This year's slowing in China's accelerating life insurance industry has worried many observers, especially as foreign players are grabbing a larger market share in major cities.

But if Chinese insurers can learn a critical lesson from the rude awakening, and manage a successful return to a healthy protection-oriented product mix, a short-term setback like this will be worthwhile, experts say.

China's aggregate insurance premiums grew by only 10.2 percent in the first six months of this year to 237.4 billion yuan (US$28.6 billion), falling sharply from a 34 percent average for the past two decades.

The slowdown in the life sector was particularly alarming, with growth rate diving by nearly 35 percentage points from last year to 6.5 percent.

Life insurance premiums - a major target for foreign insurers - even suffered from rare negative growth in Beijing, shrinking by 4.36 percent.

In stark contrast, foreign life insurers saw their premiums surging by 51.2 percent during the same period, though to a still relatively thin 3.8 billion yuan (US$457 million).

Analysts nearly unanimously pointed the finger at a broad fall in the sales of short-term single-premium investment-linked products, a backbone product line for many Chinese life insurers.

"A primary reason was that insurance companies reduced their sales of short-term, investment-linked products, especially five-year single-premium products sold at bank outlets," said Barry Tsai, chief executive officer ING Capital Life Insurance Company, a 50-50 joint venture between ING Group NV and Beijing Capital Group.

Chinese life insurers have been aggressively promoting investment-type products in recent years, which promises policyholders part of their investment returns in addition to risk protection.

Such products witnessed expansive growth especially after a slew of interest rate cuts by the central bank made it virtually unaffordable for insurers to write policies carrying high interest rates. They accounted for 29.5 percent of total life insurance premiums in 2001, and a much more significant 58.2 percent last year.

Greater reliance on investment returns, however, makes the insurance companies more vulnerable to fluctuations in China's fledgling securities markets.

While the persistently low interest rate environment is making it difficult for insurers to set higher interest rates on long-term products to boost sales, a bearish capital market this year, particularly a stock market decline since April, has hit the insurers' pillar of investment-linked products heavily.

China Life Insurance Co Ltd, the nation's largest life insurer, reported 63 million yuan (US$7.6 million) in net realized losses on investments during the first half of this year, a sharp reversal from net gains of 420 million yuan (US$50.6 million) one year earlier.

"This result was mainly due to market volatility and considerable fluctuations in securities investment funds in the first half of 2004," the company said in its first-half report.

The macro financial environment was simply not favorable," said Huang Huaming, an insurance professor at the Beijing-based University of International Business and Economics (UIBE).

"And residents are becoming more cool-minded about insurance expenditures after pursuing investment returns through insurance somewhat insensibly," he said.

Experts have warned that the life insurance sector's over-reliance on single-premium, investment-type products will hamper the sustainability of premium growth.

And declining investment yields, coupled with expectations of an interest rate rise, threaten to increase redemptions and therefore amplify liquidity risks of Chinese life insurance companies, they say.

But the insurers are not simply unaware of potential risk. Tuo Guozhu, a professor at the Capital University of Economics and Business, said selling investment-type products, which typically carry interest rates of no more than 2.5 percent annually, would help life insurers reduce the risk of negative interest spread.

The 9 million policies Chinese life insurers sold before 1998, when the central bank's consecutive interest rate cuts brought interest rates below levels carried in those policies, resulted in an estimated 50-70 billion yuan (US$6-8.4 billion) in losses, Tuo said. And although their average investment yield dipped to 2.68 percent last year, insurers did not need to worry about negative spread for their new business at least.

Selling short-term, single-premium products, the professor said, would not only help insurers reduce commission costs, but generate significant cash flows in a short time.

"That (generation of cash flows) is undoubtedly something companies eager to expand and set up new branches would love to see," Tuo said.

Yet an insensible growth strategy is untimely at best, analysts say, with foreign insurers gaining ground at an increasingly fast pace with their years of experience and expertise.

In Guangzhou, a major target in their China strategies, foreign insurers seized an unexpectedly large 41.5 percent market share in terms of first-year life insurance premiums during the first five months of this year.

And American International Assurance has reportedly overtaken New China Life Insurance Co recently to rank the fifth in terms of sales through agents in the domestic market. The US-based insurer reaped 2.5 billion yuan (US$301 million) in premiums during the first seven months of this year, representing a 1.26 market share, official statistics indicated.

And foreign insurers' market share is bound to grow faster starting at the end of this year, when the Chinese Government, in accordance with its World Trade Organization commitments, lifts all geographical and business scope restrictions on the insurance industry, including the key group insurance sector.

To take up the challenge, Chinese life insurers need to restructure their product mix by reducing the reliance on investment-type product lines and designing more protection-oriented products that cater to the diverse needs of local residents, experts suggest.

"Product innovation is the key," said Huang at UIBE. "And innovation means being closer to market needs."

"The insurance industry needs prudence and safety," he said, referring to reliance on investment-type products. "The macro environment this year simply served to help insurers return to protection orientation, which is the essence of insurance."

The China Insurance Regulatory Commission has said local insurance firms have not fully recognized the importance of product innovation and lack mechanisms for innovations and the personnel needed. The commission has also been urging companies to step up innovation efforts, and pledged policy support.

The return to protection-oriented product development has already begun, analysts say, taking note of the declining proportion of investment-type and single-premium products in major cities, especially Shanghai, the nation's financial hub.

Premiums from investment-type products dropped by 16.5 percent in Shanghai in the first five months of this year, while sales of protection-based products started to rise.

"That means restructuring has started," Huang said.

"As the difficulties experienced in the Beijing market rang alarm bells, the experience in Shanghai provides clues as to where to go," he said.

(China Daily September 6, 2004)