Recently, Tongfang Global Life Insurance launched a new dividend insurance policy with a guaranteed predetermined interest rate of 1.5%, making the life insurance industry increasingly sensitive to declining returns. This move follows similar actions by China Italy Life Insurance and Standard Life Insurance, which have also introduced dividend-paying life insurance products with a 1.5% predetermined interest rate.
Background
Interest Rate Cuts: After the projected interest rate was cut in October 2024, the guaranteed interest rate for dividend insurance was reduced to 2%. The continued decline in the interest rate environment has led to further reductions in guaranteed interest rates this year.
Market Impact: Tongfang Global Life Insurance’s decision to launch products with even lower interest rates has caused ripples in the market, highlighting the challenges faced by the insurance industry in a low-interest-rate environment.
Challenges and Responses
A spokesperson for Tongfang Global Life Insurance told Jiemian News that the insurance industry is facing multiple challenges, including increased risk of interest spread losses, changing customer demands, increased difficulty in asset-liability matching, and intensified industry competition. The company has adjusted its product pricing interest rates to balance risk protection, enhance investment flexibility, and safeguard long-term customer interests.
Analysis
IRR Decline: According to Ge Yuxiang, an analyst from Zhongtai Non-Banking, the IRR (Internal Rate of Return) of dividend insurance guarantee and dividend demonstration has declined in the context of “integration of reporting and banking” and the continuous low-interest-rate environment. The guaranteed IRR of new products has decreased from 1.75% to 1.34%, 1.27%, and 1.27%, respectively, while the dividend demonstration IRR has decreased from 3.15% to 3.09%, 3.01%, and 2.66%, respectively.
Regulatory Requirements: In early 2025, the State Financial Regulatory Commission issued a notice requiring insurance companies to dynamically adjust product interest rates. If the maximum predetermined interest rate is 25 basis points higher than the study value for two consecutive quarters, the upper limit of the interest rate needs to be lowered. The research value released in April 2025 has dropped to 2.13%, and if the next release is below 2.25%, it will trigger the interest rate adjustment mechanism, potentially leading to a reduction in the third quarter.
Industry Outlook
Sales Challenges: The decline in interest rates may exacerbate the already difficult sales situation in the life insurance industry, which has faced a challenging start to the year.
Functional Emphasis: A senior executive of a joint venture insurance company told Jiemian News that despite the decline in yields, insurance products still have opportunities. The industry is being forced to highlight the functionality of insurance, emphasizing risk protection and wealth management roles such as health, retirement, wealth, and inheritance.
Long-Term Trends
Inevitable Rate Cuts: In the long term, it is inevitable that insurance companies will lower the interest rates of dividend insurance. Over the past five years, the total premiums of “top-tier” increasing whole life insurance exceeded 5 trillion yuan, with an average debt cost of 3.36%. In contrast, the average investment return rate of life insurance companies over the past three years was around 3.2%, indicating significant pressure on the debt side.
Dividend Insurance Advantages: Dividend insurance reduces the “rigid cost” of guaranteed interest rates and introduces “flexible distribution” of non-guaranteed dividends, transforming the interest spread loss risk from being solely borne by insurance companies into a “benefit-sharing mechanism” shared with policyholders. This flexibility allows insurers to have more options for equity assets, thereby increasing investment returns.
Conclusion
The move by Tongfang Global Life Insurance to lower guaranteed interest rates reflects the broader trend in the industry to adapt to a low-interest-rate environment. While this may impact short-term sales, it aligns with regulatory requirements and long-term industry trends. By enhancing investment flexibility and sharing risks with policyholders, dividend insurance products can better navigate the challenges of a changing economic landscape.
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