Insurers teeter on abyss amid antipathy for deeper reform
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E-mail Shanghai Daily, November 19, 2012
Chinese insurance companies may be facing a bleaker than usual winter.
Despite steps by the China Insurance Regulatory Commission to expand investment options for insurers, lasting weakness in the stock market and shrinking demand for life insurance products continued to weigh on the companies' performance in the first three quarters this year.
Earnings report for China's four listed insurers painted a grim picture.
China Life Insurance Co's profit dropped 55.6 percent from a year earlier, while China Pacific Insurance Group Co reported a 55.3 percent decline.
On the brighter side, at least on paper, New China Life Insurance Co said profits edged up 2.4 percent. Ping An Insurance Group Co reported 10.8 percent growth in net, but those gains mostly came from banking businesses, which were included in their financial reports for the first time this year.
The four listed insurers reported an aggregate 45 billion yuan (US$7.2 billion) in losses related to declines in the securities market in the first nine months.
For the industry as a whole, withdrawals by policyholders eased a bit in the third quarter but still loomed. China Life spent nearly 10 percent of its revenue covering withdrawals, while New China Life spent 15 percent, according to the performance reports.
On a quarter-to-quarter basis, profit declines were magnified. China Life net plunged 155 percent in the third quarter from the second, while profit at New China Life was down 63 percent, according to data compiled by Dongguan Securities.
"Given their shrinking assets, the investment yields for all listed insurers were lower than last year," said Deng Mao, an analyst with Dongguan Securities. "The stock market has shown no sign of improvement, and insurers will still face high costs from compensation claims and withdrawals."
Share prices of insurance companies got a boost in the first half of the year, amid expectations that regulatory efforts to expand investment options and products would help an industry on the abyss.
But disappointing investment returns and delays in kicking off a pilot project on tax-deferred pensions dimmed investor optimism. Insurance stocks, all Shanghai-listed, dropped more than the Shanghai Composite Index.
Tall order
The fourth quarter is traditionally a low season for insurers. Analysts said insurers will have to improve the quality of their products to survive the winter chill. That's a tall order for companies that have been obsessed with chasing premium income in the past decade.
"It seems that the nearly 10 new investment policies released between April and October won't help in a short term," said Deng. "Insurers need to improve their products and sales channels in the long term."
As early as 2004, some analysts started to worry about the "bubble" in the life insurance sector, which has recorded nearly 30 percent annual growth since 1996. The pursuit of larger premium income spawned the common practice of focusing on the development and sale of insurance policies as wealth management tools, which promised certain returns when clients deposited money with insurers over a fixed term.
It was not until 2011 that the insurance regulator implemented new auditing rules that excluded a large portion of income from investment-related products from the calculation of premium income.
The rules were aimed at helping insurers refocus on products that would insure consumers against risks, rather than on products that took their money for investment purposes.
Executives of the four listed insurance companies have said on different occasions that slower industrial growth will allow more time for them to readjust their business focus. But in reality, the economic slowdown seems to have highlighted the insurers' hot pursuit of more income.
The China Insurance Regulatory Commission said in a statement last week that it received 10,289 complaints against insurers in the first nine months of this year, nearly triple the number a year earlier.
Slower growth
China's seven largest life insurers all recorded slower premium income growth in October, the Shanghai Securities News said last week citing an internal document.
Weak sales will force branches of life insurers to spare no effort in pursuit of new business if annual targets are to be met, the newspaper said.
"Changes must be made in how insurance companies are assessed in order to improve the industry's image and guide insurers back to their main mission," said Hao Yansu, an insurance professor of the Central University of Finance and Economics. "They should be assessed both in terms of economic performance and in terms of their performance of social responsibilities."
He said income from depositary products should be strictly excluded from premium income statistics and the regulator should assess the industry not by the total assets but by how much healthcare and accident coverage insurers have provided the public.
If capital markets where insurers park their money remain weak, the industry will be forced to develop more profitable products.
"The horrible thing is that insurers failed to change their business strategy amid a weak market in the past few years and continued to be obsessed with developing wealth management products," Hao said. "That is a vicious circle."
The insurance regulator last week issued rules that will tighten inspection over the behavior of insurance agents, starting next year. Agencies will be punished for misleading consumers, and sales executives may be sacked if serious violations are detected.
Hao said he hopes the tighter regulations will nurture more third party agencies and professional insurance brokers to assist in the transformation of China's insurance industry.
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