Insurance law changes and the elimination of “guaranteed repayment” for insurance-based wealth management products have recently sparked heated debate in China.
Financial experts advised that Chinese investors must face a cruel fact: The end of the so-called guaranteed full repayment is inevitable amid the ongoing economic recession.
The debate was sparked by a March 19 front-page article in Caixin Weekly titled “Settling Troubled Insurance Companies.” The article listed the risk events in the insurance industry in recent years and revealed that the insurance sector is facing a shortfall of hundreds of billions of yuan ($1 is equal to about 7.22 yuan).
In recent years, the Chinese insurance industry has experienced numerous risk incidents, including the Anbang Group and Tomorrow Holding that have been penalized, as well as insurance companies that are awaiting takeover, the article stated.
It also stated that the current situation in the insurance sector concerns not potential risks but rather “risks that have already materialized,” with a conservative estimate indicating the existence of “up to 600 billion yuan (about $8.3 billion) in high-risk assets.”
Some even estimate this figure to reach several trillion yuan or higher (1 trillion yuan is approximately $138.4 billion). The insurance industry faces a shortfall of several hundred billion yuan, and as China’s economy slows and investment returns decline, the amount of risky assets is expected to increase, according to the article.
The financial outlet revealed that the draft Insurance Law, which is being amended, proposes a new clause stating that “if the assets of the taken over insurance company are insufficient to pay off all debts, or if the insurance business is transferred in accordance with the law, the insurance contract may be reasonably changed with the approval of the State Council.”
No More Principal-Protected Investments
The news immediately sparked a plethora of discussions and commentaries on the internet.Renowned Chinese financial writer Wu Xiaobo posted an article on social media saying that everyone must prepare to face the cruel reality: the end of guaranteed repayment is an inevitable trend.
“Money invested in the stock market is trapped, housing prices are falling, and insurance wealth products no longer guarantee the principal. [Under such economic conditions,] the issue of asset protection has become a real problem for China’s new middle class. In the future, one must pay more attention to the ‘brand’ of the insurance company one chooses and only select those with risk control capabilities,” he wrote.
In a pessimistic tone, Mr. Wu also said, “Prepare mentally for long-term low returns, as ‘principal-guaranteed investment’ is likely to be a false proposition in the future.”
The Caixin article explained that the insurance industry’s move to “break the hard promise” draws on practices during the bursting of Japan’s economic bubble in the 1990s. Back then, in response to a wave of bankruptcies in the insurance industry, Japan allowed insurance companies facing bankruptcy to adjust the pre-set interest rates on existing policies by modifying the contracts.
On April 25, 1997, Nissan Life, one of Japan’s insurance giants, declared bankruptcy. In the following four years, seven life insurance companies, including Toho Life, Daihyaku Life, Taisho Life, Chiyoda Life, Kyoei Life, Tokyo Life, and Yamato Life, went bankrupt one after another.
In his article, Mr. Wu said Japan adopted three main strategies at that time: First, the acquiring insurance companies adjusted their product structures to reduce operational risks; second, they issued more bonds for financing and sought higher returns through overseas investments; and third, they revised the Insurance Business Law to allow insurance companies facing bankruptcy to reduce the predetermined interest rates on existing policies.
All Chinese Insurance Companies Are on Their Way to Bankruptcy
In a recent interview with The Epoch Times, Mike Sun, a China expert and a North American investment consultant, said the crisis encountered by insurance companies in China is similar to the experience of Japan in the 1990s.“Both are inevitable outcomes when the bursting of an economic bubble has a negative impact on the banking, insurance, and other financial systems,” he said. “Typically, insurance companies invest the money they receive from their customers in bonds, bank deposits, stocks, funds, unsecured bonds, real estate, and so on, according to a certain allocation ratio. But their investment in government bonds and banks saw a decline in interest rates, while the returns promised to their own customers were at high interest rates. This discrepancy resulted in negative values, leading to what is known as ‘interest rate spread losses.’”
Mr. Sun also explained Nissan Life’s bankruptcy in greater detail.
Between 1985 and 1990, Nissan Life’s 10-year life insurance offered customers a predetermined interest rate of 6 percent. However, after the bursting of the economic bubble in 1992, the Japanese stock market fell from nearly 40,000 points to below 8,000 points, and at the same time, the Bank of Japan also cut its interest rate all the way down, and the interest rate for one-year time deposits was reduced to 0.25 percent in 2001.
“Insurance companies had to pay high interest rates to their customers, while their investment returns plummeted repeatedly, sometimes even turning negative. Eventually, they had to go bankrupt,” Mr. Sun said.
He believes that China’s major insurance companies are now in the same situation, as they have to pay investors high interest rates, some as high as 6 percent, but the return they get on investors’ money is currently 2.5 percent on government bonds and less than 4 percent on bank deposits.
“Although China’s insurance companies will not go bankrupt immediately, they are on the road to bankruptcy and are holding out and waiting for the authorities to bail them out. But how much money can the authorities put together to bail out the 600 billion yuan ($8.3 billion) black hole? Even if only a small number can be saved, it is still the best possible outcome,” Mr. Sun said.
