Scheduled interest rate adjustment: Why are leading insurance companies holding their ground amid the "three arrows" approach?

Recently, the frequent discussions about "scheduled interest rate reductions" in the insurance industry have reached a phased conclusion.

On January 10, the Insurance Association announced on its official website that the current research value for the scheduled interest rate of ordinary life insurance products is 2.34%.

Shortly thereafter, the Financial Regulatory Administration issued a notice titled "Notice on Establishing a Mechanism for Linking Scheduled Interest Rates with Market Interest Rates and Dynamic Adjustments" (hereinafter referred to as the "Notice"), which detailed the previously proposed dynamic pricing mechanism for scheduled interest rates;

It proposed requirements such as "if the maximum value of the scheduled interest rate for ordinary life insurance exceeds the scheduled interest rate research value by 25 basis points or more for two consecutive quarters, the maximum value of the scheduled interest rate for new products should be promptly lowered."

However, prior to this, institutions such as China Life Insurance, Ping An Life, Taikang Life, and ICBC-AXA Life had successively announced their intention to maintain the maximum scheduled interest rates of 2.5% for ordinary insurance, 2.0% for participating insurance, and a minimum guaranteed interest rate of 1.5% for universal insurance.

Three pieces of news emerged on the same day, reigniting heated discussions about whether and when the scheduled interest rates for life insurance would be lowered.

From the content of the "Notice," it is expected that insurance institutions will not face a mandatory reduction in scheduled interest rates in the short term.

For the currently sold ordinary life insurance, the "Notice" clearly states that the condition for a reduction is "if the maximum scheduled interest rate exceeds the scheduled interest rate research value by 25 basis points or more for two consecutive quarters";

For participating insurance and universal insurance, the "Notice" requires that "while adjusting the maximum scheduled interest rate for ordinary life insurance, a reasonable adjustment should be made according to a certain difference."

According to regulatory requirements, after the last round of adjustments, the upper limit of the scheduled interest rate for life insurance is 2.5%, which is 16 basis points higher than the research value of 2.34%, still within the 25 basis points range;

It is precisely for this reason that after the central bank paused the purchase of government bonds and the yields stabilized, leading insurance companies also announced that they would not lower the scheduled interest rates.

From the current competitive landscape of the industry, the likelihood of insurance companies voluntarily lowering yields is relatively small.

Lowering interest rates without regulatory requirements could, to some extent, facilitate the matching of company assets and liabilities; however, in the highly competitive and homogeneous life insurance market, it would be akin to "self-sabotage."

This is especially true for small and medium-sized insurance companies with limited product systems, value-added services, and sales capabilities, where rates have long been their core competitiveness; most insurance companies tend to set the scheduled interest rate at the maximum value during product design, making it difficult to lower it proactively.

In the long term, if government bond yields continue to decline and investment capabilities do not recover, a reduction in scheduled interest rates will still be unavoidable.

Especially in recent years, with declining interest rates and the "bull market" in bonds and equities, the asset yield levels of different insurance companies may show significant divergence, thereby affecting product pricing levels.

On the product side, after the dynamic pricing mechanism for scheduled interest rates is refined, insurance companies with stable investment capabilities may prefer participating insurance.

After October 2024, life insurance will fully enter the "2 era," and the market's attitude towards insurance has undergone subtle changes:

On one hand, a scheduled interest rate of 2% no longer has a significant advantage compared to large deposits; on the other hand, the warming trend in the capital market has diverted funds from the wealth management market Under this trend, insurance companies have begun to promote participating insurance and reduce the proportion of guaranteed returns to enhance competitiveness; several leading insurance companies have stated that they expect the proportion of participating insurance in the future will be around 50%.

ZheShang Securities has previously believed that the enhancement of market confidence under the policy combination is beneficial for the sales of participating insurance. "With the increase in value rates brought about by the reduction in the scheduled interest rate, it is expected that the new business value of 'New Year’s Opening' in 2025 is likely to achieve positive growth."