Small insurance companies in China face a struggle to survive after the recent regulatory crackdown targeting aggressive sales and investment practices, note industry observers.

“In the next two to three years, some of them may start to surrender in one way or another, getting smaller and smaller till [their size is] not meaningful any more, and we expect to see market consolidation,” said Jennifer Law, director of Asia ex-Japan insurance, equity research at BOCI Research.

The China Insurance Regulatory Commission (CIRC) has taken a more rigorous approach this year amid Beijing’s growing focus on combating malpractice in the domestic financial industry.

Universal life products: the problems and the penalties

The China Insurance Regulatory Commission  (CIRC) has been clamping down on new life insurers’ sale of universal life products, which combine some capital protection and accumulation with investment features. The insurers invest money from these accounts to improve the policy’s cash value.

Firms such as Anbang Life, Huaxia Life and Qian Hai Life had sold universal life policies offering high expected annual return (over 5%) and 3% guaranteed returns, with short duration (one to three years) and few protection functions, noted Haitong Securities, one of China’s largest brokers, in a report in December 2016.

Several insurers ploughed the money into blocks of A-shares of well-regarded companies, hoping to push up share prices and then sell out for a tidy profit, as reported. Haitong data revealed 10 insurers publicly disclosed stakes of more than 5% in nearly 50 A-share companies between July 2015 and the end of 2016.

In essence, the products were short-term and high-risk wealth manacgement products that offered the insurers a “low-cost” funding tool, Haitong said. Retail investors poured an estimated Rmb1.1 trillion ($161.8 billion) into the products in the first 11 months of 2016, 67% higher than the same period in 2015.

The CIRC began censuring companies in December 2016. It suspended the universal life insurance business of Qian Hai Life in December, revoked its chairman Yao Zhenhua’s qualification for the firm’s management and banned him from entering the industry for 10 years at end February.

And on May 5, the regulator banned Anbang Life from submitting new product applications for three months, noting that the firm had submitted two insurance products for approval that were not compliant with the rules.

On June 14, Anbang announced chairman Wu Xiaohui was temporarily relinquishing his duties for undisclosed ‘personal reasons’. Wu has reportedly been detained by the Chinese authorities as they investigate the insurer. In addition, the authorities have banned at least six major domestic banks from selling Anbang insurance products.

Its focus is clearly on newer insurance players, which took advantage of its formerly light-touch stance to offer short-term universal life insurance products with dangerously high return promises, in a naked attempt to gain market share, analysts said.

The regulator imposed tighter conditions on such products, such as requiring them to have longer maturities and that they should represent a smaller proportion of insurers' portfolios. 

The move already seems to have had a big impact. New premiums paid by policyholders – mostly for universal life insurance products – fell 60% year-on-year to Rmb320.6 billion ($47 billion) in the first five months of 2017, said Chen Wenhui, CIRC vice chairman, in a speech made on July 5 and posted on the regulator’s website.

The CIRC’s aim is to improve the business structure of the industry and ensure product innovation is focused on capital protection, he said. This will be conducive for sustainable and healthy industry growth, noted Chen.

Insurers hit in the clampdown between December 2016 and May 2017 were mostly smaller players, such as Evergrande Life and Qian Hai Life, but also included one big firm, Anbang Insurance. They have all faced public censure for mis-selling or poor investment practices in the past few months (see box).

With their preferred product type – universal life policies – now shut off, mainland insurers look set for trying times.

Eunice Tan, director of financial services ratings at S&P Global Ratings, predicts smaller insurers could face a liquidity squeeze and potential losses in the short term, though most should be able to fund payouts by selling investments.

Nevertheless, smaller and more ambitious unlisted participants will struggle under more onerous life insurance policy rules.

A combination of the CIRC’s crackdown and the rising risks associated with offering high yields means Chinese insurers have started offering lower expected return rates on their policies. And that will affect their sales volumes.

Firms are trying to adapt by offering longer-maturity products. “Companies told us the products that are used to replace the short-term products restricted by the regulator are mostly five-year products,” said Qian Zhu, senior credit officer at rating agency Moody's.

But that puts them in direct competition with larger, better-capitalised rivals, even as they face expensive payouts on outstanding high-return policies. With questions lingering over their longer-term financial health, China’s smaller insurers face a bleak future.

This piece is adapted and updated from a feature published in the June/July issue of AsianInvestor magazine. Look out for a second article in the coming days, which will discuss the investment challenges that life insurers face in China.

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