Traditional Insurance Not Luring on Interest rate Raise

China’s central bank recently announced a rise of its benchmark one-year lending and deposit rate by 0.25 percentage points effective from October 20.

But for insurers in the market, it is both good news and bad news. On the one hand, both the deposit rate of loans they put in Banks and the return on investment of capital they injected into bonds will rise. But on the other hand, they will have to raise the assumed interest rate of traditional insurance products. That is to say the attraction of their traditional insurance products will be slashed and to some extent, it will be a tougher job for them to shift the function of insurance back to security.

Most of the traditional life insurance products marketed now are designed and launched amid negative interest rate and the assumed interest rate is always 2.5 percent at most. And after the interest rate raise, their cash return on investment is the same with the one-year deposit rate. Thus their attraction will be zero. Notably, the raised interest rate may cause some consumers to withdraw such insurance and buy varieties with higher yields. In addition, insurers will see the policy capital cost of participating insurance and universal life insurance surge.

“The interest rate raise is a double-blade sword but in the long run, it will do good to insurers,” pointed out an analyst with Haitong Securities Co., Ltd. (SHSE: 600837).,Statistics from the China Insurance Regulatory Commission (CIRC), the top Chinese insurance regulator, show that insurers’ capital utilization outstanding reached CNY 4.3 trillion as at the end of August 2010, of which 29.7 percent was placed in Banks, 50.5 percent was invested in bonds, 16.9 percent was injected into stocks and funds, and 2.9 percent was infused into other fields.

The People’s Bank of China (PBoC), the central bank, in the evening on October 19 announced a rise of its benchmark one-year lending and deposit rate by 0.25 percentage points effective from October 20. It is the first time for the nation to raise interest rate in about three years and the sudden announcement is widely seen as a move it takes to fight against rising pressure from inflation. After the adjustment, the one-year deposit rate will be 2.50 percent and the one-year lending rate will be 5.56 percent.