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<Research>CICC: CN Notice for Life Insurance Product Pricing Mechanism Does Not Imply No More Negative Spread Risks For Insurers
CICC covered in a report that on 2 August, the National Financial Regulatory Administration (NFRA) issued the "Notice on Improving the Pricing Mechanism of Life Insurance Prod...
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<Research>CICC: CN Notice for Life Insurance Product Pricing Mechanism Does Not Imply No More Negative Spread Risks For Insurers
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CICC covered in a report that on 2 August, the National Financial Regulatory Administration (NFRA) issued the "Notice on Improving the Pricing Mechanism of Life Insurance Products" (literal translation of "關於健全人身保險產品定價機制的通知").

CICC commented that the Notice's purpose has been hinted at many times in the past - in the interest rate downturn environment, the regulators are very likely to launch a variety of measures to improve the cost of liabilities of insurance companies and to ensure reasonable profits. Important means to achieve these goals include lowering the return rate of insurance products following the changes in market interest rates, and regulating the cost of expenditure, among other measures.

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Previously, charging less to customers and paying more to channels have been the main ways for small and medium-sized companies with poorer operational capability to obtain more business. In the process of lowering the actual cost of debt in the industry, it is likely that the various measures will help companies with stronger operational capabilities to improve their competitive landscape and increase their market share.

The broker believed the reduction in the insurance products' return rates would not lead to difficulties in selling products. Under the downward trend of interest rates, the unique "long-term capital preservation" attribute of insurance products will give them a competitive edge over deposits and bank wealth management in people's asset allocation. Meanwhile, due to the longer term of insurance products, the return rate will in most cases be higher than the yield provided by bank deposits and other short-term products.

Under the circumstance that residents do not change their expectation for the interest rate to enter a downward trend, the long-term growth of savings-type insurance products is optimistic, as seen in other economies. In addition, after the adjustment, the actual yield of participating insurance products has developed an increasingly clear premium compared with that of traditional insurance products, and CICC expected that the attractiveness of participating insurance would increase.

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As to whether the introduction of regulatory policies means that potential policy catalysts have arrived, CICC believed the Notice's contents have been anticipated by the market, but the Notice also reflected regulatory attitudes and directions of efforts, namely to prevent potential financial risks such as the negative spread (between products' return rates and investment returns) and to promote the sustainable development of the industry. In this direction, the broker believed that there are reasons to believe that if the interest rate environment remained challenging in the future, there are still more expected measures to improve the operating pressure of the industry. Thus, the Notice does not signify the complete arrival of policy catalysts, but instead may sign the start of operating pressure improvement in the sector.

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