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Asset Management / Wealth Management
CIRC’s crackdown on universal products threatens smaller insurers
CIRC’s regulations have significantly impacted universal products, affecting smaller insurers disproportionally
Janette Chen 21 Sep 2017

The Chinese insurance industry’s growth rate, especially the universal life sector, has slowed due to tighter regulations. The regulations and subsequent slowdown will have a larger impact on firms whose businesses are reliant on universal products, particularly smaller and niche insurers.

In May, the China Insurance Regulatory Commission (CIRC) issued a notice preventing insurers from offering universal products as add-ons to insurance policies. In July, they issued another notice, bringing tighter supervision on short- to medium-term products, of which universal polices comprise a major part.

The effects of the regulatory constraints are seen clearly in the data. The market share of universal products in the life insurance industry has decreased by 19% from 36% in the second half of 2016, to a 17% market share in the first half of 2017, according to CIRC’s statistics. Premium growth rates of universal products fell to -61% in the first three months of 2017, down from a dramatic peak of more than 200% in the first quarter of 2016, according to a Fitch Ratings report.

Further, 44 Chinese life insurers recorded negative growth rates for their universal premiums during the first seven months of 2017, and 11 of those insurers saw premium growth rates fall more than 90% y-o-y , according to CIRC. Sino-French Life Insurance also saw a decline of 100% for their universal premium growth rates – the highest among the list of the 44 insurers. Anbang Insurance Group, which has been aggressive in expanding its business in recent years, recorded a decline of 98.42%. Overall, the universal premium growth rates of Chinese insurers decreased by 57.9% and 35.11% for foreign insurers, during the first seven months of 2017.

Universal life insurance is a mature insurance product, says the vice chairman of CIRC, Huang Hong, although he notes that there are problems with the product itself – due to the short duration of universal products insurers whose businesses largely comprise universal products may be unstable, says Hong. Such insurers are likely to have duration mismatches and liquidity concerns.

Smaller insurance companies whose core businesses focus on universal policies rely heavily on new premium inflows to support liquidity needs. “They usually rely on continuing to sell new policies to support their cash flow,” says Joyce Huang, director of insurance at Fitch Ratings.

Hong explains that when CIRC tightened the regulations, it meant “that there are more difficulties in selling universal products,” noting that smaller companies may have issues in expanding their businesses. “They may not have sufficient cash inflows to support the surrender of the existing policies,” he adds.

What adds to this issue is the possible wave of cash payouts that might begin this year. This results from the concentrated burst in sales of short-term saving-type products over the past two to three years, which are due to come to maturity this year. However, this mostly threatens smaller or niche players whose core businesses are associated with universal products.

“For those bigger players, for example, China Life and Ping An, they have a broad spectrum of insurance products in addition to universal life,” says Terrence Wong, director of insurance at Fitch Ratings. Therefore, the tightened regulations and the possible surrender trend are not threatening to the entire industry.

“Whether smaller players are able to make a turnaround and expand their distribution channels as well as the scope of their products and become larger insurers, will be the key,” Wong adds. Niche players need to transform their products composition and develop more long-term products.

CIRC suggests smaller players take precautions against risks, including cutting non-core businesses to ease liquidity pressure in the short run.

“From a regulatory point of view, especially from the insurance operation side, what CIRC is doing will have a positive impact on the industry over the long term,” adds Wong.

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