There has been widespread attention to the further reduction of settlement interest rates for universal insurance. Recently, several insurance companies disclosed that the settlement interest rates for universal insurance in January this year have generally been lowered to below 4%. According to data from Wind, among the more than 560 universal insurance products that have been disclosed, only 9 products from two companies have an annual settlement interest rate of 4%, while the rest are below 4%.
Industry insiders believe that the reduction of guaranteed interest rates and settlement interest rates for universal insurance is a trend. In a low-interest rate market environment, insurance companies face investment pressure. To mitigate the risk of interest rate spread losses, the adjustment of universal insurance rates is in line with market development.
Does the interest rate reduction meet expectations?
Specifically, among the disclosed settlement interest rates for universal insurance products, over 80% of products have settlement rates ranging from 3% to 3.95%, and around 15% have settlement rates below 3%, showing a clear difference compared to December last year. Data shows that in December last year, among over 1200 universal insurance products, there were over a hundred products with an annual settlement interest rate above 4%, accounting for approximately 8%, and the highest settlement interest rate could reach 4.7%.
"This adjustment is in line with market expectations," revealed an actuary from an insurance company to the media. Universal insurance is a type of insurance product that allows flexible premium payments, adjustable insurance coverage levels, and combines protection and investment functions. It typically consists of a guaranteed interest rate and a settlement interest rate. The guaranteed interest rate is written into the insurance contract and usually ranges from 1.5% to 2.5%. The settlement interest rate is variable and linked to the investment returns of the insurance company's portfolio. The insurance company announces it monthly through official channels.
According to the latest news from the China Banking and Insurance Regulatory Commission, the annualized financial yield of insurance funds in 2023 is only 2.23%, further decreasing from the 2.92% in the third quarter. Considering the settlement interest rates of universal insurance, the actual rates of many products and investment yields have already shown an inverse relationship, putting significant pressure on the asset-liability side.
Aside from settlement interest rates, since August last year, products with guaranteed interest rates above 2% for universal insurance have been completely suspended.
According to industry sources, at the beginning of this year, regulatory authorities provided guidance on the settlement interest rates for universal insurance. Starting from January 2024, the settlement interest rate for universal insurance of each insurance company should not exceed 4%. From June onwards, it should not exceed 3.8%, and for some large companies and risk disposal institutions, it should not exceed 3.5%. The settlement interest rates for universal insurance in January this year also reflect this situation.
Is the product still attractive?
It is evident that the interest rates for universal insurance may further decrease in the future. However, if the interest rates for universal insurance continue to decline, will the products still be attractive to consumers?
From historical data, the settlement interest rate of universal life insurance has gradually decreased to below 5% since 2020. By the end of 2023, the settlement interest rate of most products has been below 4%. However, after experiencing a continuous decline in premium for universal life insurance products in 2020, 2021, and 2022, premium income in 2023 has experienced a turnaround. According to data from the China Banking and Insurance Regulatory Commission, by the end of 2023, the premium income represented by policyholders' investment premiums for universal life insurance products has increased against the trend to 595.6 billion yuan, a year-on-year growth of 5.9%. The counter-trend growth of premium income is closely related to changes in the market environment alongside the simultaneous reduction in interest rates and settlement interest rates. In recent years, the continuous lowering of bank deposit rates, net value management of bank wealth management products with generally low yields, and volatility in the equity market have caused a continuous decline in risk appetite among residents who have high savings demand. The combination of these factors has actually enhanced the competitiveness of universal life insurance products. Universal life insurance can provide guaranteed returns, and consumers can also share in the returns above the minimum guaranteed interest rate with the insurance company. At the same time, the relatively flexible deposit and withdrawal methods of universal life insurance can meet consumers' fund management needs. Despite a certain decline in settlement interest rates in the recent period, it is still one of the preferred investment products for consumers. Source: Financial Times
