Summary
Under the risk of interest rate loss, is it safe to buy insurance? Behind the discussion on the amendment of the Insurance Law is the contradiction between the underwriting side and the investment side, with the rapidly rising premiums on one side and the gradually declining investment yields on the other
Text: Ding Yan, Yang Rui
Edited by Yuan Man
"The Insurance Law will be amended", "Insurance will break the rigid redemption", "Insurance companies will be allowed to modify contracts and lower interest rates"..... Recently, with the news that the "Insurance Law" will be revised, the confusion of policyholders has come one after another.
For a long time, insurance contracts are the most stable financial contracts, and the fact that insurance companies will not fail is the "just redeeming the Bible" on the lips of insurance company agents, and it is also the reason why long-term investors favor insurance products.
Recently, the General Office of the State Council issued a notice on the issuance of the "2024 Legislative Work Plan of the State Council". According to the circular, among the draft amendments to the National People's Congress (NPC) that are to be submitted to the Standing Committee of the National People's Congress for deliberation, the draft amendment to the Insurance Law is among them, which means that the pace of revision of the "Insurance Law" is accelerating.
Although the proposed amendment is still under discussion, it is proposed to add the content that "if the assets of the insurance company to be taken over are insufficient to pay off all debts or the insurance business is transferred in accordance with the law, the insurance contract may be reasonably modified with the approval of the State Council".
Behind the discussion of the amendment is the contradiction between the underwriting side and the investment side, with the rapidly rising premiums on one side and the declining investment returns on the other.
After the new regulations on asset management, wealth management products have broken the rigid redemption, and insurance products with guaranteed interest rates have been labeled as "rigid redemption". Since 2022, the 3.0% predetermined interest rate of incremental whole life insurance products has become the absolute staple of the life insurance market.
The insurance industry has the "three differences" of death difference, fee difference and interest rate difference, which refers to the difference between the actual income of insurance funds and the capital cost of the policy, which is the most important source of profit for life insurance companies. When the company's debt cost is high, and as interest rates fall, investment income is under pressure, and it is difficult to cover the cost of debt, resulting in the risk of "interest rate spread loss".
The data of the first quarter shows that the insurance industry is currently facing the pressure of interest rate loss: according to statistics, in the first quarter of this year, the insurance business income of 76 life insurance companies reached about 1.35 trillion yuan, a year-on-year increase of 6.35%; On the investment side, the investment yield of many life insurance companies hovered around 2% in the first quarter, and the comprehensive capital cost of some small and medium-sized life insurance companies was also higher than the current actual investment return rate.
In order to mitigate the risk of interest rate loss, the regulator has continuously lowered the booking rate. According to industry insiders, in the middle of this year, the scheduled interest rate will be directly reduced from 3.0% to 2.5%, and the window period is expected to be only one month, no longer giving insurance companies "speculation" time, and the future 2.5% scheduled interest rate may continue to fall.
In addition to lowering the predetermined interest rate, vigorously issuing low-cost new policies to dilute high-cost policies, matching assets and liabilities, and pursuing relatively stable and long-term investments are all effective ways to resolve the risk of "interest rate loss".
"The impact of the revision of the insurance law is huge, and the establishment of an exit mechanism is necessary, but the resulting crisis of confidence is also immeasurable." A source close to the regulator commented.
"The insurance industry's 'breaking the rigid exchange' may be the long-term trend of the industry in the future." In terms of consumer insurance product selection, Alex Mou, a North American associate actuary and actuarial vision manager, suggested that consumers should not worry about the safety of policies that have been sold, and they do not need to surrender the policy in advance because of anxiety. However, for the insurance policy to be purchased in the future, it is recommended that consumers choose a company with strong financial strength and stable operation.
1. The confusion and entanglement of the policyholder
In the dual voice of "insurance breaking the rumors of just redemption" and the 3% predetermined interest rate product will usher in a reduction, many policyholders are entangled in the choice of whether to purchase additional products.
On April 10, in order to reduce the net interest margin, China Merchants Bank no longer issued new quotas for 3-year and 5-year large-denomination certificates of deposit. Then, on May 7, a number of account managers of Minsheng Bank also said that they would stop selling large-value certificate of deposit products with a maturity of half a year or more nationwide from May 7.
Wu Qin, a post-70s generation who has always kept her deposits in banks, has realized in recent years that the income of banks' wealth management products is declining, and large-amount certificate of deposit products are being suspended recently. After several times of communication with insurance agents, Wu Qin selected a bancassurance fixed income product with three years of insurance and eight years, with an interest rate of nearly 3% in the sixth year.
However, with the recent rumors that "insurance is also going to break the rigid redemption", Wu Qin's heart is also rippling. Wu Qin said that she recently heard rumors from a wealth manager at a branch of a Bank of Shanghai who went to the company's headquarters for a meeting last week and mentioned that the 3% interest rate insurance product will be lowered to 2.5% in the future, but the specific mediation time has not yet been determined.
On the one hand, the scheduled interest rate of insurance and wealth management products in the future will be reduced to 2.5% in the middle of the year, and the 3% scheduled interest rate products will be discontinued.
"The reason why banks don't do business is very simple, because not only do they not make money, but they even lose money." Judging from the current agent's "words" for the promotion of increased whole life insurance, an agent of a leading insurance company said that the interest rate of 1-3 months large-amount certificates of deposit currently on sale is 1.7%, but the insurance and wealth management products are written in black and white in the contract, which can "lock" the income.
However, from the communication with a number of top insurance company agents and head brokerage company brokers, most of them believe that under the current situation, the income of insurance and wealth management products can be locked, but it is difficult to say if the product is adjusted in the future, but it is certain that the principal of insurance and wealth management products will be guaranteed to be undamaged. "Breaking the income just redemption is one of the options, and there is a high probability that insurance and wealth management products will not be able to be redeemed in the future. But compared to other products, it is already the best choice. ”
According to the visit to some Bank of Shanghai outlets, some bank outlets still recommend bancassurance products such as increased whole life insurance as the main popular products, and label them as "limited quota". It is understood that there are not many whole life insurance products with an increased interest rate of 3% on the market.
(Image source: on-site visit shooting)
There are policyholders who are struggling at the intersection of new entry and additional purchases, and there are also policyholders who bought a whole life insurance product with a predetermined interest rate increase of 3.53% from a small and medium-sized life insurance company in April last year, and are afraid that they will not be able to pay as scheduled in the future.
2. The first question of insurance: Will insurance and wealth management products break the "just exchange"?
For the future, there are two main types of feedback from bank outlets: one type of wealth management manager said that the guaranteed interest rate of insurance and wealth management products will be written into the policy contract, and the current "Insurance Law" is only a draft, and there is no clear provision, so there is no need to be anxious;
Another type of financial manager said frankly that the state is currently formulating relevant regulations, if the terms are modified in the future, the cash value of follow-up insurance and wealth management may not be guaranteed, it is recommended to buy a relatively good brand of insurance companies, its ability to redeem is relatively strong, and the income will be relatively stable.
From the perspective of the future interest rate trend, there are currently two views in the industry: one view is that the future will be in the era of low interest rates, and the investment income will continue to decline in the next 5 or 10 years; Another view is that the economy is cyclical, for example, 10 years is a cycle, and it is currently in the first cycle, and it may slow down in 10 years.
According to a large insurance company product actuarial person, the future of interest rates will rise, fall, because it is impossible to judge the future prospects of the industry, then the spread loss is difficult to quantify, from the current general trend, the return on investment in the past two years has declined, the future 2.5% may need to be guarded.
According to Yang Jun, chairman of Centennial Insurance Asset Management, he previously wrote that the scenario of interest rate loss is often too optimistic about the long-term trend of interest rates, and a large number of long-term policies with high fixed interest rates have been accumulated during the economic upswing. If the spread loss is not effectively resolved for a long time, it will directly threaten the profitability and operational stability of the life insurance company, and may eventually lead to bankruptcy and endanger the interests of policyholders.
"At present, the problem of interest margin loss of small and medium-sized life insurance companies has been very serious." Yang Jun said that the industry generally estimates that the current comprehensive cost of funds of small and medium-sized life insurance companies is about 5%, which is much higher than the current level of actual investment return. Interest margin loss is the "culprit" of sending small and medium-sized life insurance companies to the ICU.
In order to reduce the "hole" of interest rate loss, in addition to lowering the predetermined interest rate to 2.5% for new policies, the cash value of existing insurance and wealth management policies such as universal insurance and increased whole life may change in the future.
According to an actuarial source from a large insurance company, from the perspective of the entire big finance, the development of the insurance industry is indeed relatively extensive, and the current supervision is relatively strong, and the main direction is to avoid new risks. At present, from the perspective of the entire industry, insurance and wealth management products are priced at a predetermined interest rate of 3.0%, which is the cost of consumers, but after selling, the entire industry has to bear the cost, which is what the regulator is worried about, and it hopes to solve this problem from the actuarial top-level design.
"The future adjustment of the stock of insurance policies may cause greater public opinion, but this is an important direction to solve industry problems in the future, the current trial from the new business side, but the ultimate goal in the future is to adjust the stock of policies." The actuarial of the above-mentioned large insurance company admitted that in recent years, the regulator has held several meetings to discuss the issue of interest rate loss in the industry, and its ideal model is not to force the predetermined interest rate from 3.5% to 2.5%, but to design a set of floating mechanism income linked to the general environment.
Over the past few years, most life insurers have assumed long-term investment returns of around 5%. Recently, in order to further reduce the risk of spread loss, listed insurance companies such as Chinese Life, Chinese People's Insurance Company, Ping An of China, China Pacific Insurance, and Xinhua Insurance have lowered their long-term return on investment assumptions for life insurance to 4.5%, which is also the second downward revision of this assumption in seven years.
Fitch Ratings believes that life insurers that rely on the sale of savings products for profit are more sensitive to interest rates, and the spread loss or spread gain is relatively high. A reduction in the risk discount rate usually increases the present value of future profits, thereby increasing the embedded value. According to the life insurer's annual report, changes in economic assumptions in 2023 have led to a decrease in the value of new business and embedded value, but the contraction in embedded value is less than that of new business. Lowering ROI assumptions has a much greater impact on new business value than on embedded value.
3. The second question of insurance: as long as the rate of return is high, it doesn't matter which company you choose for the product?
"It can guarantee the income and make a rigid payment", "the insurance company will not go bankrupt, and even if the insurance policy is bankrupt, it will definitely be able to be paid", this is the phrase often used by insurance agents when selling. Therefore, when purchasing insurance and wealth management products, many consumers choose products from small and medium-sized life insurance companies with better returns.
So, based on these stereotypes alone, can we ignore the qualification judgment of insurance companies? The answer, of course, is: No.
From the observation of consumers, Fang Qi had purchased a 4.025% incremental whole life insurance policy from a small life insurance company in 2018, and when she saw the proposed amendments to the draft Insurance Law, she fell into deep thought and began to check the profitability of this small life insurance company in recent years, and she was surprised to find that the company had been suspended from disclosing its annual report.
Judging from the net profit performance of life insurance companies in the first quarter of 2024, public data shows that a total of 76 life insurance companies have announced their results, of which only 36 life insurance companies are profitable, and 40 life insurance companies are loss-making, accounting for more than half, an increase of 9 over the same period last year, with a total loss of 11.371 billion yuan. At the same time, the number of companies with losses of more than 1 billion yuan also increased from 2 in the same period last year to 4. According to the original insurance premium income at the end of 2023, 28 of the insurance companies with a scale of less than 10 billion yuan are loss-making.
From the perspective of the solvency adequacy ratio index of life insurance companies, among the 78 life insurance companies in 2023, in terms of risk rating, 2 will be D, namely Three Gorges Life Insurance and Peking University Founder Life Insurance; 5 are C, namely Huahui Life Insurance, Ping An Pension, United Life Insurance, Changsheng Life Insurance and Bohai Life Insurance.
The solvency adequacy ratio is the capital adequacy ratio, which refers to the ratio of the actual capital to the minimum capital of the insurance company. The comprehensive risk rating is a measure of the overall solvency risk of an insurance company.
On January 25, at a press conference on the high-quality economic and social development of financial services held by the State Council Information Office, Liu Zhiqing, spokesperson of the State Administration of Financial Supervision and Administration and head of the Department of Statistics and Risk Monitoring, introduced that the comprehensive and core solvency adequacy ratios of life insurance companies at the end of 2023 were 186.2% and 110.3%, respectively.
According to the Regulations on the Administration of Solvency of Insurance Companies, a company with a solvency adequacy ratio of less than 100% is considered a company with insufficient solvency. Among the 78 life insurance companies in 2023, there are 22 companies with core solvency adequacy ratios below 100%, including China Post Life Insurance, Guolian Life Insurance, Hongkang Life Insurance, Beijing Life Insurance, Li'an Life Insurance, Happy Life Insurance, etc. Among them, the core solvency adequacy ratio of Fuxing United Health Insurance and Bohai Life Insurance is low, with only 55.3% and 55.5% respectively.
(Source: Solvency Report of Listed Insurers 2023)
According to public information, as of the first quarter of 2023, 14 insurance companies have suspended the disclosure of annual reports or solvency reports, of which 6 are in the solvency exemption period (still in the process of risk disposal), including Dajia Insurance (formerly Anbang Life), Ruizhong Life Insurance (formerly China Life), Zhonghui Life Insurance (formerly Tianan Life), Harbour Life Insurance (formerly Evergrande Life), Harmony Health, and BYD Property Insurance (formerly Yi'an Property Insurance).
At the same time, there are 8 problematic insurers that have suspended the disclosure of solvency reports, including Junkang Life Insurance, Qianhai Life Insurance, Shanghai Life Insurance, Zhongrong Life Insurance, Zhujiang Life Insurance, Life Insurance, Centennial Life Insurance and Kunlun Health. Statistics show that the total assets of the above-mentioned institutions are about 1.5 trillion yuan.
Mu Jianqun said that because China's insurance industry has a relatively short development process in the past, the financial regulatory system is in the process of gradual improvement, and at the same time it has caught up with the cycle of China's rapid economic growth, and has hardly experienced a relatively serious downturn and recession, so there is still a long way to go in terms of risk prevention and disposal.
4. The third question of insurance: After many years, can the policy guarantee full payment?
At present, the backing mechanism for insurance policies is the insurance protection fund, which can cover the bankruptcy, liquidation and rescue of insurance companies. According to Article 22 of the Measures for the Administration of the Insurance Security Fund, when the liquidated assets of an insurance company that has been revoked or bankrupt in accordance with the law are insufficient to repay the policy benefits of the life insurance contract, the Insurance Security Fund may provide assistance to the transferee company, and the amount of relief for individual and institutional policyholders shall not exceed 90% and 80% of the policy benefits before the transfer, respectively.
It is worth noting that as of December 31, 2022, the balance of the insurance security fund (before final settlement) was 203.298 billion yuan, of which the property insurance security fund was 124.403 billion yuan, accounting for 61.19%; The life insurance security fund was 78.895 billion yuan, accounting for 38.81%.
In recent years, consumers have gradually turned their investment attention to insurance, believing that although the investment return of insurance products is not high, it is better to be stable, and the products are "just redeemed" and will not default.
According to Mu Jianqun's analysis, Greece's debts can default, Silicon Valley Bank in the United States can fail, and Nissan Life Insurance Company, which has been operating in Japan for nearly 100 years, can also go bankrupt, so theoretically speaking, there is no "absolutely safe" financial investment product in the market. The safety of the investment depends on the creditworthiness of the issuer or seller of the financial product, as well as the needs of the country at different stages of development.
A North American actuary in the industry said that the current product form of the insurance industry has gradually shown a trend of "breaking the rigid exchange". It said that after the suspension of 3.5% interest rate insurance products last year, the market began to fully transform to 2.5% dividend insurance, which fully reflects the trend of "breaking the rigid exchange" in the insurance industry. For insurance companies, participating insurance products provide lower guaranteed returns and higher expected returns, and while providing customers with higher potential returns, they transfer part of the investment risk to customers to bear, which is actually a kind of "breaking the rigid exchange" idea.
"With the further maturity of China's insurance market, the average guaranteed income that insurance products can provide will also be further reduced, like the Hong Kong insurance market, the dividend insurance will be the mainstream of the market, and gradually reduce the investment risk of insurance companies themselves, so that the operation of insurance companies can be more sustainable and stable." So says the above-mentioned North American actuary.
So, under the pressure of broken redemption and interest rate loss, can consumers' insurance policies be guaranteed to be paid in full in the future?
According to an actuary in the industry, from the perspective of protection products, critical illness insurance, medical insurance, accident insurance and life insurance (term life insurance and leveraged whole life insurance), such products are mainly reinsurance companies with more compensation amounts, and after deducting the timeliness of claims, they can be redeemed. However, if the insurance company is in a great crisis, there may be a first refusal or delay in the settlement of insurance claims.
From the perspective of savings insurance products, the above-mentioned actuaries in the industry said that if it is a stable insurance company, it can continue to make profits and have stable premiums, and it is no problem to pay according to the contract; However, for aggressive insurance companies, once there is a cash flow liquidity crisis, the biggest problem for such insurance companies is that the guaranteed payment part of the reserve fund is insufficient, and it will be difficult to pay according to the contract.
"There are also precedents in foreign countries for the redemption of such insurance companies, and it is expected that they will be paid according to the discount of cash value or the average level of the insurance industry during the same period." So says the above-mentioned actuary in the industry.
(Wu Qin and Fang Qi are pseudonyms in the article)