Nimble Insurers Play Cat and Mouse With Regulator
(Beijing) — When Chinese regulators decided last year to crack down on financial leverage, universal life insurance products were among the main targets. They were concerned these short-term policies, usually offered by small insurers with maturities of one or two years or even less, were funding the purchase of long-term illiquid assets and risky investments that could expose retail investors to losses.
Amid warnings that this asset-liability mismatch could pose significant liquidity risks to insurers if their investment returns drop or they are suddenly faced with massive repayment obligations, the China Insurance Regulatory Commission (CIRC) decided in September to rein in this booming market, proposing to tighten rules on guaranteed returns and early redemption penalties.
In December, the commission said that any insurance company whose short- and medium-term products accounted for more than half of total premiums on a quarterly basis would not be given approval to set up new branches. The commission also required all insurers to reduce the portion of medium- and short-term products to below 40% of total premiums by January 2020. Last month, the regulator issued a directive halting sales of universal life insurance products by property and casualty (P&C) insurance companies.
The rules should have sounded the death knell for these popular policies, which are basically wealth management products that offer a combination of life insurance protection, normally in the form of a death benefit, with an investment that offers a guaranteed return far higher than bank savings rates. Unlike traditional policies designed for long-term protection, they usually have shorter maturities of six months to two years.
But not surprisingly, insurers and banks have been reluctant to see such a lucrative segment of the market shrivel. Universal life products were popular among retail investors because they offered higher returns than other investments, they earned juicy commissions for the banks and insurance agents that sold them, and allowed insurance companies to rapidly ramp up their premium income.
As a result, many insurers have found ways to get around the restrictions by adjusting the terms of their new long-term policies to make them strikingly similar to the old, short-term policies, leading industry analysts to warn that the risks that regulators aimed to defuse are still a serious threat.
Interviews with employees at several insurance firms and banks have revealed that while the major new products now being marketed are more-traditional policies with maturities of over five years, they allow early surrender with almost no penalty and offer a fixed yield even if a policy is cashed in before it matures.
“These products on sale now are not called universal insurance, but basically that’s what they are,” said a bank clerk who sells insurance products to clients, adding that the products are still short-term wealth management products with a fixed yield.
Industry experts say the regulatory ban on universal life insurance policies could lead to a capital crunch for some small insurers who generate a significant portion of their premium income from the sale of short-term policies, as they struggle to refinance the long-term investments they have already made. And while they may be able to seek temporary relief from selling revised versions of traditional policies, they are only delaying the inevitable.
One analyst warned that tweaking the terms of traditional insurance policies has just turned these products into yet another form of risky investment as they perpetuate the asset-liability mismatch.
Sales of universal life insurance have grown quickly over the past few years.
According to Huang Hong, deputy chairman of the CIRC, of the 1.4 billion life insurance policies registered with the commission as of September, only about 40 million were traditional life policies. The vast majority were short-term investment-linked products with maturities of less than five years, as investors were attracted by higher yields rather than life protection, Huang said.
The boom in universal life insurance products has been driven by smaller and newly established insurance companies eager to grab a bigger share of the insurance market and boost their premium income. The aggressive sale of such policies generated significant funds for insurers, giving them the firepower to undertake a range of investments and activities that triggered concern among regulators.
Anbang Insurance, a secretive financial conglomerate, went on an overseas investment spree that included the purchase of the Waldorf Astoria New York in 2014. It also headed a consortium that made an abortive attempt last year to buy Starwood Hotels for $14 billion. Foresea Life Insurance used revenue from policy premiums to finance a hostile takeover by its parent, Baoneng Group of China Vanke, the country’s biggest property developer. Foresea Life was among several insurers publicly censured by the CIRC in late December for the misuse of funds raised through investment-linked policies.
Data from the CIRC showed that as of November 2016, 70 out of the country’s 76 life insurance companies were offering universal life insurance policies, and sales in the first 11 months of the year raised a total of 1.12 trillion yuan ($163 billion). In 14 of the companies, investment-linked policies accounted for more than 70% of their total premium income.
As the popularity of universal life insurance soared, companies that traditionally offered only property and casualty insurance jumped on the bandwagon. According to estimates by KPMG, an auditing and advisory services firm, China’s P&C insurance companies had issued investment policies amounting to more than 300 billion yuan by the end of 2016. Anbang and Tian An Property Insurance Co. are the biggest players, it said.
Before the CIRC’s Jan. 10 ban on the sale of investment-style policies by P&C insurers, Anbang had raised more than 100 billion yuan in premiums from Jan. 1 to Jan. 5 through the sale of its popular Win-Win No. 3, which guaranteed a return of 5%, according to a source close to the company.
“Property insurers are investing the proceeds of these types of products into long-term projects, leading to great risks,” an industry source who did not want to be identified told Caixin.
Insurance industry experts interviewed by Caixin said the regulator’s tough moves against universal life products are an attempt to force companies to transform their business models to put them on a more-sustainable footing and defuse the risks now building up in the system.
“The earlier this problem is fixed, the lower the price that will ultimately have to be paid,” said one academic who focuses on the insurance sector.
Yu Wenbo, former deputy general manager of Funde Sino Life Insurance Co., said that overall, the risks related to short- and medium-term products are under control in the insurance industry, but some companies who rely heavily on such products face looming liquidity risks.
The insurance industry needs to go back to basics and develop more protection-style products that meet market demand, Yu said.
Contact reporter Han Wei (firstname.lastname@example.org)
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