Further Interest Rate Cuts for Life Insurance Products Signals Shift for Insurers (AI Translation)

【周刊提前读】寿险产品再降息 保险业利差损迎来修复期

Summary:

In July 2025, China’s life insurance industry underwent another significant reduction in the assumed interest rate ("降息"). The China Insurance Association set the research value for the assumed interest rate of ordinary life insurance products at 1.99%, a further decline from prior quarters, and more than 25 basis points (BP) below the maximum rate of active products at 2.5% for two consecutive quarters. This triggered a rule requiring insurers to lower the maximum assumed interest rates for new products within two months and ensure a stable transition between old and new offerings[para. 1][para. 2].

Major insurers including China Life and Ping An announced adjustments: ordinary life insurance product max assumed rates were reduced by 50BP to 2.0%, participating (dividend) products by 25BP to 1.75%, and universal life product minimum guaranteed rates by 50BP to 1.0%. From August 31, 2025, no new policies exceeding these rates would be accepted[para. 3].

This shift dramatically impacts the market. Insurance agents have been urging consumers to buy before the changes, forecasting increases in premiums for critical illness insurance and reduced profitability for wealth management-linked products. Chinese life insurance yields, traditionally aligned closely with market and bank deposit rates, reflect tightening yields, with five-year deposit rates now at 1.3%, down 50BP from one year ago[para. 4].

The change follows a 2025 policy requiring dynamic linkage between assumed interest rates and market rates. When maximum active product rates exceed the research value by 25BP for two quarters, automatic rate reduction is triggered. The second quarter 2025 meeting registered a research value drop to 1.99%, activating the policy. The decision to cut ordinary life rates by 50BP (rather than the 25BP some expected) was to maintain stability and avoid repeated, disruptive changes for both companies and customers[para. 5][para. 6][para. 7].

Three market indicators are used to set the research value: (1) five-year plus Loan Prime Rate (LPR), (2) five-year time deposit rate, and (3) ten-year government bond yield. By Q2 2025, these fell to 3.5%, 1.3%, and 1.65%, respectively. Analysts argue that the “one-step” 50BP reduction should stabilize expectations and smooth the product transition period[para. 8].

This marks the end of a multi-year single-direction rate reduction: since 2023, assumed rates dropped from 3.5% to 3.0%, then 2.5%, now to 2.0%. Insurers, after years of pressure from declining yields, may now enter a period of adjustment and stability.[para. 9][para. 10]

A major feature of this round is the asymmetric cut for participating (dividend) products, whose rates fell by only 25BP, making them more competitive versus traditional and universal products (both cut by 50BP). As a result, dividend life insurance is expected to become the industry’s mainstay from September onwards. In 2025, over 84% as many dividend products were launched as in all of 2024, and major insurer sales now show sharply rising proportions of such products[para. 11][para. 12][para. 13].

Furthermore, regulators are increasing scrutiny on profit-sharing practices, requiring insurers to set dividend levels prudently, based on actual investment performance and risk grades[para. 14].

On the asset side, insurers are increasing allocations to equities to stem yield compression. Policies are promoting long-term insurance capital entry into capital markets, with a 2025 target for large insurers to invest 30% of new premiums in A-shares and measures to increase long-cycle assessment. For example, China Life added over 90 billion yuan in equity investments in H1 2025 alone[para. 15][para. 16].

As of Q1 2025, insurance funds amounted to 34.93 trillion yuan—with 2.82 trillion in stocks (up 16% quarter-on-quarter). This asset-side recovery is reflected in insurance sector stock performance: from January to July 2025, insurance sector indices rose 16.84%, outpacing broader indices[para. 17][para. 18][para. 19].

Overall, with lower liability costs and expanding asset returns, especially through increased equity investment and refined product design, China’s life insurance industry is entering a new phase emphasizing both dividend products and capital market involvement[para. 20][para. 21].