Life Insurance Rates May Fall to 3.5% or Less, Ending an Era
In recent days, everyone has been paying attention to a major event that may soon be forgotten.
What is it?
The silver bullet is the regulator's latest move: the China Banking and Insurance Regulatory Commission (CBIRC) held a meeting with insurance companies and associations to discuss their debt costs and strengthen debt quality management.
This time, the focus was on:
1. The debt costs of life insurance companies, including the distribution of ordinary insurance rates, the rate of return for endowment insurance, and the minimum guarantee rate; 2. The matching situation between assets and liabilities, including historical investment returns, the timing of asset and liability matching, and cost-effectiveness analysis; 3. A review of the reasonableness of debt costs, with a view to explaining what measures will be taken if debt costs are deemed unreasonable; 4. The impact of decreasing the reserve rate on companies, including new product pricing, surrender values, sales behavior, and market competition changes; 5. The impact of decreasing the reserve rate on the industry; 6. Suggestions and recommendations for regulatory departments or industry associations to promote a decrease in debt costs and improve debt quality.
The purpose of this research is to guide life insurance companies to reduce their debt costs and strengthen debt quality management, which is essentially reminding each insurance company: be prudent and don't get reckless.
Although the research covered a lot of content, everyone's attention was focused on the sentence "The responsibility reserve rate is currently 3.5%, and it can be lowered to 3% first, with dynamic adjustments later."
This may signal the end of the 3.5% era.
What is "responsibility reserve rate"?
A responsibility reserve, also known as a liability reserve, is a type of fund set aside by an insurance company to cover future claims. This reserve is based on the expected value of future liabilities and is used to determine the present value of the reserve.
For example: if an insurance product needs to pay out 50 million yuan in 30 years, the company only needs to prepare 17.8 million yuan (50/1.035^30) based on a 3.5% interest rate, and can supplement the remaining 32.2 million yuan through investments.
Because this money is based on future risks, it requires an investment rate to discount the present value of the reserve, which is the responsibility reserve rate.
Why lower the "responsibility reserve rate"?
In 2019, the CBIRC issued a notice to improve the mechanism for forming responsibility reserve rates and adjust them based on market interest rates and industry investment returns.
The main reason for lowering the responsibility reserve rate is the downward trend in market interest rates and stock prices, which has affected the insurance company's ability to generate revenue from investments.
Now, four years later, we are once again facing a reduction in the responsibility reserve rate.
For some people, this may be a good thing. However, for others, it is not.
Generally speaking, the higher the responsibility reserve rate and the expected return on investment, the lower the premium.
This may also have an impact on the profitability of insurance products.
This article was first published on WeChat public number: Cai Niao Financial. The content is the author's personal opinion and does not represent the views of Hexun.com. Investors should exercise caution when making decisions based on this information.
(Responsible editor: Wang Rizhao HF013)