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Insurance rates liberalization unlikely
By Zhang Dingmin (China Daily)
Updated: 2005-04-18 08:43

Conditions are not yet ripe for China to remove interest rate controls on insurance policies, a top regulator said on Saturday.

Wu Xiaoping, vice-chairman of the China Insurance Regulatory Commission (CIRC), said the immaturity of Chinese insurers and the current development levels of the capital and money markets suggest that fully liberalizing assumed interest rates on life insurance policies now will likely lead to widespread increases of the rates.

"If you don't raise rates, somebody else will take away the premiums," he said, referring to the typical mentality of Chinese insurers.

But the current market conditions are hardly able to guarantee higher investment returns to keep the policies profitable, he said. China's major stock indices have been on a downward spiral for months despite government efforts to boost market sentiment, hurting insurers' investments in the stock market.

"Personally, I think the conditions are not yet in place for the liberalization of assumed interest rates," Wu told a lecture co-organized by Sino-US Metlife Insurance Co and the School of Continuing Education of Tsinghua University.

Wu's remarks would presumably disappoint Chinese life insurers, who have been calling for the scrapping or raising of the 2.5 per cent ceiling on assumed interest rates that their policies can carry after the central bank raised interest rates for the first time in nine years last October.

Higher bank rates have eroded the attractiveness of life insurance, which is in large part determined by the assumed interest rates and have reportedly led to retractions by some policyholders.

The 2.5 per cent ceiling still stands above the 2.25 per cent benchmark one-year bank rate, which analysts said could be a major reason the CIRC did not adjust the ceiling. However, many believe more interest rate hikes by the central bank are in the pipeline, given the need to contain inflation and phase out credit curbs.

Besides problems in the capital market, Wu said Chinese insurers are also facing other challenges such as growing competition from banks, fund management firms and trust companies launching more wealth management products, a lack of new growth engines, unprofitable bancassurance business as well as an insurance agent system that must be reformed.

Following 20 years of robust growth, the pace of China's life insurance sector downshifted drastically last year, while foreign insurers operating in the country enjoyed accelerated premium growth. Premiums by Chinese life insurers continued to slide in the first two months of this year, Wu said.

The reason for the change is that major domestic players are making readjustments, largely by trimming unprofitable operations, in a major transition to a more profit-oriented growth path from a long-standing premiums-first strategy, the official said.

"That is a huge improvement in China's life insurance market and it will lay a good basis for the long-term healthy growth of the industry," Wu said. "But the adjustments should not be made in haste so as to prevent major fluctuations."

He added: "I hope the adjustment period will not last too long."

As Chinese insurers struggle to improve profitability, foreign competitors are poised to gain more ground in the coming years. They will be aided by years of preparations in the local market and their newly-won freedom to expand anywhere in the country in nearly all business lines, according to Robin Chi, general manager of Sino-US Metlife, a 50-50 joint venture between US insurer Metropolitan Life Insurance Company and the Capital Airport Group.

"In the coming few years, the growth of foreign or Sino-foreign insurers will outpace that of Chinese insurers, even the newly-established ones," he said. And their market share could hopefully grow from the present 3 per cent "to 15 per cent at least, if not 20 per cent," in five years, he added.

China lifted all geographical and business scope restrictions towards the end of last year as part of its World Trade Organization commitments, opening up lucrative areas such as group insurance.

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