Chinese life insurers are expected to see slower year-over-year growth in the 2017 first quarter, their most important sales period of each year, amid lower assumed interest rates to be offered on policies and tightened rules on the sale of certain products.

It is an industrywide tradition for China's life insurers to pursue strong sales numbers early in the year, particularly in January, to lay the foundation for a good annual performance.

The first quarter is usually a time when Chinese consumers hold more cash, right before the Lunar New Year, and are more receptive to insurance sales forces, Li Jian, China insurance research partner at Hong Kong-based Autonomous Research Asia, told S&P Global Market Intelligence.

For this kickoff sales period, companies prepare special products that combine protective benefits with investment features.

In 2014 and 2015, Chinese life firms sold approximately one-third of their policies in the first quarter of each year, and almost one-fifth of each year's policy sales were made in January alone. These companies also saw significant growth in the 2016 first quarter, recording 1.6 trillion yuan in total life insurance premiums, a 90.6% year-over-year growth.

Profitability drops

"High investment returns in the previous period benefit insurers' policy sales," said Luo Xiang, an analyst at Shanghai-based Hwabao Securities. Higher returns would raise assumed returns in the next period, thus incentivizing customers to buy insurance products.

The Chinese life sector's premiums soared in early 2016 because insurance companies had recorded high net profits and investment returns across the board a year earlier, Luo said.

Assumed rates for early 2017 are a different story, he noted, pointing to declines in investment returns and net profit drops at life insurers in the first nine months of the year. The life sector saw a 47.15% yearly fall in net profit, a sharp fall from the 109.77% increase seen in 2015.

New rules that came into effect at the start of 2016 also meant Chinese insurers had to build up reserves when the 750-day moving averages of government bond rates moved lower to take into account market risks. This further ate into insurers' profit.

Some life insurers have reduced assumed interest rates for their 2017 kickoff period products due to poor profitability in the past year.

China Life Insurance Co. Ltd., the largest insurer in the country by market share, set the assumed interest rate for its 2017 kickoff product at 3.5%, lower than this year's 4.025%, after its net profit for the nine-month period fell 60% year over year. Another listed company, New China Life Insurance Co. Ltd., lowered the assumed rate for its kickoff product to 3% from 3.5% after seeing a 44.6% year-over-year net profit decline over the same period.

Assumed interest rates for products offered in the kickoff sales period have become lower, with a decline in the number of products offering returns between 3.5% and 4.025%, according to a November report from Changjiang Securities.

Meanwhile, the assumed rates of commercial banks' wealth management products for early 2017 average 3.5%, Shanghai-based Securities Daily reported Dec. 8, making insurance products less competitive as an investment option.

Curb on sales of universal life insurance

The China Insurance Regulatory Commission's recent crackdown on the sales of insurance contracts with terms of one to three years will likely further constrain sales.

The regulator has trained its sights in particular on universal life insurance, which carry few protection features and offer higher yields than traditional life policies. In essence, these investment-type policies function like wealth management products.

In the first quarter of 2016, these policies accounted for 37.5% of total policy sales and saw 213.55% year-over-year growth, making them a notable driving force in kickoff period sales. "Premium growth [in 2016] has been particularly high not only because of increasing demand [from the middle class] for insurance, but also because of the sales of universal life policies," Li said.

However, since March, the CIRC has explicitly discouraged the sale of short-term universal life policies, accusing some insurers of generating cash from these premiums to fund speculative activity in the Chinese equity markets.

The rule tightening will have some impact on next year's kickoff sales, though this should be limited, Li said. "The CIRC's goal is not to depress the fast growth of premium income," he noted.

Li expects premium growth to remain in the double digits for the 2017 first quarter, albeit lower than this year's growth rate of more than 90%.

"This is a time when China's middle-class families are actively looking for insurance," he said. "Demand will last for a while."

As of Dec. 28, US$1 was equivalent to 6.95 Chinese yuan.