On 11 July 2010 the China Regulatory Commission (the CIRC) stated that it proposed to remove restrictions on insurance companies in China in deciding the assumed (or guaranteed) interest rates for “conventional” (non-participating) life insurance policies in order to protect consumers’ interests and encourage innovation in the sector. The CIRC hopes that this deregulation will help to boost sales in conventional insurance policies, which have been in decline for a number of years.

At present the interest rate that may be paid under a conventional life insurance policy is capped at 2.5%. The initial cap was introduced by the CIRC in 1999 when fierce competition drove insurance companies to pay increased returns (that is increased interest rates) to policyholders exceeding the yields that could be obtained on other investments. “Conventional” life insurance policies are life insurance policies with premiums and policyholder benefits already determined at the time the policies are written. Market analysts are of the opinion that deregulation of interest rates will bring greater competition to the sector, although it will reduce the profit margin on conventional life insurance policies as the higher interest rates set by investors will inevitably reduce their profit from those policies.

Following the CIRC’s announcement, the value of shares in Chinese life insurers fell dramatically. However, a Citibank report indicated that negative impact on life insurers would be modest as conventional life insurance policies no longer constitute their main product.

A final decision has still to be made by the CIRC regarding the lifting of the cap on interest rates for conventional life insurance policies, although it is anticipated that the CIRC will ultimately implement the change.