Insurance Industry Gets Boost

China's life insurance industry will soon be allowed to invest the premiums of policies in new ways to increase returns for companies and policyholders.

Insurance companies, first the Ping An Insurance Company of China, now New China Life Insurance, have developed unit-linked policies, which are widely used internationally.

Unlike traditional insurance plans that have fixed sum returns, unit-linked policies allow companies to invest all the premiums in various channels with the consent of the insured and give back the returns to the insured.

Such policies also provide a certain amount of insurance return to the insured party in addition to returns from investment, but the sum is smaller than under traditional policies.

The actual investment return cannot be predicted because the policies are still in the trial stage, but a New China Life source said that returns should be no less than under traditional policies.

"Developing unit-linked policies can help Chinese insurance companies speed up development," said Sun Weiguang, vice-president of New China Life at a recent conference.

China's life insurance sector has been dogged by a severe payment crisis because of consecutive interest rate cuts by the central bank and limitations placed on investment.

It is estimated that potential losses of the sector caused by the imbalance between a high nominal insurance rate and a low bank interest rate will reach 162.3 billion yuan (US$19.55 billion) over the next 10 years, said Zhang Hongtao, director of the insurance department of Renmin University at a recent seminar.

By separating returns from a pre-set nominal rate, unit-linked policies can help insurance companies shrug off the payment burdens in the future, said Sun Weiguang.

Unit-linked policies account for 50 per cent to 60 per cent of the life insurance policies sold by Western insurers, he said.

"Economic development has laid a sound basis for China to develop such policies," said Peter Morgans, consultant actuary for New China Life who has researched the new product.

The living standards of the Chinese people have been improving, which has spurred demand for more choices for investing their capital, he added.

He also claimed Chinese life insurers must develop such policies quickly in preparation for competition brought by the country's pending entry into the World Trade Organization.

Pan Lufu, executive vice-chairman of the Insurance Institute of China, echoed these sentiments, saying, "The new policies are also in preparation for liberalization of the financial sectors," he said.

"Over the next five years, financial sectors may still operate in their own field, but an intermingling of the three sectors of insurance, banking and securities is the trend for the future," he added.

To date, the investment channels for unit-linked policies are still confined to bank deposits, treasury bonds, three corporate bonds, inter-bank lending market and securities funds.



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