news

한어Русский языкEnglishFrançaisIndonesianSanskrit日本語DeutschPortuguêsΕλληνικάespañolItalianoSuomalainenLatina

Data is a treasure

Data treasure

Less worries about stock trading

As the "anchor" of the wealth management market, bank deposit interest rates have entered the "1" era, leading to a downward trend in the yields of various wealth management products. Starting from September 1 this year, the guaranteed interest rate of life insurance products will enter the "2" era from 3.0%, and the guaranteed returns of universal insurance and dividend insurance will drop to a lower level.

A large amount of funds are chasing low-yield safe assets, which in turn stirs up the financial world. Recently, as insurance companies have released their 2023 dividend realization rates, dividend insurance has "gone viral": according to estimates, even if the dividend realization rate of dividend insurance is only 35.7%, the customer's theoretical rate of return can still reach 3%. This means that the yield of most dividend insurance products in the past year is slightly better than that of bank wealth management.

Dividend insurance is a type of "mild guarantee" insurance, with a guaranteed minimum return and a floating return. It not only meets consumers' needs for security and profitability, but also alleviates insurance companies' concerns about interest rate spread losses. It is strongly recommended by major insurance companies and has become a rising star in the market.

Dividend insurance is no longer popular?

This is the second year that the regulator requires insurance companies to disclose the dividend realization rate of participating insurance. However, the release of relevant data has put insurance companies under more or less pressure.

"When we counted the numbers, we were all shocked," Long Ge, deputy director of the Innovation and Risk Management Research Center of the University of International Business and Economics and co-founder of Zhongtuobang, told the Securities Times reporter, "Regardless of the size of the company, regardless of investment capabilities, the latest disclosed 2023 dividend insurance dividend realization rate has shown a sharp decline."

Long Ge used to work in the product actuarial department of an insurance company and has been closely following the development trend of dividend insurance. The dividend realization rate disclosed this year has industry year-on-year data for the first time, but surprisingly, the industry average has dropped sharply compared with last year.

Data obtained by the reporter from the insurance industry consulting agency "13 Actuaries" showed that as of August 2, a total of 52 insurance companies disclosed the dividend realization rate in 2023, involving 2,068 products. The arithmetic mean of the dividend realization rate was 47.4%, a decrease of approximately 53% compared with 101.9% last year.

The "13 actuaries" also counted the dividend realization rates of the mainstream participating insurance products of China Life, Ping An Life, CPIC Life, and Taikang Life. In 2023, the four life insurance companies announced a total of 563 participating insurance products with an average of 38.5%.

The dividend realization rate is the ratio between the actual dividends distributed by the insurance company and the expected (or mid-range) benefit demonstration in the insurance plan. An annual dividend realization rate of 100% means that the actual income of the current period is consistent with the benefit demonstration.

In 2023, in order to prevent the risk of interest rate spread losses, the regulatory authorities provided window guidance to insurance companies, requiring life insurance companies to implement the principle of cost-benefit matching and reasonably determine the dividend realization rate. Longge believes that this is only one of the reasons for the decline in the dividend realization rate of insurance companies last year, but it is not the core reason.The root cause is the sluggish investment.

In 2023, the capital market as a whole was under pressure, the index fluctuated at a low level, and the investment performance of 28 trillion insurance funds was poor. Both the annualized financial rate of return and the annualized comprehensive rate of return were at their lowest levels in more than 10 years. Among them, the financial investment rate of return of 2.23% was the lowest level since 2008; the comprehensive investment rate of return was 3.22%, the "second lowest" since 2011, only higher than 1.83% in 2022.

The overall return is still more than 3%

With dividend distribution “cut in half”, can dividend insurance continue to be “red”?

The customer yield of participating insurance products consists of two parts: the guaranteed interest rate and the non-guaranteed interest rate. The guaranteed interest rate is the interest rate designed for the policy when the participating insurance product is priced (i.e. the predetermined interest rate), which can be regarded as the bottom line income provided by the insurance company to customers. The non-guaranteed interest rate part is the dividend part. Sales personnel must inform customers that this part of the income is uncertain and will fluctuate with the market.

The guaranteed interest rate corresponding to the guaranteed return has been lowered several times in the past few years at the request of the regulatory authorities. In the fourth quarter of 2019, annuity insurance with a guaranteed interest rate of 4.025% was collectively removed from the shelves; at the end of July 2023, the 3.5% era of life insurance guaranteed interest rates, which had been maintained for 10 years, ended and dropped to 3.0%, of which the upper limit of the guaranteed interest rate for dividend insurance was lowered to 2.5%. On August 2 this year, the Financial Regulatory Bureau issued another notice, requiring that the guaranteed interest rate for dividend insurance be lowered from 2.5% to 2.0% again starting from October 1.

Although the guaranteed interest rate is gradually decreasing, the dividend insurance has a different world after adding the dividend income.

Based on the calculation method of dividend realization rate of dividend insurance, Longge made a quick reference table of the relationship between the scheduled interest rate and the customer's theoretical rate of return. The results show that under the current dividend insurance scheduled interest rate of 2.5%, when the dividend realization rate reaches 35.7%, the customer's theoretical rate of return is 3%, and when the dividend realization rate is 100%, the customer's theoretical rate of return can reach 3.9%; if the scheduled interest rate drops to 2%, the customer's theoretical rate of return will be 3% when the dividend realization rate reaches 57.1%, and if the dividend realization rate is 100%, the customer's theoretical rate of return will be between 3.5% and 3.9%.

Although the dividend realization rate has declined across the board in 2023, the mainstream insurance companies are all above 35.7%. The average realization rate of the 52 companies that have disclosed data is 47.4%, which means that most customers can obtain a theoretical return of more than 3%.

Looking around at the current situation, the return on investment in the entire financial market continues to decline, and safe assets with high principal protection in the wealth management market are enthusiastically sought after. In the first half of this year, the average yield of wealth management products was 2.8%. At the end of July, banks successively lowered deposit interest rates, and the bank's 5-year fixed deposit interest rate entered the "1" era on a large scale. In comparison, the theoretical yield of 3% for dividend insurance can be said to be "still carrying the beauty of the old times."

Affected by this, dividend insurance has not only not been silent, but has "gone viral" due to the discussion caused by the downward trend of dividends, and major life insurance companies have stepped up their sales efforts. It is reported that the original insurance premium income of dividend insurance of life insurance companies in the first four months of 2024 increased by more than 8% year-on-year, which is significantly higher than other types of insurance. Industry exchange data shows that as of the end of the first quarter of this year, the proportion of dividend insurance premiums has increased from 19.5% at the end of last year to 22.1%.

Re-understanding dividend insurance under interest rate spread loss

The pressure of interest rate spread losses has forced the industry to collectively lower the dividend realization rate, and has also made various market participants re-examine dividend insurance.

Participating insurance appeared in the mainland market in 2000 when interest rates dropped sharply. What is the actual dividend situation over the past few years? "13 actuaries" have made an estimate of this. The agency collected the dividend realization rates of more than 2,600 dividend products from more than 60 life insurance companies, eliminated unqualified companies, and estimated the expected average dividend realization rate of the insurance industry since 2013. The study shows that based on historical data, the industry's dividend realization rate in the past was generally in line with expectations, and exceeded 100% in most years.

In 2013, the large insurance company where Longge worked had a dividend insurance policy that could generate a 3.8% return after adding the guaranteed return and cash dividends. However, according to the regulatory requirements at the time, the demonstration return given to customers could only be 3%. "At the time, there were more than one company whose actual return was higher than the demonstration return."

Starting from 2020, due to the decline in investment returns, the dividend realization rate of the entire industry slowly declined, until 2023 when most companies suddenly "cut in half".

The high dividend realization rate that has been maintained for many years has suddenly declined. Can customers accept it? Will it lead to policy cancellations? Insurance companies are the first to feel the pressure. In the sales channel, some account managers are also actively preparing to explain to customers.

After experiencing the real fluctuations in returns, customers also "learned" the true face of dividend insurance. A customer of Ping An Life Insurance's dividend insurance told reporters: "The non-guaranteed part of the return can be 0 in extreme cases."

In the Hong Kong market, dividend insurance is a highly accepted leading insurance product because its dividend realization rate is compulsorily disclosed annually and the information is open and transparent. Some products with high dividend realization rates are developed into star products by insurance companies and become an important consideration for customers when making long-term investment decisions.

At the beginning of 2023, the mainland, drawing on Hong Kong, introduced a dividend realization rate disclosure system, requiring insurance companies to announce the dividend realization rate of dividend-type products on their official websites within 15 working days after the announcement of the annual dividend plan. In the past, the annual distribution plan of dividend insurance was only sent to customers separately, and customers had no way to make horizontal comparisons, and the industry had no comparable data. Dividend insurance was like a "black box", and the outside world had no way to judge the overall income quality. With the implementation of the relevant information disclosure system, the transparency of dividend insurance has been greatly enhanced, and insurance consumers can intuitively understand the deviation between their policy income and the original benefit demonstration.

However, the difference between mainland China's dividend insurance and Hong Kong's is that after the scheduled interest rate of mainland China's dividend insurance is lowered, it can still reach a maximum of 2%, while the guaranteed return of Hong Kong's dividend insurance is very low, with the scheduled interest rate usually between 0.2% and 1.3%. Most of the 6% to 7% compound interest demonstrated to customers comes from the non-principal-guaranteed part.In this context, the dividend realization rate in Hong Kong is regarded as a very important reference information. Once the insurance companies announce it every year, they will be compared by market participants. Insurance companies also actively maintain a high dividend realization rate to ensure the competitiveness of their products. For example, the dividend realization rate of HSBC Life is relatively stable overall, with most dividend realization rates ranging from 100% to 110%; the dividend realization rate of almost all products of Taiping Hong Kong remains at around 100%, which is relatively stable; the dividend realization rate of 85% of the products of FTLife Insurance remains at 100%. However, products with an annual dividend realization rate of less than 30% also appear from time to time in large insurance companies in Hong Kong, which fully reflects the non-guaranteed characteristics.

Professor Zhu Junsheng, a member of the Expert Committee of the China Insurance and Social Security Research Center of Peking University, believes that a reasonable dividend realization rate can be defined as follows: If the dividend realization rate is too high, it will increase the liability cost of the insurance company, which is not conducive to long-term stable operation. In addition, it will also push up customer expectations in the short term, and subsequent declines will trigger the risk of policy cancellation. If the dividend realization rate is too low, it may cause customers to unexpectedly cancel their policies. Generally speaking, the management requirements for dividend insurance need to be "artistic" and maintain a reasonable level of dividend realization rate.

Competition of investment capabilities

As the expected interest rate goes down, the key to the success or failure of dividend insurance in the financial management market has become the non-guaranteed part, that is, the dividend performance. Behind the dividend realization rate is the competition of investment ability.

In the past three fiscal years, the investment return rate of insurance funds has been below 5% for three consecutive years. Before the 2023 annual report, most insurance companies still set the long-term investment return rate economic assumption at 5%. In the 2023 annual report, listed insurance companies collectively lowered the investment return rate assumption from 5% to 4.5%, indicating that the insurance industry has reached a consensus on the downward revision of future investment returns.

Entering 2024, the investment yield of insurance funds showed signs of marginal improvement. In the first quarter, the annualized financial investment yield of insurance funds was 2.24%, and the annualized comprehensive investment yield was 7.36%. The substantial increase in the comprehensive investment yield indicates that the floating profit of insurance funds is increasing significantly.

Over the past 20 years, the investment yield of insurance funds has experienced many fluctuations. In 2007, riding on the shoulders of the bull market, the investment yield of insurance funds reached a historical high of 12.17%, but then fell to a historical low of 1.91% in 2008. Overall, in most years of the past 20 years, the investment yield of insurance funds has been higher than 4.5%.

Past achievements do not represent the future. As the interest rate center gradually moves downward, the decline in insurance product returns often lags behind the decline in deposit rates and bank wealth management returns, because insurance funds have a long asset allocation period, and the bonds allocated in the early years have become scarce high-value assets after the interest rate declines.

As one of the main holders of long-term government bonds, insurance funds have always been the most aggressive in allocating ultra-long-term special government bonds, with the allocation rate rising from 4.3% in 2007 to 3.6% in 2017 and 2.57% this year. In May this year, the 30-year ultra-long-term special government bonds were issued through bidding, with the total subscription multiple reaching 3.9, among which insurance institutions actively participated. An insider of China Life Asset Management said that the company has continuously and massively invested in long-term bonds, and currently long-term bonds account for a considerable proportion of its holdings.

According to the statistics of the fixed income investment department of a large insurance asset management company in 2023, among the main bond varieties held by insurance funds, the average yield of 5-year AAA bonds in the past 16 years was 4.27%, the average yield of 30-year treasury bonds in the past 20 years was 3.98%, and the average yield of 10-year treasury bonds in the past 20 years was 3.49%. Based on this calculation, the long-term yield of insurance funds bond investment is about 4%.

The basic idea of ​​insurance investment is to obtain higher coupon income from illiquid fixed-income assets such as debt investment, non-standard products, and large-denomination certificates of deposit, provide a safety cushion and stabilizer for insurance fund investment, and then increase returns through equity assets such as equity, stocks, and funds.

After experiencing multiple rounds of interest rate cycles and capital market cycles, insurance funds have accumulated experience in cross-cycle asset allocation and the pursuit of stable returns, providing the possibility for them to obtain long-term and stable investment returns.

Zhu Junsheng believes that fundamentally, the sustainability of the dividend realization rate is based on the company's long-term investment capabilities. In the current market environment, it is very important for the industry to improve its ability to manage dividend insurance. The challenges of dividend insurance management include dividend management, maintaining reasonable customer expectations and macroeconomic uncertainty. How to smooth the account's reserve funds, how to formulate an annual dividend policy, and how to balance peer competition and corporate interests are still challenges for insurance companies. At the same time, insurance companies need to manage customer expectations, neither raising their appetites too high nor suppressing expectations too much. Macroeconomic uncertainty will affect the investment returns of the insurance market, and insurance companies need to convey their understanding of the market to customers in a timely manner.

Warning sign of declining dividend realization rate: Don’t over-promise your clients

Securities Times reporter Pan Yurong

As insurance investment returns have gradually declined, more and more insurance companies have tasted the bitter fruit of "over-promises" in the past three years.

In the past, life insurance companies seemed to be trapped in such a vicious circle: close to the regulatory ceiling, designing policies with a predetermined interest rate of 3.5% and 3%, promising customers a guaranteed return, and selling a large number of long-term policies with fixed interest rates; then, faced with the market environment where bank wealth management broke the "rigid payment", deposit interest rates fell, and stock fund volatility intensified, investment income continued to decline; however, in order to maintain the cash flow of policy maturity payments, insurance companies had to maintain the growth rate of new policies. How to quickly obtain premiums? It was still a familiar formula: close to the regulatory ceiling, sell high-interest policies, and make a guaranteed return to customers...

From 2019 to 2023, the investment yield of insurance companies fluctuated downward, from 4.94% to 2.23%, but until the end of July 2023, the guaranteed interest rate of the hot-selling insurance products was still as high as 3.5%. Some industry insiders predict that the average liability cost of the industry is about 3.1%. The interest rate spread loss is like a sword hanging over the heads of life insurance companies, and the slightest mistake may lead to catastrophic consequences.

The mandatory disclosure system for dividend realization rates, which will be implemented in 2023, is the best tool to constrain insurance companies to "practice what they preach" to customers. The newly disclosed dividend realization rates this year have dropped sharply, which is a warning to insurance companies for their past "over-promises": dividend realization rates are non-capital-guaranteed, and the past 100% realization rate cannot represent the future, and the minimum return on the dividend part can be 0.

At the beginning of the year, the regulatory authorities required all life insurance companies to "implement the principle of cost-benefit matching." Lowering the dividend realization rate may have another meaning: the industry should strictly abide by the nature of "dividends are not principal-guaranteed" and should adjust the rate down in a timely manner when investment performance is poor; otherwise, it will create an illusion of implicit guarantee in the market.

The discussion triggered by this incident also highlights the unique value of dividend insurance: it prevents insurance companies from promising high returns that cannot be sustained in the long run; it makes the return rate obtained by customers from dividend insurance consistent with the return rate of the entire market investment. These can help insurance companies spread market risks to customers, balance the interests of policyholders and companies, and thus help the insurance industry control the risk of interest rate spread losses.

The warning is not only applicable to dividend insurance. Currently, the risk of interest rate spread is sending a warning to the entire industry. Any insurance product that writes a fixed predetermined interest rate into the policy should keep this lesson in mind: in the long run, will the policy sold today become a negative asset in the future? After all, the lessons learned from every crisis should not be wasted.

Source: Securities Times official microblog

Statement: All information content of Databao does not constitute investment advice. The stock market is risky and investment should be cautious.

Editor: Xie Yilan

Proofreading: Ran Yanqing

Data treasure