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01339 PICC GROUP
RTNominal unchange2.500 0.000 (0.000%)
Research Report

02/09/2019 17:39

Icy winter coming for China's annuity underwriters - S&P

[ET Net News Agency, 2 September 2019] S&P Global Ratings said today that a regulatory
move to lower the discount rate on some insurance products in China will increase
sustainability in the sector, and curtail insurers' exposure to interest-rate risks.
However, it will also dent growth for annuities and some endowment insurance, because
lower promised returns on such products will decrease their selling appeal.
"China's latest regulation shows it's determined to control risks in the world's second
largest life insurance market," said S&P's credit analyst Eunice Tan. "This move comes
amid increasing volatility within the global and domestic capital markets, and a global
interest rate environment that is low for longer."
On 30 August 2019, the China Banking and Insurance Regulatory Commission (CBIRC)
announced the formation of a committee to review the valuation interest rate (VIR) based
on market conditions. The VIR is the rate insurers use when calculating the liabilities
they need to set aside.
At the same time, the CBRIC cut the current VIR cap to the lower of either: (i) 3.5% or
(ii) the interest rate used in pricing the product. The new cap applies to traditional
pensions sold after 5 August 2013, or traditional long-term annuities with a benefit
period of 10 years or above, and compares with a 4.025% cap implemented from August 2013.
S&P thinks the regulator's action is aimed at stopping insurers from offering high
guaranteed returns. Many annuity and endowment policies were hot sales products in the
past few years (particularly around 2014-2016). The policies, which function as savings
endowment contracts, promised guaranteed returns of up to 4.025%.
The credit rating agency anticipates new life-insurance business growth will slow in
2020, especially during the annual "jumpstart" period in the first quarter, with typically
high sales in 10-year annuity policies. In 2018, the premium income in the first quarter
represented over 40% of the sector's annual total.
A higher discount rate on savings-related products is part of a continuous effort by
regulators to promote protection-type policies. The agency believes the shift toward
protection could also strengthen life insurers' agency productivity as well as product
innovation. (KL)

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