a financial stability guarantee fund and an industry guarantee fund. ”

◎ Third, to be prepared for long-term low returns, "capital preservation and financial management" is likely to be a false proposition in the future, with the continuous over-issuance of currency, you should still be insured, the flowers that should be spent, perhaps only "fear is the greatest productivity".

本篇作者 | 徐涛 | 责任编辑 | 何梦飞

主编 | 何梦飞 | 图源 | VCG