Over the past several years, investment-linked policies have been a key driver of corporate revenue for China's insurance companies, just like any other insurance market in Hong Kong, Taiwan or Singapore. The slump in the sales of investment-linked policies in 2008 that followed the bursting of the product bubble and revelations of widespread abuses of mis-selling was a costly blow to the entire industry.
And now the China Insurance Regulatory Commission (CIRC) is taking some unusual steps to revamp the way these products are sold, in a vague hope that by purging the system of past excesses, consumer confidence and willingness to buy will emerge again.
To begin with, in a first for regulators in the region, the CIRC is banning banks from selling investment-linked policies from their regular counters. Instead, the regulator says banks should put up counters dedicated to wealth management or set up wealth management centres for this purpose to prevent banking customers from confusing policies as saving products.
The CIRC is also raising the minimum premium size of these policies to Rmb30,000 ($3,846), which might be a paltry sum anywhere else in the region, but in China, it probably will differentiate the middle-class customer who can afford to invest from the everyday customer who may not understand the risks associated with the product.
Insurers have also been asked to develop an internal risk rating system for their distribution channels. Staff involved in distribution should know their customers' financial status, experience in investment and risk tolerance level, and recommend a suitable product accordingly. Both customer and the sales staff are now required to acknowledge the recommendation with signatures on a legally binding document. If the staff believe a customer to be unsuitable for a product, the customer will be required to counter-sign on an endorsement of the risk assessment report.
The CIRC is also clamping down distribution of investment products in rural regions and is banning sales of investment-linked policies by agents with less than one-year of experience. All agents involved in investment-related products will be required to sit through at least 40 hours of training, while third-party distributors such as banks will have their suitability to sell reassessed every six months.
Some 175 insurance brokers went out of business in 2008 alone - most had been in business for only a few years and many had been clustered in poorer regions such as Xinjiang, Guangxi and Inner Mongolia. These closures undoubtedly hurt peasants who held onto the dream of a better future through investing in the A-share bubble in 2006 and 2007.
However, there has been no mention of these brokers in the CIRC's latest overhaul. Instead, the focus is on banks and direct distribution channels under the insurance companies.
The new measures will make it difficult for insurers and their distribution partners to generate a quick buck like they did during the bullish days. But they will serve as to regain trust in the system, before business livens up again.
Later today, senior executives from six state-owned insurers including China Life, PICC, China Re, China Insurance Group, China Export Credit Insurance, Minsheng Life, as well as Ping An, China Pacific, Huatai, Taikang and New China Life are set to be called into Beijing to be lectured by CIRC's chairman Wu Dingfu on the importance of "discipline". It will be the industry's first gathering in this new Chinese lunar year.