China life insurers poised to see growth, but smaller firms left vulnerable to market shocks
Originally published at the South China Morning Post on January 20, 2016.
Chinese life insurers are showing potential for robust sales growth this year despite rising risk profiles, analysts say, while warning that smaller insurers remain vulnerable to shocks in China’s stock market.
Individual new business premiums for life insurers saw strong growth during the first four days of the year, with many sales pre-sold last year and booked on January 1, Credit Suisse analysts said in one of a set of research reports on the insurance sector released this month. China Life Insurance saw a rise of about 60 per cent, China Pacific Insurance (Group ) 130 per cent and Ping An Insurance 30 per cent.
“We see underlying sales momentum continuing and outlook to be very strong into 2016 for the China life sector, driven by strong increase in sales forces and more competitive yields on insurance products,” another report said. “We also expect further detail on the pilots of commercial health insurance and tax-deferred pension in 2016.”
As yields faced greater pressures, life insurers were offering higher guarantees and raising their risk profiles, the report said. The analysts recommend insurers that restrict sales of higher guaranteed products and instead focus on building quality agency franchises such as Ping An, China Taiping and China Pacific.
“We highlight that not all companies are selling [higher guarantees],” analysts said. “We prefer life companies with better underlying quality and new business growth.”
Yet according to a report by Fitch Ratings this month, the recent rapid decline in mainland China’s stock market leaves small and medium-sized insurers – which have more aggressive risk appetites than larger firms – more susceptible to unrealised investment losses.
Since smaller companies had limited distribution networks and were more dependent on the sale of products through banks, they were exposed to tougher competition from banking products and peer companies, the report said.
“Many small insurers concentrate on low-margin savings-type products with short durations, such as single-premium universal life policies,” the Fitch analysts said. “The short durations of their insurance liabilities might lead them to dispose of some of their investments at unfavourable prices.”
Smaller insurers also tended to pursue high investment returns of between 4 per cent and 6.5 per cent and occasionally up to 8 per cent, in contrast to a three-year deposit rate of 2.75 per cent, to offer more attractive rates to policyholders and gain profits by generating interest spreads. Doing so could leave them more exposed to equities than their larger counterparts, the report added.
In contrast, larger life insurers that had more conservative asset allocations and bigger shares of insurance policies with long durations should be more resilient to mainland market volatility, the analysts said. China Life, Ping An, China Pacific and New China Life Insurance saw declines of less than 10 per cent in their share prices in the third quarter of last year, when the benchmark Shanghai index plunged 29 per cent.
“Fitch believes that the impact of the recent stock market correction in China remains manageable for large life insurers,” the analysts said. “Continuing premium inflows and flexibility to reduce policyholders’ payments also cushion the impact of a volatile stock market.”
The mainland’s stock markets have seen sharp declines this year, with fears of further yuan depreciation and a worsening economic slowdown souring investor sentiment.
Economic growth fell to its slowest pace in a quarter of a century last year, with the fourth quarter of 2015 garnering figures that were weaker than expected. The economy grew by 6.9 per cent last year, the slowest since 1990, and by 6.8 per cent in the fourth quarter, the National Bureau of Statistics said on Tuesday.