China Life Insurers Plummet after Removal of Premium Controls

Published: Mon 12 Jul 2010

Larry Roth

p>China Pacific Insurance Group Company and China Life Insurance Company dropped precipitously in Shanghai trading after regulators announced plans to abolish a cap on the guaranteed rates of return on certain life insurance contracts, eliminating a ten-year-old ceiling intended to curtail price competition.

The country's biggest insurance company, China Life dropped 6.7 percent, the largest decrease since November 28, 2008, to 23 yuan as of 2:04 PM local time. China Pacific fell 6.6 percent. Ping An Insurance Group Company stock is suspended until the arrival of an announcement regarding its bank unit's restructuring.

On July 9, the China Insurance Regulatory Commission said it will permit insurers to determine the "preset interest rate" paid to traditional life insurance policyholders. Most likely, price competition will heighten and lessen profit margins, while the growing appeal of such policies may impede the sales of other types of policies, explained Olive Xia, an analyst for Shanghai-based Core Pacific Yamaichi.

"The short-term negative impact on life insurers is fairly obvious," Xia explained during a telephone interview today. "The market will need some correction in evaluations to digest the impact."

Corporations were asked to provide their feedback on the proposal by the 20th of July, according to the statement. In June of 1999, the regulator reduced the cap on preset interest rates for all life insurance contracts to 2.5 percent, after life insurers accumulated losses as price competition forced returns paid to customers higher than investment yields. The larger the preset rate is, the more affordable life insurance policies are for consumers.

Manageable Impact

The term "traditional life insurance" describes contracts with rates and policyholder benefits established when the policy is created, according to the regulator. These contracts, which concentrate on covering risk and are comparable to investment-related products and participating life insurance policies, account for less than 20 percent of the Chinese insurance market by rates, Xia said.

"The overall impact on the industry is controllable," Guosen Securities Company analysts Shao Ziqin and Tong Chengdun explained in a report yesterday. "Given the environment of low market rates, the likelihood of vicious competition and a repeat of the high interest rate contracts is small."

China's second-largest insurance company, Ping An, will be affected the least by any rise in the guaranteed rate of return because the organization's lowest proportion (9.7 percent) of traditional life policies compared to the total individual life insurance premiums, analysts for Guosen Securities reported. That contrasts with 45 percent for China Life and 50 percent for Pacific Insurance.