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China: Par business to regain dominance

Source: Asia Insurance Review | Jul 2017

China Life & Health

As a result of regulatory dynamics and the market environment, participating business has a great chance to reclaim its once dominant position in the Chinese market, according to independent actuarial and consulting firm Milliman.
 

   In its research report on participating business in Asia released in early June, Milliman notes that a benefit for par business under China Risk-Oriented Solvency System (C-ROSS), which was implemented last year, is its loss-absorbing mechanism. When unexpected losses arise, insurers can take management actions to adjust non-guaranteed benefit cash flows in par business to absorb some or all of the losses incurred, which has the effect of reducing the total capital requirement. 

 

   Under C-ROSS, insurers with a higher portion of long-term protection products, less risky assets, and better risk management practices benefit from the lower capital requirements. 
 
   Milliman also gives an outline of the development of par business since it was first introduced in China in 2000, following a significant fall in interest rates during the second half of the 1990s. One-year bank deposit rates fell quickly from the historic high of 11% in 1996 to 2.25% in 2000. Chinese insurers faced huge negative interest spreads at that time. 
 
   The CIRC issued an urgent notice to cap pricing interest rates at 2.5% on 10 June 1999, which helped reduce the negative interest spreads on new business, but also made traditional products much more expensive and therefore harder to sell. 
 
   Par products quickly dominated traditional and bank savings products, driven by their profit sharing mechanisms. Par business is written on a 70:30 profit-sharing arrangement, with the policyholder return provided almost exclusively through cash bonus. To date, the annual cash dividend approach still remains the most common method for surplus distribution in China. Products are most often written in the form of endowments. Whole life variants are also popular. 
 
Nonpar products
In August 2013, the restrictions on pricing interest rates were lifted for nonpar products, and given the recovery in interest rates since 2000, this resulted in significant premium reductions. A significant increase in the sales of nonpar products at the expense of par products then followed. 
 
   However, since September 2015, pricing restrictions (eg, 2.5% pricing interest rate ceiling) on par business have also ended, with an expectation of a recovery in par business. A 
 
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