Hong Kong, March 13, 2017 -- Moody's Investors Service says that the risk associated with the
sale of universal life policies will represent one of the key considerations
in the assessment of the Chinese life insurance industry and the regulatory
landscape in the coming 12-18 months.
"While the regulator's policy tightening should stall further growth
of these products and speed up the transformation of the industry,
some small- and medium-sized insurers with sizeable existing
books of these policies will continue to face higher asset liability management
challenges in the coming years," says Frank Yuen, a
Moody's Assistant Vice President and Analyst.
"Our analysis also shows that the relatively high guaranteed rates
and low surrender charges of universal life products are disadvantageous
for insurers in both a rising and falling interest rate scenario,"
adds Yuen.
Moody's analysis is contained in its just-released report
on the Chinese life insurance sector, "Universal Life Product
Sales Have Peaked, but Credit Impact Will Linger".
Over the past year, the China Insurance Regulatory Commission (CIRC)
has introduced various policy measures to slow the sales of aggressively
priced, short-term savings products -- and
in particular of universal life policies -- that will likely result
in a shift in insurers' product mix in 2017.
While Moody's views this development as credit positive for the
industry from a risk accumulation perspective, it will also raise
considerable liquidity and investment risk for insurers that have seen
strong growth in such products.
China's universal life products are essentially mass-market
savings-type products that offer high crediting rates, short
premium terms, low fees, and minimal protection elements for
the insurer. This contrasts with certain universal life policies
in developed markets that carry comprehensive fee structures, offer
material protection elements and target high-net-worth clients.
The high return, high liquidity characteristics of China's universal
life products make them very popular among Chinese policyholders,
as reflected in their strong growth since 2014. However,
these same features pose considerable risk to some insurers' credit standing.
In particular, many insurers have adopted a so-called "barbell"
asset allocation, whereby they maintain (short-term) high
cash holdings to meet the potential high surrender rates on the one hand,
and invest their (long-term) non-cash holdings in high-risk
assets to achieve the targeted returns on the other. This strategy
raises credit and duration mismatch risk.
In addition, there are also material pricing risks embedded in these
products. Policyholders receive relatively high minimum guaranteed
rates, and also have the option to surrender the policy at any time
at a low penalty.
Moody's analysis shows that the combination of these two features
is disadvantageous for insurers in both a rising and falling interest
rate scenario. Rising interest rates could trigger product lapses
as customers pursue higher yields, thereby pressuring insurers'
product margins. Falling interest rates, in turn, could
result in negative spreads and thus trigger losses for insurers.
Subscribers can access the report at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1048851
The report may also be found through Moody's topic page "China's
Trilemma: Growth, Reform and Stability", available
at http://www.moodys.com/chinarebalancing.
This page provides a centralized source for Moody's research related to
key credit issues in China as the country's macroeconomic story continues
to unfold.
Recent Moody's publications relating to China's Trilemma include:
• China's Coordinated Approach to Regulating Investment Products
Would Be Credit Positive for Banks
• Default Report: Default Rate for Asian Non-Financial
Corporates Expected to Remain Low in 2017
• Coal -- China: Government Measures Will Drive Coal Prices
Lower but Strong Enough to Support Miners' Credit Profiles
• Rated High-Yield Non-Financial Companies --
China: Most Companies Could Manage 10% Renminbi Depreciation
vs US Dollar in 2017
• Securitization -- China: Sector Update -- Q4 2016:
Auto ABS and RMBS Performing Well as Insurance Grows
• China Government: Local Government Incentives Hinder Central
Government Reform Agenda
• Quarterly China Shadow Banking Monitor
• Life Insurance -- China: Credit Profiles under Pressure
from Shifting Investment Allocation
• Renminbi Bonds Monitor: February 2017
• Asia Credit -- 2017 Outlook: Challenging Global Environment
to Test Asia's Robust Credit Fundamentals
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for the most updated credit rating action information and rating history.
Wing Kei Frank Yuen
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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Yat Man Sally Yim
Senior Vice President
Financial Institutions Group
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Releasing Office:
Moody's Investors Service Hong Kong Ltd.
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