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While the impact of China's recent interest rate increase on economic growth remains to be seen, its implications for the local insurance industry are relatively clear, analysts say.
The rate hike will help lift the dwindling returns on insurance companies' fast-growing assets, and boost their solvency margins. Although, higher interest rates threaten to divert clients' attention away from a broad range of low-yield insurance products, they say.
"It's like a double-edged sword," said Tuo Guozhu, a professor with the Beijing-based Capital University of Economics and Business.
"The interest rate rise may prompt some policyholders to consider retracting contracts, but insurance companies' investments will likely see some improvement," he added.
China's central bank announced its first rate hike in nine years last Thursday in an effort to slow down economic growth, raising the one-year benchmark rates on both lending and deposits by 27 basis points.
The action, though long-anticipated and seen as a mild one, triggered a drop in both domestic and overseas financial markets.
But insurance stocks outperformed. All three listed Chinese insurance companies rose the following day, with stocks of China Life and Ping An, the nation's leading life insurance providers, closing up 4 percent.
The major reason investors welcomed the move, analysts say, was the concrete support the rate hike will bring to insurance companies' bottom line, and expectations that further actions may be in the pipeline.
"The interest rate rise will push up yields on both deposit agreements, in which insurance companies hold a large part of their assets, as well as bonds," Tuo said. "That will improve their investment returns and boost repayment capacity."
Currently, Chinese insurance firms can only invest in bank deposits and some types of bonds, and trade stocks only through securities funds. The insurers were recently allowed to trade stocks directly, but are still in a preparatory stage.
The insurers held 52 percent of their investments, totalling a combined 873.9 billion yuan (US$105 billion) at the end of last year, in bank deposits.
A string of interest rate cuts and a bearish stock market have resulted in declining investment returns for insurance firms. Prior to last week's rate increase, the one-year deposit rate was 1.98 percent, a years low.
Average investment returns among insurance companies dipped to 2.68 percent last year from 3.14 percent in 2002.
What last week's 27 percentage point rate increase will bring to insurers is not just an improving amount of interest income, but hopes for more rate rises in the coming months as many believe China's monetary policy has now entered a phase of rate increases, following years of rate cuts to fight inflation.
But the sword also cuts the other way. Analysts say higher bank rates will make the already low return on a wide range of insurance policies, including many conventional life insurance products and more recently-launched with-profits policies, even less appealing.
The short-term single-premium with-profits policies, which saw huge sales in the past couple of years, typically carry interest rates of less than 2 percent and have generated no more than 1 percent of profit for policyholders in the past two years due to the bearish stock market.
"Such policies do not offer high protection levels, and the yield has been low," said one analyst who declined to be named.
"So the interest rate rise will likely make some policyholders retract their contracts," he said, adding that massive policy retractions threaten to cause liquidity difficulties for insurance firms.
A low interest rate environment has strongly boosted sales of with profits-and- investment-linked life insurance products, through which insurers try to woo clients in the hopes of investment returns as compensation for the low interest rates. But the persistently low capital market has disappointed many policyholders.
"Insurance companies will have to develop new products and make adjustments," Tuo said.
Some insurers have already responded by raising interest rates on their products. Hua An Insurance Co raised the annual return on a new three-year homeowner product to 3.27 percent from 2.55 per cent the day after the rate increase announcement. And the Guangzhou Branch of American International Assurance, the largest foreign life insurer in China, has also reportedly raised yields on two universal life insurance products.
But others say they are in no hurry to raise returns on policies. Many insurers, both domestic and foreign-invested, said they will not follow suit in the near term.
"We are fully prepared for this (interest rate increase)," Li Liangwen, deputy general manager of China Life Insurance Co Ltd, was quoted by China Insurance News as saying. "We believe those who choose to retract contracts will only be a small number, because there is a cost involved if doing that without a proper reason."
(China Daily November 6, 2004)
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