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Government Clampdown on Insurers’ High-Yield Offerings Hits Small Firms

By Yang Qiaoling and Dong Tongjian

(Beijing) — Many small insurers in China are feeling the pinch of regulatory restrictions on the sale of their short-term, high-yield insurance products.

The restrictions have cut into a lucrative revenue stream and forced the insurers to rethink their business model.

Universal life insurance products — generally, short-term offerings that combine minimal death benefits with high-return investments — have become popular in the past two years. Such products usually promise a yield as much as 5%, higher than the average 3.8% offered by most wealth management products that banks sell.

But regulators became concerned about the aggressive marketing of such products because of huge uncertainties about insurers’ cash flow and liquidity management. In order to generate enough cash to cover payouts, insurers had invested their premium income into long-term risky investments, causing a mismatch between when their payments obligations were due and when they received the return on their investments.

So the China Insurance Regulatory Commission (CIRC) began clamping down in March 2016. Insurers were told to limit their sale of short- and medium-term products — which have a life of no more than five years — to 50% and 30% of their gross premiums by 2019 and 2021 respectively. The regulator also barred insurers from opening new subsidiaries and branches if they heavily rely on short-term savings products or universal-life premiums. Meanwhile, new insurers established as of Jan. 1 are not allowed to sell universal life products in their first year.

The restrictions have led to a drop in new-premium income from universal life insurance products, which fell to 11.4 percent of all new life insurance premiums in January from 34.8 percent the month before, according to the latest data from the CIRC.

‘Dire Need of Cash’

The sale of universal-life products has grown quickly since 2014, as smaller insurers tried to build up assets quickly amid fierce competition to grab market share from giant insurance companies.

Under regulatory pressure that forces them to start selling more-conventional insurance products, small insurers won’t have advantages in terms of marketing, product design, and internal corporate governance, a senior executive of a big Chinese insurer told Caixin.

“Because of the liquidity challenge caused by the large number of universal life insurance products sold previously, these insurers are in dire need of cash, and it would prove extremely difficult for them to shift gears all of a sudden,” the executive said.

One company thrust into the spotlight was Foresea Life Insurance Co. Ltd. Regulators suspended its sales of universal life policies in December for failing to meet the new regulatory requirements on short- and medium-term products.

As a result of the clampdown, Foresea Life saw its total premium income drop 40% in January to 7.9 billion yuan ($1.14 billion) compared with the same month the year before, according to CIRC data. In January, income from universal life represented merely 0.28% of the total, down nearly 74 percentage points from a year ago. An additional 27 insurance companies saw their total premium income fall in January, according to the CIRC.

Marketing is one of the major challenges that smaller insurers face in shifting their business focus toward conventional insurance products.

Most customers buying universal life products are more interested in returns than the insurance protections. It has been relatively easy for small insurers to sell these products online, or through what is called the “bancassurance,” a partnership between banks and insurers to sell insurance products to bank clients.

When Chinese bank clerks promote universal-life products, they stress the attractive payouts and encourage clients to surrender the policies after three years or so and purchase other products with even higher yields.

A vice president of a big insurer told Caixin that because there isn’t a big demand for traditional insurance, small insurers will have to spend more on marketing to try to drum up business.

“Do they need insurance? Yes, they do, but they are never in a rush to buy it, which means sales rely more on aggressive marketing strategies,” the executive said. “For the most part, it’s unlikely for people to buy protection-style insurance voluntarily.”

Like ‘Starting From Scratch Again’

Small and midsize insurers don’t have enough expertise on operation and marketing strategies to remodel their business with a focus on traditional insurance products, said Yu Wenbo, former deputy chief manager of Sino Life Insurance Co. Ltd. “It’s a huge project to brush up on marketing procedures and build up a client pool,” he said.

Since the beginning of this year, several insurers have begun adjusting the universal life products they sell, including lengthening the maturity. But insurance analysts said they are still investment-style wealth management products or altered universal-life products because they do not provide much of a protection element, still promise relatively higher yield to attract customers, and won’t meet the new guidelines.

As for those insurers once aggressively selling short-term universal life policies, analysts said it is impossible for them to grow big in a short period of time due to the considerable difficulty in boosting sales even if they manage to shift toward traditional insurance business. In developed economies, it usually takes a decade for insurers with a focus on protection-style products to generate profits.

Another senior executive of a big insurer said, “If they really want to transform their business, it is no different from opening a new company, starting from scratch again, recruiting insurance professionals and setting up internal management mechanism, as the old model of making profits is not sustainable anymore.”

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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