Universal Insurance Companies Lowering Settlement Interest Rates
Southern Finance all-media reporter Zheng Jiayi reported from Beijing
In recent news, it has been discovered that several insurance companies are preparing to lower the settlement interest rates of universal insurance. The adjustment is expected to see the settlement interest rate of universal insurance in the personal insurance industry commonly dropping below 4.0%. This comes as a response to the industry’s collective effort to balance asset-liability matching.
Throughout the first three quarters of 2023, personal insurance companies’ investments registered a noticeable decrease from the previous year. Out of 77 companies included in the statistics, only one reported an investment return rate higher than 4%. A further 23 companies saw an investment return rate ranging between 3% and 4%, while a staggering 53 companies reported investment return rates below 3%. Such figures indicate that universal insurance settlement interest rates above 4.0% will put significant pressure on asset-liability matching for the majority of the industry players.
This shift is in line with the move to balance the investment liabilities of personal insurance companies and mitigate the risk of interest rate losses. As a result, the industry has ceased selling universal insurance with a minimum guaranteed interest rate higher than 2.0%. Against a backdrop of declining deposit interest rates and market fluctuations, the settlement interest rates of the universal insurance industry have been consistently plummeting, with many insurance companies having lowered their settlement rates multiple times in 2023.
Wang Guojun, a professor at the School of Insurance at the University of International Business and Economics, commented that reducing settlement interest rates in a low-interest environment can help boost insurance companies’ profitability and reduce industry risks. “Universal insurance is a product that provides policyholders with flexible premium payment, flexible insurance period, and insurance amount adjustment, and its investment attributes should not be emphasized one-sidedly,” he added.
It is estimated that over 200 insurance products may be affected by the shift. Though widespread, the phenomenon of lowering the settlement interest rate of universal insurance is observed across all industry players, including both leading and small to medium-sized insurance companies.
In a broader context, the reduction in universal insurance settlement interest rates is deemed beneficial to promoting the matching of industry liabilities and assets. “In principle, there is no upper limit on universal insurance settlement interest rates. For this reason, many insurance companies are accustomed to raising interest rates and will emphasize this as the selling point of universal insurance,” an industry insider explained. However, maintaining the settlement rate above 4% sets a high benchmark for the investment return rate, which may not align with the current performance of personal insurance companies.
Moreover, signaling a change in participating insurance product performance may also be affected by the reduction in settlement interest rates as they do not promise income. Thus, the industry is navigating the need to adjust settlement interest rates based on the matching of assets and liabilities across insurance companies.
As of now, it is crucial for the industry to adopt a balanced approach to universal insurance settlement interest rates in order to sustain long-term operations and risk management. The reduction in settlement interest rates is not a one-size-fits-all approach and is contingent upon the performance of the companies’ investments.