New Directions for China’s Life Insurance Industry

May 2024

China's life insurance industry has undergone many changes, as well as some growing pains over the years. Following more than three decades of continuous development with a compound annual growth rate (CAGR) ranging from a high of 37 percent to gradually decreasing to 7.6 percent through 2020, China’s life insurance industry progressively slowed and then plummeted to a negative growth rate of -0.3 percent in 2021. In 2022, the industry showed signs of recovery with the CAGR growing to 2.8 percent. In 2023, the industry continued its upward trend with an 8.9 percent year-over-year gain in industry premium in the first quarter of 2023, along with predictions calling for a CAGR of 8.7 percent or more for 2023 through 2028, according to Global Data.

Today, the industry is entering a time of major change and transformation, and is trying to find a new direction. Part 1 of this two-part article offers an overview of China’s life insurance industry: from where it has been to where it is. Part 2, which will be published next month, will discuss the direction the industry is heading and what it will take to succeed.

Changes and Challenges

During the past few years, China's life insurance industry has matured. Customer demands are changing constantly, and industry supervision is becoming much more stringent. The industry is experiencing new challenges. More specifically:

High premium growth is trailing away. Although the premium growth level is expected to be substantially repaired as of 2023, due to the dual drive of the scheduled interest rate change and the increase in residents' savings demand, the average original premium income CAGR from 2019 – 2022 ended at 3 percent, much lower than the 11 percent recorded from 2017 through 2019, indicating insurers need to become accustomed to a new normal.

The industry is seeing slow value recovery. Despite the life insurance industry in China showing signs of recovery in 2022 and early 2023, according to Fitch Ratings, major life insurers’ annualized investment yields declined from 3.4 percent net and 5.24 percent total from first quarter 2023 to 2.29 percent net and 3.37 percent total by fourth quarter 2023, which incidentally were declines from their initially assumed rate of 5.0 percent. The declines are in sync with the insurers reducing expectations for investment return and risk discount rates in 2023, as well as reassessing their assumptions for embedded value (EV) and new business value (NBV) — all in response to the continuing low interest rates in China.

Asset-side risk is intensifying. China has entered a downward interest rate cycle, and assets with shorter investment periods will face reinvestment risks, even though regulation has lowered the predetermined interest rate cap of ordinary life insurance from 3.5 percent to 3 percent since August 2023. But the adjustment of the predetermined interest rate is relatively lagging, and the cost of the liability side is higher than the income of the asset side, which creates a loss in profit margin.

There is an overall decline in solvency. The implementation of the second-generation solvency at the beginning of 2022 led to an overall decline in the solvency of insurance companies. Beginning at the end of first quarter 2022 through the end of fourth quarter 2022, the industry’s comprehensive solvency ratio fell from 219 percent to 186 percent — a drop of 33 percent. At the end of second quarter 2023, the National Administration of Financial Regulation data indicated another drop — a comprehensive solvency ratio for life insurers of 178 percent, according to Insurance Asia.  

As the transformation of China’s life insurance industry continues from high-speed development to high-quality development, industry leaders have reached a consensus:  The industry must face the challenge of transforming the distribution channel and identify and introduce a new growth model.

Seeking a New Growth Model

With the increasing diversity of customer needs that life insurance companies must meet, transparency of information is paramount to customer autonomy and meeting customers where they are. Furthermore, the sales team must change from a "product orientation" to a "customer need-based" model. To do that, sales professionals must probe deeply into the real needs of customers and optimize product services and the customer experience, thereby enhancing customer stickiness and loyalty.

In addition, in the face of the narrowing of the interest rate spread under the pressure of the asset side, increasing the contribution of the "fee difference" to profits is also key for insurance companies to win in the new era.

Part 2 of this article, which will be published next month, will discuss the new direction the industry is taking, as well as how insurers are meeting the challenges head-on.