New Insurance Adjustment: All products with a predetermined interest rate greater than 3.5% will be delisted? Interest rate | insurance products | delisting

Recently, it has been reported that all insurance products with a predetermined interest rate greater than 3.5% will be delisted after July 31st, and a new round of gear shifting for insurance products is beginning.

The reporter called multiple insurance customer service representatives and learned that insurance products with a predetermined interest rate greater than 3.5% have indeed been fully taken down. China Pacific Insurance delisted life insurance with interest rates above 3.5% before August 1st, and as a supplement, launched multiple new life insurance with interest rates adjusted to 3%. China Life Insurance has recently taken down more than 20 products, and currently there are no products with a predetermined interest rate above 3.5%. There is no specific notice when new products will be launched. Recently, PICC has taken down 61 products with interest rates above 3.5%.

On some insurance online platforms, it can be seen that the highest interest rate for insurance products has been reduced to 3.0%. On the platform of Alipay "Ant Insurance", the highest annual growth rate in the column of increased life insurance is 3.0%; The life insurance product named "Shengshi Yisheng" on the Ping An Insurance mini program has an annual increase in coverage of 2.5%; The official website of China People's Insurance Corporation (PICC) is selling PICC Life Insurance's annual exclusive commercial pension insurance, with a maximum guarantee interest rate of 3.0%.

Why would the predetermined interest rate be adjusted? What impact will this adjustment have on insurance companies and consumers?

Preventing the risk of interest rate spread loss

The adjustment of the scheduled interest rate is closely related to the bank's interest rate reduction. In June this year, the six major state-owned banks lowered their deposit listing rates again after September 2022. Among them, the current deposit interest rate has been lowered from 0.25% to 0.2%, the 2-year fixed deposit interest rate has been lowered by 10 basis points to 2.05%, the 3-year fixed deposit interest rate has been lowered by 15 basis points to 2.45%, and the 5-year fixed deposit interest rate has been lowered by 15 basis points to 2.5%.

"If the guaranteed return rate of insurance products is much higher than the bank interest rate, it will pose a great risk to the operation of insurance companies, which is the risk of interest rate spread loss," explained Su Fang, director of the Institute of Finance and Insurance at Shanghai University of Finance and Economics.

Interest spread loss refers to the loss caused by the return on investment of insurance funds being lower than the average predetermined interest rate of a valid insurance contract. Simply put, insurance companies sell policies at high predetermined interest rates, but if the investment return is lower than the predetermined interest rate, the resulting loss is called spread loss.

It should be noted that life insurance has a revenue locking function, and insurance contracts have a long-term nature. Once signed, the predetermined interest rate will not change, which belongs to rigid costs. Insurance companies often invest premiums in the bond and currency markets, and the interest promised to consumers also comes from these investment returns. As banks lower interest rates, the yields of the bond and money markets will also decrease.

Ping An Securities stated in its research report that since 2018, the long-term interest rate center of major securities has declined, and the supply of long-term bonds and high-quality non-standard assets is limited, posing challenges to the allocation of insurance fixed income assets. Meanwhile, the volatility of equity market returns has a significant impact on investment returns. When the investment returns of insurance companies fall short of expectations, it is likely to cause spread loss risk.

In fact, this is not the first time that the policy reserve interest rate has been adjusted, and some insurance companies also carried the burden of interest rate spread losses in the 1990s. In the early 1990s, the average one-year interest rate of banks was as high as 10%, and the predetermined interest rate of savings insurance was also above 8%. A few years later, the market situation turned sharply downwards, followed by the Asian financial crisis. Starting from May 1996, the central bank implemented eight interest rate cuts, and the benchmark interest rate for one-year bank deposits was lowered from 9.18% to 1.98% in 2002.

In 1999, the former China Insurance Regulatory Commission issued an urgent notice on adjusting the predetermined interest rate of life insurance policies, which comprehensively suspended high predetermined interest rate products and forced life insurance companies to adjust the predetermined interest rate of life insurance policies to no more than 2.5% annual compound interest. According to relevant data, before the release of this policy, China's life insurance industry had accumulated interest rate spread losses of tens of billions of yuan.

In the long run, the benefits outweigh the drawbacks for insurance companies

Products with high interest rates are a common means for insurance companies to occupy the insurance market and expand their premium scale. The "window period" before the product adjustment brought a wave of sales frenzy to the insurance products that were still on the shelves at that time.

According to announcements from the top five listed insurance companies, the year-on-year growth of the personal insurance sector in June exceeded double digits. China Life Insurance achieved a monthly premium income of 71.6 billion yuan, a year-on-year increase of 18.35%; Ping An Life Insurance achieved a premium income of 40.986 billion yuan, a year-on-year increase of 22.85%; Taiping Life Insurance achieved a premium income of 30.178 billion yuan, a year-on-year increase of 39.02%; Xinhua Life Insurance achieved a premium income of 19.634 billion yuan, a year-on-year increase of 24.21%; PICC Life Insurance achieved a premium income of 9.179 billion yuan, a year-on-year increase of 84.02%.

So, will the adjustment of interest rates cause the loss of insurance customers? The non bank team of Dongwu Securities believes that the adjustment of the predetermined interest rate sends a signal for regulatory prevention of interest rate spread risk, which is expected to guide life insurance companies to reduce their debt costs. "For insurance companies, this adjustment will bring insurance products and other financial products back to the same starting line of competition." Su Fang said that the decrease in predetermined interest rates may affect the sales of insurance products in the short term, but from the perspective of long-term risk control, the benefits outweigh the drawbacks for insurance companies.

It is worth mentioning that if investment returns continue to decline, it may also have an impact on the price of insurance products. Because the calculation of premiums is a complex process, insurance companies will use future estimated earnings to subsidize current premiums. If there is less profit from future investments, then the current premiums will naturally be higher. According to the non bank team of Dongwu Securities, when the predetermined interest rate is lowered from 3.5% to 3.0%, the corresponding gross premium increases for annuity insurance, lifelong life insurance, term life insurance, comprehensive insurance, and health insurance are 18.4%, 19.5%, 3.5%, 7.5%, and 16.4%, respectively. Short term insurance and long-term insurance products with stronger protection functions are relatively less sensitive to interest rates. Therefore, there is no need to overly worry about the pressure of new order data after this adjustment. Even if the predetermined interest rate drops, it will not have a significant impact on customers who pursue long-term stable returns with guaranteed principal.