China introduces increased regulation of life insurance

Image to denote life insurance confusion

In recent years the insurance industry in China has done nothing short of boom. Expats who have lived in the country for a long period of time have seen the variety of policies expand from just those offered by one provider to hundreds if not thousands of different providers now offering a wide array of products. One of the most popular types of insurance secured in China these days has to be life insurance. According to China Daily, “The Chinese insurance industry has experienced rapid expansion over the past decade, with annual life-insurance premiums growing from $10 billion in 1999 to $300 billion in 2013.”

In this article, we take a look at the two major categories of life insurance sold in China, the recent regulations implemented in regards to this type of insurance, and what this means for consumers.

Categories of life insurance in China

Insurers in China, like in many other countries, have a variety of life insurance policies available for residents to secure. Generally speaking, these products can be divided into two categories based on the expected length a person will have a policy:

  • Short- and mid-term life insurance products – Policies that the insurer expects to or creates to have an effective duration of five years. Effective duration is the term, or how long the policy will be taken out for. A good example of a policy that is considered short to mid-term life insurance would be accident insurance.

  • Long-term or whole life products – Policies that are created by insurers to last, or provide coverage, for a long period of time. In China, this means more than five years up to a person’s whole life. An example of life insurance policies with long terms would be the historically popular long-term care insurance.

The current life insurance situation in China

Historically, life insurance in China was provided by a number of state-owned insurers like China Life Insurance Company. Following market liberalization and reforms throughout the 80s, 90s, and 2000s, the industry started to see exponential growth with an ever increasing number of providers joining the market and offering plans.

Like many other countries, it was popular to secure long-term life insurance, but as the population grew and life expectancy increased the number of insured also grew. This increase in the number insurers, along with longer lives, meant that insurers faced higher risks of actually paying out on a policy. To mitigate this risk, insurers have continually increased premiums to the point where many long-term policies are not really palatable to many consumers – the premiums far outweigh the actual coverage benefits.

So, in a way to reduce premiums, insurers started to market shorter term plans. To entice people to buy these products, many of these policies offered much lower premiums than the long-term plans, along with high levels of return. Some plans guaranteed returns of over 3.5%, while other plans even advertised returns as high as 8%. Of course, lower premiums and guaranteed return proved to be incredibly popular. In fact, when the CIRC (Chinese Insurance Regulatory Commission) implemented a new regulation that all policies secured must be registered, it was found that these short-term policies were extremely popular.

As Asia Insurance Review highlighted, “The number of insurance policies recorded so far (since 2015) totals 1.4 billion. However, the number of people who bought long-term life insurance stands at around 40 million. The bulk of insurance policies sold comprises short-term products, particularly short-term accident insurance.”

One of the reasons these policies have been so popular is that there areĀ smaller, unlicensed companies aggressively pushing these policies, with many insurers touting these policies more as investment products than protection products. They then turn around and invest the money gained from premiums into other markets like real estate and listed companies (a process which was allowed in 2014).

The problem with this

There are actually two major concerns with these actions and plans. Firstly, it is incredibly risky, especially if an insurer is taking the premiums and investing them. If there is a market recession or crash and the insurer has guaranteed a high return, there is a high chance that they won’t have the liquidity to pay out on the returns. Or worse, they could go insolvent, leaving any people with these plans high and dry.

Secondly, there is a good chance that your returns will be considerably lower. For example, some insuresĀ guarantee a 4.5% return, charge 3% in fees which means your actual return will be 1.5%. Beyond that, because these plans are short-term, you are going to want to re-invest, especially if you get a good return. The thing is, you will be 5 years older which means the premiums will be higher and possibly the returns guaranteed lower. Over time, you could see any returns minimized or even negated. Essentially, it’s a risky investment strategy.

Recent regulations

To alleviate some of this risk, there have been a number of regulations recently implemented.

First off, according to Reuters, “The new rules say that at the end of the latest quarter, the annual insurance premiums from short-to-mid-term products should be less than 2 times greater than an insurer’s invested capital or net assets. The rules also specify that annual insurance premiums for products with terms between 1 and 3 years should only comprise 50 percent of an insurer’s total premiums by 2018.”

The second regulation implemented regarding life insurance states that life insurance policies terminated within the first three years will be charged a penalty (as of the writing of this article, there has been no word on what this amount will be). It was also announced that the CIRC set a cap on returns on policies of 3%, down from the previous 3.5%. Any plans that guarantee a return above this must first be approved by the regulator with any payments being based on the actual performance of the universal life account.

The impact on insurance

If the regulations continue in the direction in which they are headed, we expect to see an overall decrease in the number of short-term plans sold, or at the very least plans offering a more sensible return that helps reduce risk. As the CIRC has stated, however, they want to ensure that people are buying plans for the sake of securing coverage instead of an investment vehicle.

It will be interesting to see how the life insurance industry changes in the coming months, and years. In the meantime, if you are looking for life insurance that provides you adequate coverage, please contact Pacific Prime China.

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