Behind the Life Insurance Industry's Losses: How to Address Concerns Over Declining Interest Rates? (AI Translation)

【周刊提前读】寿险行业亏损背后：利率下行忧患何解？

Insurance liability reserves are complex and opaque components of an insurance company’s financial statements, largely impervious to external analysis. One significant factor behind life insurance companies' losses in 2023 is the increased insurance liability reserves, exacerbated by decreased investment returns [para. 1]. According to data, 74 life insurance companies reported a total net profit exceeding 130 billion yuan in 2023, mainly driven by the "big six" insurers. However, if data from 14 non-disclosing companies were included, systemic industry losses could reach 100 billion yuan [para. 1][para. 2]. Some insurers improved profit margins by altering discount rate assumptions through increased premium rates, thereby reducing insurance liability reserves amidst declining treasury yields [para. 3][para. 4].

Insurance companies' profit adjustments are significantly influenced by the extent of reserves allocated for liabilities, with comprehensive premiums being a critical adjustment tool. Increasing premiums helps counteract the impact of a declining yield curve by reducing the required reserves [para. 5][para. 6]. Typically, the industry caps the default premium at 60 basis points, but some insurers have raised it to 70 basis points or higher to alleviate reserve pressure, a move seen as regulatory authorities implementing counter-cyclical measures [para. 7][para. 9].

Despite short-term financial statement improvements, the underlying pressures on the insurance industry remain, especially with declining interest rates. Effective asset management and development of interest rate-resistant policies are essential [para. 10]. Since 2021, the insurance industry has seen declining net profits, with overall systemic losses in 2023 attributed to increased reserves and poor investment performance [para. 11]. Publicly disclosed data from 2023 shows that 39 of the 74 companies were profitable, with the "Big Six" contributing 90% of the profits among the profitable companies [para. 11][para. 12][para. 13].

Investment returns have also declined, with the insurance fund utilization balance reaching 28.16 trillion yuan, marking an 11.05% year-on-year increase. However, investment return rates were at their lowest in over a decade [para. 15]. The continuous decline of the 750-day moving average Treasury yield curve has led to increased reserve pressures, further impacting profits [para. 17][para. 18]. For example, China Post Life Insurance reported a significant loss of 11.468 billion yuan, primarily due to reserve discount rate adjustments and underwhelming investment returns [para. 20][para. 22].

With varying insurance companies experiencing increased reserve needs due to the declining 750 yield curve, a company with 100 billion yuan in assets may need an additional 30 to 100 million yuan in reserves for every 1 basis point decrease in the 750 curve [para. 25]. The overall industry impact is massive, with an estimated 20 BP decrease leading to a 350 billion yuan increase in reserves, highlighting the substantial effect on pre-tax profits [para. 27].

Counter-cyclical regulation aims to mitigate the negative impacts of economic cycles on the insurance industry. For this, regulatory measures like adjusting reserve provisions and approving capital supplementary bonds are essential [para. 38]. Some industry voices suggest extending the 750 days to 1500 days for smoothing the curve and mitigating the impact [para. 40][para. 41].

Nonetheless, new accounting standards and discount rate adjustments, while helpful in short-term net profit improvement, do not fundamentally alter the business health of insurance companies [para. 50][para. 54]. Companies like AIA demonstrate stability through long-term investment strategies, whereas many insurers face risks due to shortsighted approaches [para. 55]. Managing interest rate risks effectively is crucial for the sustained performance of insurance companies [para. 57].

This summary offers an understanding of the significant issues impacting insurance companies' financial health, particularly under the pressures of declining interest rates and increased reserve requirements.