Interest Rate Spread Risk Looms Large for China’s Insurance Industry (AI Translation)

【周刊提前读】利差损风险高悬 保险业从万能险寻改革

Summary

[para. 1][para. 2][para. 3] Following two years marked by reductions in prescribed interest rates and cost controls, the Chinese insurance industry is set to implement further measures to lower liability costs in April 2025. This time, the focus is firmly on universal life insurance—an area previously overlooked. On April 25, 2025, a deadline at Rui Zhong Life Insurance for additional premium payments to universal life insurance policies with a guaranteed minimum interest rate of 3.0% or higher highlighted soaring customer activity, as policyholders rushed to capitalize on higher-than-market rates before the window closed. That same day, the National Financial Regulatory Administration (NFRA) released a policy document permitting insurers to designate a guaranteed period for minimum interest rates, after which they may, under certain restrictions, lower these rates to manage risk.

[para. 4][para. 5][para. 6] Universal life insurance, introduced in China in 2000, grew rapidly post-2012, fueled by asset-driven liability models and often criticized for market risk, resulting in stronger regulatory oversight after 2015. As of 2024, new universal life policyholder investments totaled 578.7 billion yuan, making up 15% of the life insurance sector's premium volume, though this represents a slight year-on-year decrease. Universal life products, blending traditional insurance protection, flexible premiums, and fund appreciation, became especially popular before 2017 when guaranteed minimum rates reached as high as 3.5% and credited rates exceeded 7%, causing a market buying frenzy. However, crediting rates have dropped below 3.3% due to market and regulatory pressures.

[para. 7][para. 8][para. 9] Recently, insurers have started restricting or suspending additional contributions to universal life accounts with high guaranteed rates, notably 3.5% and now 3%, as maintaining such rates amid falling market returns poses asset-liability and solvency risks. Regulatory attention increased as some companies exhibited unclear top-up policies and negligent product design, raising concerns among policyholders over whether the new rules undermine the perceived guarantee on insurance returns. However, insiders clarify existing contracts remain unaffected.

[para. 10][para. 11][para. 12][para. 13][para. 14] The regulatory notice also introduces a mechanism to dynamically adjust the guaranteed interest rate for new universal life policies starting in 2025, potentially lowering maximum rate limits on traditional insurance by 25-50 basis points. The measures aim to strengthen risk control for interest rate spreads. The top-up premium feature had allowed policyholders to inject unlimited additional funds into existing high-interest accounts, yielding returns superior to alternative products like five-year bank deposits (now below 2%). This triggered last-minute rushes as companies closed these channels, followed by complaints over lack of notification and debates about contractual rights.

[para. 15][para. 16][para. 17][para. 18] The evolution of universal life insurance in China has diverged from its American origins, morphing into flexible products prioritizing wealth management. High guarantees and unlimited top-ups have, however, exposed insurers to greater risks. Older high-yield universal policies, concentrated with intermediaries and possessing long terms, now threaten insurer stability due to extended liabilities outlasting supporting assets. While some policyholders act cautiously, the appeal of guaranteed rates as high as 3.5% remains strong.

[para. 19][para. 20][para. 21][para. 22][para. 23] The latest regulations allow insurers, for new products, to reset minimum guarantees and align them with actual investment returns—mirroring international practice but requiring careful communication to preserve consumer trust. Additional safeguards are included: lengthening policy durations, stricter fund utilization controls, and tighter sales supervision to forestall misrepresentation and excessive risk-taking.

[para. 24][para. 25][para. 26][para. 27][para. 28][para. 29] Simultaneously, the NFRA is preparing for further interest rate cuts. The assumed interest rate for ordinary life policies, set at 2.13% for 2025, signals potential regulatory moves to bring maximum guarantees down from 2.5%, reflecting persistent declines in market rates. Data for Q1 2025 indicate tepid growth—overall premium income up just 0.93% year-on-year and life insurance up only 0.2%. Participating insurance, which balances protection and investment, is increasingly favored for its flexible liability structure, with notable spikes in premium income at major insurers like CPIC and New China Life Insurance, even as overall industry growth remains subdued.

[para. 30] In summary, the Chinese insurance industry is undergoing significant regulatory changes to manage risks from legacy high-guarantee universal life products, cope with tumbling market interest rates, and shift towards more sustainable liability and interest rate frameworks for new offerings.