Insurance industry still healthy
China's insurance industry continues to grow as its economy expands. And like the economy, the sector saw ups and downs over the past decades.
The industry's product structure has been under attack recently. Critics say investment-oriented products have taken an unproportionately large part of the industry, which, they claim, will menace the role of guarantees in the insurance industry.
From the perspective of long-term development, however, we need not worry too much about the "structural imbalance."
There are problems within the sector, which seeks to develop ever faster to catch up with powerful overseas insurers entering the domestic market. But the problems are not structural.
Insurance buyers complain they are treated differently before and after they buy policies. All-out efforts to sell policies have brewed some irregularities.
But in terms of quantity and quality, the industry has grown by leaps and bounds. The fast development will lead to enhanced guarantee ability of the industry, even if some products are aimed at gaining profits for policy holders.
In 1982, when the country's life insurance resumed operation, the total premium volume of the industry was only 2 million yuan (US$241,000). Starting in 1992, the industry began to enter the fast track. In 1997, life insurance premium incomes outpaced property insurance for the first time. From 1992 to 1996, life insurance premiums increased from 2.1 billion yuan (US$253 million) to 87.2 billion yuan (US$10.5 billion), a 70 per cent annual increase on average.
During that period, all products of life insurance were the guarantee type, not investment-oriented.
Financial authorities used to exert strict controls on the investment of insurance funds, which was allowed to be put in bank deposits and bonds. As the country repeatedly adjusted its interest rates downward over the past decade, profits of the insurance fund investment continued to shrink.
To ward off risks and enhance competitiveness, insurers resorted to the experiences of advanced economies to get out of the predicament.
They attempted to expand business by multiplying their product portfolio. Internationally, the investment-oriented participating unit link, equity link and universal insurance products have grown steadily. Domestic companies have followed suit.
Insurance regulators also encouraged insurers to tap new products and optimize their product structure.
Such new products that both ensure life guarantee and bring investment bonuses have provided more choices to satisfy the varied market demands from policy buyers. They also plan to improve insurance managers' abilities in fund management.
As more such products are launched, insurers have become a vital part of the institutional investors of the capital market. Insurance funds helped promote the healthy development of the immature capital market. A total of 973.2 billion yuan (US$117.3 billion) worth of insurance funds were on the market by the end of June this year, according to Wu Dingfu, chairman of the Chinese Insurance Regulatory Commission.
Most importantly, insurance products that provide guarantee and investment yields immediately for policy holders do not automatically spell risks for the industry. Solid management can in fact ensure the safety of the insurance fund.
As the insurance industry develops, it should not be confined within the scope of guarantee-based products. While insurers should remain capable of paying for potential claims of policy holders, the capital market has provided a good venue for investment in the insurance fund.
Since the 1980s, Western insurers have started to launch products that provide both financial guarantee and investment premiums. Now the proportion of investment-based insurance products account for more than 40 per cent of the overall insurance funds in the United States, United Kingdom and Singapore. More than 80 per cent of the insurance products in North America share out bonuses; in Hong Kong, the ratio is 90 per cent; and in Germany, participating products account for 85 per cent of the life insurance market, according to Wu Xuejun, a researcher from the Corporate Research Centre of the Capital University of Economics and Business.
The capital market should not be closed to the insurance fund. In Western economies, the insurance industry has shared the premium of the booming capital market. In China, many experts and policy-makers have qualms about the health of the stock market. As regulators strengthen regulation of the market, however, an improving market will provide opportunities for the insurance fund to profit in the long run.
In October, financial regulators nodded approval for the direct investment of insurance funds in the stock market, a sign of policy-makers' confidence in the investment-oriented operation of insurance funds.
In recent years, insurance regulators are shifting focus of the regulation from charge rates to insurers' ability to manage funds safely. This will help ward off risks as more investment-based insurance products are launched.
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