After breaking the rigid redemption in the future, will your insurance policy be

Is buying insurance still safe under the risk of interest rate differential losses? Behind the discussion of the revision of the "Insurance Law" to break the rigid exchange, there is a contradiction between the underwriting and investment ends, with one side being the rapidly rising premiums, and the other side is the gradually declining investment return rates.

"The 'Insurance Law' will be amended," "Insurance will break the rigid exchange," "Allowing insurance companies to modify contracts to lower interest rates"... Recently, with the news that the "Insurance Law" will be amended, policyholders' confusion has surged.

For a long time, insurance contracts have been the most stable financial contracts. The claim that insurance companies will not go bankrupt is the "rigid exchange Bible" that insurance company agents often mention, 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 "State Council's Legislative Work Plan for 2024." The notice shows that among the various revision drafts that are ready to be submitted for deliberation by the Standing Committee of the National People's Congress, the draft revision of the Insurance Law is included, which means that the pace of the revision of the "Insurance Law" is accelerating.

Although the proposed revision provisions are still under discussion, the one that has sparked heated debate is the proposed addition of "If the assets of the insurance company under administration are insufficient to pay off all debts or if the insurance business is transferred according to the law, with the approval of the State Council, reasonable changes can be made to the insurance contracts."

Behind the discussion of the revision is the contradiction between the underwriting and investment ends, with one side being the rapidly rising premiums, and the other side is the gradually declining investment return rates.

After the new regulations on asset management, wealth management products broke the rigid exchange, and insurance products with guaranteed interest rates were labeled with a big "rigid exchange" tag. Since 2022, the incremental life insurance products with a predetermined interest rate of 3.0% have become the absolute main products in the life insurance market.

The insurance industry has the "three differences" of death difference, expense difference, and interest rate difference. The interest rate difference refers to the difference between the actual return of the insurance fund operation and the capital cost of the policy, which is the main source of profit for life insurance companies. When the company's liability cost is relatively high, and with the decline in interest rates, the investment return faces pressure and is difficult to cover the liability cost, forming the risk of "interest rate differential loss."

The data for the first quarter shows the pressure of interest rate differential losses that the insurance industry is currently facing: According to data 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 end, in the first quarter, the investment return rates of many life insurance companies hovered around 2%, and the comprehensive capital costs of some small and medium-sized life insurance companies were also higher than the current actual investment return rate level.To mitigate the risk of interest rate differential losses, regulators have been continuously lowering the guaranteed interest rates. According to insiders in the industry, in the middle of this year, the guaranteed interest rate is indeed expected to be directly reduced from 3.0% to 2.5%, with an expected window period of only one month, no longer providing insurance companies with "speculative cessation" time, and the 2.5% guaranteed interest rate may continue to be adjusted downward in the future.

In addition to lowering the guaranteed interest rate, vigorously issuing low-cost new policies to dilute high-cost policies, properly matching assets and liabilities, and pursuing relatively stable and long-term investments are all effective ways to resolve the "interest rate differential loss" risk.

"The revision of the 'Insurance Law' has a huge impact, and the establishment of an exit mechanism is necessary, but the trust crisis it may trigger is immeasurable," commented a person close to the regulatory authority.

"The 'breaking of the rigid payment' in the insurance industry may be a long-term trend for the industry in the future," said Alex, a North American actuarial candidate and the person in charge of Actuarial Vision, regarding consumer choices of insurance products. Consumers can rest assured about the safety of policies that have already been sold, and there is no need to withdraw them prematurely due to anxiety. However, for future policies to be purchased, it is recommended that consumers choose companies with strong financial strength and stable operations.

The confusion and dilemma of policyholders

Amidst the dual voices of the "insurance breaking the rigid payment rumor" and the upcoming reduction of 3% guaranteed interest rate products, many policyholders are torn over whether to add more products.

On April 10th, to reduce the net interest margin, China Merchants Bank no longer issued new large-amount certificate of deposit products with terms of 3 years and 5 years. Subsequently, on May 7th, several customer managers of Minsheng Bank also stated that from May 7th, large-amount certificate of deposit products with a term of half a year or more will be suspended nationwide.

Wu Qian, a "post-70s" who has always kept her savings in the bank, has realized in recent years that the returns on bank wealth management products are declining, and large-amount certificate of deposit products are being suspended recently. After several communications and adjustments with insurance agents, Wu Qian chose a fixed-income silver insurance product with a three-year payment and eight-year protection, with an interest rate of nearly 3% in the sixth year.

However, with the recent rumors of "insurance also breaking the rigid payment" constantly circulating, Wu Qian's heart has also been stirred. Wu Qian stated that she recently heard from a wealth management manager at a Shanghai bank branch that she attended a company headquarters meeting at the end of April, mentioning that the future 3% interest rate insurance products will be reduced to 2.5%, but the specific adjustment time has not yet been determined.

On the one hand, the future insurance wealth management product guaranteed interest rate will be reduced to 2.5% in the middle of the year, and the 3% guaranteed interest rate products will be discontinued. On the other hand, the certainty of "locking" the future guaranteed interest rate also seems to be more "vague". Recently, Wu Qian has also fallen into a dilemma about purchasing insurance wealth management products."The reason banks don't engage in certain business is simple: not only do they fail to make a profit, but they may even incur losses." From the current sales "scripts" for increased term life insurance, a top insurance company's agent stated that the interest rates for large-amount certificates of deposit currently on sale with terms of 1 to 3 months are all 1.7%. However, the returns on insurance financial products are clearly written into the contract and can be "locked in."

However, from discussions with several top insurance company agents and top brokerage firm brokers, the majority believe that while the returns on insurance financial products can be locked in under current circumstances, it's uncertain if this will hold true if the products are adjusted in the future. Nevertheless, it is certain that insurance financial products guarantee the principal is intact. "Breaking the rigid return promise is one option; it is highly likely that insurance financial products will not be able to rigidly return in the future. But compared to other products, it is already the best choice."

Visiting some bank branches in Shanghai, it was observed that some still promote silver insurance products such as increased term life insurance as their main blockbuster products, and label them with "limited quota." It is understood that there are also not many increased term life insurance products with a 3% interest rate on the market currently.

There are policyholders who are torn at the crossroads of new purchases and additional purchases, and there are also those who bought an increased term life insurance product with a 3.53% pre-determined interest rate from a small and medium-sized life insurance company in April last year, fearing that they will not be able to cash in as scheduled in the future.

The first question for insurance: Will insurance financial products break the "rigid return promise"?

For the future, the current feedback from bank branches is mainly divided into two types: one type of financial manager states that the guaranteed interest rate of insurance financial products will be written into the insurance policy contract, and the current "Insurance Law" is only a draft, with no explicit provisions, so there is no need for anxiety.

The other type of financial manager frankly admits that the country is currently formulating relevant regulations, and if the terms are modified in the future, the cash value of subsequent insurance financial products may not be guaranteed. It is recommended to purchase insurance companies with relatively better brands, which have relatively stronger cashing capabilities and more stable returns.

Looking at the future interest rate trends, there are two views in the industry: one view believes that the future will be an era of low interest rates, and investment returns will continue to decline in the next 5 to 10 years; the other view believes that the economy is cyclical, for example, 10 years is a cycle, and we are currently in the first cycle, which may recover after 10 years.

According to a person in charge of product actuarial aspects of a large insurance company, there are both increases and decreases in future interest rate judgments because it is impossible to judge the future industry outlook, so the interest rate gap loss is also difficult to quantify. From the current overall trend, the investment return rate has decreased in the past two years, and it may need to be guarded at 2.5% in the future.

Yang Jun, the chairman of the century-old insurance asset management, previously wrote that the scenario of interest rate gap loss often occurs when the long-term trend of interest rates is overly optimistically predicted. During the economic upswing, a large number of long-term insurance policies with high fixed interest rates were accumulated. As the interest rate level declines, the investment return continues to fall, and the interest rate gap loss gradually emerges. If the interest rate gap loss is not effectively resolved in the long term, it will directly threaten the profitability and operational stability of life insurance companies, and may eventually lead to bankruptcy and endanger the interests of policyholders."Currently, the issue of interest rate differential losses for small and medium-sized life insurance companies has become very serious," Yang Jun stated. The industry generally estimates that the comprehensive funding cost for small and medium-sized life insurance companies is around 5%, which is significantly higher than the current actual investment return rate. Interest rate differential losses are the "culprit" that sends small and medium-sized life insurance companies into the ICU.

To reduce the "gap" of interest rate differential losses, in addition to lowering the preset interest rate for new insurance policies to 2.5%, the cash value of existing insurance financial products such as universal life insurance and increasing term life insurance may undergo changes in the future.

According to a person in charge of actuarial affairs at a large insurance company, from the perspective of the entire financial sector, the development of the insurance industry is indeed relatively extensive, and the current regulatory efforts are strong, with the main direction being to prevent new risks. Currently, from the perspective of the entire industry, insurance financial products are priced at a preset interest rate of 3.0%, which is the cost of guaranteed redemption for consumers. However, once sold, the entire industry has to bear the cost, which is a concern for regulators. They hope to solve this problem from the top-level design of actuarial science, and future regulation may adjust the existing insurance financial products, with the cash value of products potentially being adjusted in the future.

"Adjusting the existing insurance policies in the future may cause a significant public opinion, but this is an important direction for solving industry issues in the future. Currently, we start with trials in new business, but the ultimate goal is still to adjust the existing insurance policies," the person in charge of actuarial affairs at the large insurance company admitted. In recent years, regulators have held multiple meetings to discuss the industry's interest rate differential loss issues. Their ideal model is not to forcibly reduce the preset interest rate from 3.5% to 2.5%, but to design a floating mechanism for returns that is linked to the overall environment.

In the past few years, the long-term investment return assumptions for most life insurance companies have been around 5%. Recently, to further reduce the risk of interest rate differential losses, listed insurance companies such as China Life, PICC, Ping An, China Pacific, and New China Life have successively reduced their long-term investment return assumptions for life insurance to 4.5%, which is the second adjustment of this assumption in seven years.

Fitch Ratings believes that for life insurance companies that rely on the sale of savings products for profit, their interest rate sensitivity is higher, and the proportion of interest rate differential losses or gains 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 annual reports of life insurance companies, the changes in economic assumptions in 2023 have led to a decrease in the value of new business and embedded value, but the contraction of embedded value is lower than that of new business value. The impact of lowering investment return assumptions on new business value is much greater than on embedded value.

Second question for insurance purchase: As long as the return rate is high, it doesn't matter which company's product is chosen?

"Can guarantee returns, rigid redemption," "Insurance companies will not go bankrupt, and even if they do, the policy is definitely redeemable," these are the phrases often used by insurance agents when selling. Therefore, when purchasing insurance financial products, many consumers choose products from small and medium-sized life insurance companies with better returns.

Thus, can these stereotypes alone ignore the assessment of the insurance company's qualifications? The answer is, of course, No.

From the observation of consumers, Fang Qi purchased an increasing term life insurance with an interest rate of 4.025% from a small life insurance company in 2018. After seeing the proposed revision of the "Insurance Law" draft, she fell into deep thought and began to look up the profit situation of this small life insurance company in recent years. She was surprised to find that the company had been suspended from disclosing its annual report.Looking at 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 performance, with only 36 companies making a profit, while 40 companies suffered losses, accounting for more than half, an increase of 9 companies compared to the same period last year, with a total loss of 11.371 billion yuan. At the same time, the number of companies with losses exceeding 1 billion has also increased from 2 to 4 compared to the same period last year. In terms of scale, the institutions that are still losing money are still concentrated in small and medium-sized insurance companies. Among the insurance companies with less than 10 billion yuan in original insurance premiums at the end of 2023, there are 28 companies that are losing money.

Looking at the solvency adequacy ratio of life insurance companies, among the 78 life insurance companies in 2023, in terms of risk rating, 2 companies are D, which are Sanxia Life and Peking University Founders Life; 5 companies are C, which are Huahui Life, Ping An Pension, Hezhong Life, Changsheng Life, and Bohai Life.

The solvency adequacy ratio, also known as the capital adequacy ratio, refers to the ratio of the actual capital of an insurance company to the minimum capital. In layman's terms, it is the number of times an insurance company can pay for all the insurance policies it has underwritten at the same time. The comprehensive risk rating is a measure of the overall solvency risk of an insurance company.

On January 25, at the press conference on financial services for high-quality economic and social development held by the State Council Information Office, Liu Zhiqing, the spokesperson for the State Financial Regulatory Administration and the head of the Statistics and Risk Monitoring Department, introduced that at the end of 2023, the comprehensive and core solvency adequacy ratios of life insurance companies were 186.2% and 110.3%, respectively.

According to the "Insurance Company Solvency Management Regulations", companies with a solvency adequacy ratio below 100% are considered to have insufficient solvency. Among the 78 life insurance companies in 2023, a total of 22 companies had a core solvency adequacy ratio below 100%, including China Post Life, Guolian Life, Hongkang Life, Beijing Life, Li'an Life, and Xingfu Life. Among them, the core solvency adequacy ratios of Fuxing United Health Insurance and Bohai Life were relatively low, at 55.3% and 55.5%, respectively.

Public information shows that as of the first quarter of 2023, 14 insurance companies have suspended the disclosure of annual reports or solvency reports, among which 6 are in the solvency exemption period (still in the risk disposal process), including Daxiang Insurance (formerly Anbang Life), Rui Zhong Life (formerly Huaxia Life), Zhonghui Life (formerly Tian'an Life), Haigang Life (formerly Evergrande Life), Harmony Health, and BYD Property Insurance (formerly Yi'an Property Insurance).

At the same time, there are another 8 insurance companies that have suspended the disclosure of solvency reports, including Jun Kang Life, Qianhai Life, Shanghai Life, Zhongrong Life, Pearl River Life, Life Life, Centennial Life, and Kunlun Health. Statistical data shows that the total asset scale of the above institutions is about 1.5 trillion yuan.

Mou Jianqun said that due to the relatively short development history of China's insurance industry, the financial regulatory system is in the process of gradual improvement, and at the same time, it has caught up with the high-speed growth cycle of China's economy, and has hardly experienced a more serious downturn and recession. Therefore, there is indeed a long way to go in terms of risk prevention and disposal.

The third question for insurance: Can the policy guarantee full payment many years later?

At present, the bottom mechanism for policies is the insurance guarantee fund, which can provide a bottom line for the bankruptcy, liquidation, and rescue of insurance companies. According to Article 22 of the "Insurance Guarantee Fund Management Regulations", when the liquidation assets of an insurance company that has been legally revoked or legally implemented for bankruptcy are insufficient to pay for the benefits of life insurance contracts, the insurance guarantee fund can provide assistance to the receiving company, and the assistance amount to individual and institutional policyholders is limited to not exceeding 90% and 80% of the policy benefits before and after the transfer, respectively.It is noteworthy that, as of December 31, 2022, the balance of the insurance guarantee fund (before final settlement and payment) was 203.298 billion yuan, of which the property insurance guarantee fund was 124.403 billion yuan, accounting for 61.19%; the life insurance guarantee fund was 78.895 billion yuan, accounting for 38.81%.

In recent years, consumers have gradually turned their investment focus to insurance, believing that although the investment returns of insurance products are not high, they are stable, and the products are "guaranteed to pay out", without default.

Mou Jianqun analyzed that Greece's debt can default, Silicon Valley Bank in the United States can go bankrupt, and Nissan Life Insurance Company in Japan, which has been operating for nearly a century, can also go bankrupt. Therefore, theoretically, there is no "absolutely safe" financial investment product in the market. The safety of investment depends on the credit situation behind the issuer or seller of the financial product, as well as the development needs of the country at different stages.

A North American actuary in the industry said that the current insurance industry product forms have gradually shown a trend of "breaking the guarantee to pay out". He said that after the 3.5% interest rate insurance products were discontinued last year, the market fully began to transform towards 2.5% dividend insurance, which fully reflected the trend of "breaking the guarantee to pay out" in the insurance industry. For insurance companies, dividend insurance products provide lower guaranteed returns and higher expected returns. While providing customers with higher potential returns, they transfer part of the investment risks to the customers to bear. In fact, it is a way of thinking of "breaking the guarantee to pay out".

"With the further maturity of the Chinese insurance market, the average guaranteed returns that insurance products can provide will definitely be further reduced. Like the Hong Kong insurance market, dividend insurance will become the mainstream of the market, gradually reducing the investment risks of insurance companies themselves, so that the operation of insurance companies can be more sustainable and stable." The above North American actuary said so.

So, under the pressure of breaking the guarantee to pay out and interest rate loss, can the consumer's policy ensure full payment in the future?

According to a response from an industry actuary, looking at the protection type products, critical illness insurance, medical insurance, accidental insurance, and life insurance (term life insurance and leveraged whole life insurance), these products mainly have more compensation from the reinsurance companies. Considering the timeliness of claims, it is possible to ensure the payment. However, if the insurance company falls into a great crisis, the insurance claims may be rejected or delayed first.

Looking at the savings type insurance products, the above industry actuary said that if it is a well-managed insurance company, it can continue to make profits and have stable premiums entering, and it is no problem to pay according to the contract; but for the insurance companies with aggressive operations, once a cash flow liquidity crisis occurs, the biggest problem for these insurance companies is that the guaranteed payment part of the reserve is insufficient, and it will be difficult to pay according to the contract.

"For the payment of such insurance companies, there are also precedents abroad, and it is expected that the payment will be made according to the discounted cash value or pulled back to the average value of the industry at the same period." The above industry actuary said so.