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Tough new rules on life policy design to hit Chinese insurers' sales

The latest rules from China's insurance watchdog could transform how life insurance policies are designed and eliminate an entire class of products, potentially hitting sales volumes, analysts told S&P Global Market Intelligence.

In its ongoing effort to clamp down on Chinese life insurers' reliance on short-term, wealth management-type products, the China Insurance Regulatory Commission has ordered them to no longer make benefit payments to policyholders in the first five years of an endowment or annuity insurance policy. In addition, the CIRC said insurance products carrying a significant investment portion should be designed as independent products, instead of as an add-on to protective coverage policies.

"The theme of the CIRC's [new] regulation is to ask insurers to offer protection-oriented long-term insurance policies, [while] not misleading customers [with wealth management functions]," said Li Jian, China insurance research partner at Hong Kong-based Autonomous Research Asia.

The regulator's latest move is intended to make insurance policies carry more protective functions and behave less like investment channels for policyholders. Under the changes, Chinese life insurers will have to abandon the sales strategies long used in the first three months of a year when most of the affected products are usually sold, analysts said.

As a result, they expect premium income growth to slow in the first quarter of 2018.

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The first quarter of a calendar year has traditionally been the sector's most important sales period. According to CIRC data, 46.1% of the total value of life insurers' 2016 premium income was generated between January and March.

Insurers also are not allowed to market policies as wealth management products and investment plans under the rule changes, which were unveiled to the sector May 11. The CIRC has asked companies to incorporate the changes into new policies with immediate effect and cease sales of existing products that do not meet the new regulatory parameters by Oct. 1.

Casting a wider net

The new rules are more stringent than those implemented since 2016, which have also targeted wealth management-type products. The regulator argued that widespread selling of such products could create liquidity risks given the potential for severe asset-liability mismatches.

"Previous regulations mainly targeted high-cash-value insurance products with an effective duration of less than five years," said Ma Ning, a Hong Kong-based analyst at Maybank Kim Eng, noting that the new rules target longer-term policies that had not been previously covered. While life insurance policies typically run longer than 10 years, if they offer a high enough return to policyholders — as has often been the case recently their duration can be significantly shorter as policyholders could choose to surrender policies earlier without cost or at near-zero cost.

While earlier rule changes mainly affected unlisted life insurers seeking market share by selling many short-term investment-type products, the new regulations will impact listed life insurers as well, Ma added.

During the kickoff sales period, life insurers in China tend to offer product packages that provide protective benefits with investment features, usually in the form of endowment or annuity policies combined with universal life insurance with guaranteed rates that behave like wealth management products.

For example, at China Life Insurance Co. Ltd., the largest in the country by premium income as of March, insurance packages were designed for the 2017 first-quarter sales period so that policyholders could receive survival benefits worth 20% of the first-year premium after 10 days of the main annuity insurance coverage taking effect. Policyholders could deposit the benefits to the package's two universal life insurance accounts.

A short-term impact?

While such product designs will no longer be possible, insurers' top lines might only be affected over the short term.

"It is not as if life insurance policies won't sell just because companies do not design them as products with universal life insurance [add-ons]," Li said. "Insurance policies can be designed in very complex forms [to attract customers]."

According to a source with knowledge of Chinese life insurance, it would not be difficult or take too long for insurance companies to change customers' spending habits because "China's life insurance market is still a seller's market."

All told, the large, listed insurance companies such as China Life and Ping An Life Insurance Co. of China Ltd. will find it easier to adapt to the new environment because they generally rely on agents with strong knowledge of the products to pitch to customers and make sales, while smaller companies often use sales channels at banks whose staff have less product expertise, Ma said.