If the scheduled interest rate of insurance products is lowered again, can the "2 era" resolve the risk of interest rate loss?

Any duration stall in the insurance industry carries significant risks. Due to the volatility of the equity market in recent years and the continuous decline of domestic long-term interest rates, the investment income of insurance companies has generally performed poorly, while the scale of premiums has been rising. The mismatch of "capital and liability" is the root cause of the risk of interest margin loss of insurance companies. Since the pressure on the investment side is not breakable in the short term, adjusting the liability side has become a top priority. Based on this, in early August, the regulatory authorities announced that the scheduled interest rate of insurance products was reduced by 0.5%, which also means that the scheduled interest rate of insurance products has entered the "2 era".

In order to prevent the risk of interest margin loss of insurance companies, the regulator has taken further measures.

On August 2, the State Administration of Financial Regulation (SAFS) lowered the scheduled interest rate for insurance products again, this time by 50 basis points across the board.

From the perspective of the insurance industry, the mismatch of "capital and liability" has always been a chronic problem in the insurance industry. This can be seen from the growth rate of the premium scale in the past two years, under the impulse to expand the liability side, the asset side of insurance companies is widely planted and thinly earned.

Taking history as a mirror, at the turn of the millennium, insurance companies are in mourning. At that time, the high predetermined interest rate policies of insurance companies drove the scale of premiums skyrocketed, but the income on the asset side obviously could not keep up, resulting in "the more you sell, the more you lose", and the consequence was that the interest rate loss of China's life insurance was as high as more than 50 billion yuan, which made many insurance companies saddled with huge interest rate loss liabilities.

Predetermined interest rate breakdown of insurance products "3"

From 4 to 3 and now to 2, the predetermined interest rate of insurance products is constantly refreshing new lows.

At the beginning of August, the State Administration of Financial Supervision issued the "Notice on Improving the Pricing Mechanism of Life Insurance Products" to the industry, which adjusted the predetermined interest rate of insurance products again, and in general, it was reduced by 0.5% across the board.

Specifically, the upper limit of the predetermined interest rate of ordinary life insurance products has been lowered from 3.0% to 2.5%, the predetermined interest rate of participating insurance has been reduced from 2.5% to no more than 2.0%, and the predetermined interest rate of universal insurance has been reduced from the current minimum guarantee of no more than 2.0% to no more than 1.5%.

It is worth mentioning that among the many types of insurance, the impact of participating insurance may be greater.

In July last year, dividend insurance was less affected by the decline in the scheduled interest rate, and at the same time, due to its characteristics of "guaranteed income + dividends", it became the target of insurance companies.

Among the 73 life insurance institutions that disclosed the top five products of original premium income in the 2023 annual report, 45 of the top five products of the company included participating insurance, accounting for more than 60%. Among them, Taikang Life, Huagui Life, and Allianz Life Insurance are among the top five insurance products in terms of premium income, and 4 of them are participating insurances.

According to industry insiders, the first quarter of 2024 can also see a significant increase in the proportion of participating insurance, from the previous basic 0 to the current 4%.

From the point of view of yield, it is also remarkable. It is estimated that although the fulfillment rate of dividend insurance is only 35.7%, the theoretical rate of return of customers can still reach 3%.

At present, the predetermined interest rate of life insurance products will enter the "2" era from 3.0%, which also means that the guaranteed income of the previously popular participating insurance will reach a new level. Based on this, how will the participating insurance, which was previously regarded as a "guest of honor" by many insurance companies, be affected?

Some actuaries pointed out that under the condition of the current predetermined interest rate of 2.5% for participating insurance, when the dividend fulfillment ratio reaches 35.7%, the customer's theoretical rate of return is 3%, and when the dividend fulfillment ratio is 100%, the customer's theoretical rate of return can reach 3.9%; If the predetermined interest rate drops to 2% and the fulfillment ratio reaches 57.1%, the customer's theoretical rate of return will be 3%, and if the fulfillment ratio is 100%, the customer's theoretical rate of return will be between 3.5%~3.9%.

In fact, the reduction of the scheduled interest rate of insurance products is not sudden, the timeline is extended, and the adjustment of the scheduled interest rate of insurance products is only one year from the last time. At the end of July last year, the scheduled interest rate for insurance products was lowered to 3.0% from 3.5% previously. The last time the scheduled interest rate for the insurance industry was lowered from 4.025% to 3.5%, it took as much as four years to go.

Regulatory cuts in the scheduled interest rates of insurance products are closely related to the current capital market.

As we all know, the yield of 10-year Treasury bonds is the anchor of all asset prices, and all asset prices are basically priced with reference to the yield of 10-year Treasury bonds. According to Choice data, the yield on the 10-year Treasury bond closed at 2.5675% on January 2 this year, compared with 2.1475% on July 31.

The equity market continues to be volatile, with Choice data showing that from 2023 to the end of July this year, the CSI 300 will change by -10.94%.

As the market continues to slump and asset values continue to shrink, investors have suffered heavy losses. Insurance funds have always been the main force in the investment market, and such funds are the first to bear the brunt of the market downturn.

In other words, the continuous decline in interest rates and the poor return on insurance investment make it difficult for investment income to cover the cost of insurance policies. Last year, insurers had a comprehensive return on investment of 3.22 percent, which is just one step away from the 3 percent cost of debt.

"Qualifications" do not match

The mismatch between liabilities and assets is the root cause of the risk of interest margin loss for insurance companies.

The profit of life insurance is made up of three parts, namely the death spread, the fee spread, and the interest rate spread. In the past two years, due to the intensification of competition, the insurance market has become seriously homogeneous, and the profit that can be contributed by the difference between death and fee is relatively small. The profits of insurance companies mainly depend on interest rate spreads, and once the spread loss is formed, it will drag down the performance of insurance companies.

It is worth noting that when the "rumors" of the scheduled interest rate reduction in the insurance industry are spreading, the market often has the phenomenon of 'speculation and stop selling'. In 2022, 2023 and since the beginning of this year, the industry has experienced several large-scale sales suspensions, and the speculation and sales are generally savings insurance with high guaranteed interest rates.

This kind of aggressive sales method will accumulate a considerable number of high-cost policies, which is easy to form the risk of interest margin loss when the investment return is poor in the later stage.

We can also get a glimpse of the premium scale of insurance companies in recent years. According to the data released by the State Administration of Financial Regulation, the insurance industry's original insurance premium income in the first half of the year was 3.55 trillion yuan. Among them, the original insurance premium income of property insurance was 744.2 billion yuan, and the original insurance premium income of life insurance was 2.8 trillion yuan. On a comparable basis, the industry's aggregate primary insurance premium income increased by 4.9% year-on-year.

The size of the premium is an important indicator to measure the size and business scale of an insurance company. Therefore, it is important for insurers to maintain a consistent increase in premiums.

However, if the "continuous increase" of the premium scale collides with the "wide variety and thin income" of investment income, it will exacerbate the problem of interest rate loss, so that the insurance company "sells more, loses more".

If the supervision does not intervene, it is tantamount to "drinking water to quench thirst".

Among them, the most typical is the interest rate loss event in 1999. At that time, the interest rate on bank deposits soared to 10%, and in order to compete with the banks, insurance companies launched policies with high predetermined interest rates. However, since then, the central bank has cut interest rates continuously, and bank deposit rates have also been lowered. Some insurance companies don't smell the danger. As a result, before 1999, the spread loss of China's life insurance was as high as more than 50 billion yuan, and at that time, a number of insurance companies were saddled with huge spread loss liabilities.

In recent years, there have been signs that history is repeating itself in the insurance industry. In 2023, the annualized return on financial investment of insurance funds will be 2.23%, and the annualized comprehensive return on investment will be 3.22%, both of which are at multi-year lows. Among them, the return on financial investment of 2.23% hit the lowest level since 2008 and fell below 3% for the first time since 2008; The comprehensive investment return is the "second lowest" since 2011, only better than the 1.83% in 2022.

The aggressive expansion of the liability side and the decline in income on the asset side have made many insurance companies complain. In 2023, the total premium income of 78 life insurance companies will be 3.09 trillion yuan, a year-on-year increase of 8.4%. However, net profit decreased by 32.3 billion yuan year-on-year to 130.7 billion yuan, and the spearhead of increasing revenue but not increasing profits pointed directly at the loss of interest margins.

Gong Xingfeng, vice president and chief actuary of Xinhua Insurance, said that the volatility of the capital market in 2023 has taught the entire life insurance industry a vivid lesson on the risk of interest rate spread loss. The lesson is about the leverage of interest rates, especially for long-term liabilities, and the losses that can be huge if they are not covered by the costs.

For example, CITIC Chengbao Life Insurance suffered a loss of more than 3.4 billion yuan in the first half of 2024, and the culprit of the huge loss was the decline in interest rates and the high volatility of the equity market.

Behind the continuous reduction of the predetermined interest rate of insurance products

If there is no solution to the pressure on the asset side of insurance companies in the short term, they can only reduce the product interest rate to control the cost of the liability side, and balance and match the duration of the debt and the duration of the asset.

The regulators have repeatedly lowered the interest rate of insurance products to ensure the safety of the financial system and prevent the risk of interest rate loss of insurance companies and other industries. As we all know, insurance is one of the three pillars of finance, banking, insurance, and securities, known as the troika of the financial industry, which shows the importance of insurance in the financial industry.

For the insurance companies themselves, although the reduction of product interest rates can reduce the risk of interest margin loss to a certain extent, it will also reduce the attractiveness of traditional insurance products. For insurance practitioners, this means that the product is not so easy to sell.

Qiu Jian, chief insurance researcher at the Research Institute of China United Insurance Group Co., Ltd., said, "After the scheduled interest rate of the product drops, the industry competition model will change, no longer positioning insurance products as a function similar to wealth management in the past, but forcing life insurance practitioners to return to the basic protection function of life insurance, and no longer drive sales through higher investment returns." ”

Yang Zeyun, a teacher at the Department of Finance at the School of Business of Beijing Union University, pointed out that "if we must start from the perspective of investment returns, in a market environment where interest rates are declining, dividend insurance may be more able to meet market demand." "Participating insurance includes not only the part of the predetermined interest rate, but also the dividends.

Moreover, the regulator pointed out in the "Notice" that for participating insurance products and universal insurance products, when demonstrating the benefits of the policy, each company should highlight the insurance protection function of the product, emphasize the interest rate risk sharing and investment income sharing mechanism of the account, help customers fully understand the characteristics of the product, and balance the relationship between the predetermined interest rate or the minimum guaranteed interest rate and the floating income, the demonstration benefit and the dividend fulfillment rate.

Coupled with the reduction in bank deposit rates, bank deposits have become less attractive. In comparison, participating insurance, although not as attractive as before, is still better than deposits and government bonds.

With the continuous decline of domestic long-term interest rates, the scheduled interest rates of insurance products may further decline in the future, which is both an opportunity and a challenge for insurance companies.