Summary of Key Points
The China Banking and Insurance Regulatory Commission (CBIRC) has issued a new "Insurance Companies' Asset-Liability Management Measures," which consolidates and upgrades existing regulations. The new measures are designed to address changes in the industry, such as the low-interest rate environment and the adoption of new accounting standards. They aim to strengthen the linkage between assets and liabilities, guiding insurance companies to shift from a focus on "scale expansion" to "long-term value management." The new regulations include a three-year transition period, with larger insurance companies being less affected in the short term and gaining a greater advantage in the long run, while smaller and medium-sized companies need to accelerate product transformation and asset optimization. This shift is expected to exacerbate the "Matthew effect" within the industry, where the stronger companies become even stronger.
Why the New Measures?
Over the past few years, the insurance industry has faced several significant changes:
1. Low interest rates: Bank interest rates have been declining, meaning that the high-return insurance policies (e.g., those offering annual returns of over 4%) that insurance companies sold in the past may no longer generate sufficient profits to cover their costs, leading to potential losses (referred to as "interest rate spread losses").
2. New accounting standards: The new accounting standards will be fully implemented in 2026, altering the way assets and liabilities are calculated, which will have a more pronounced impact on companies' financial performance.
3. Challenges for smaller companies: Some smaller insurance companies have focused solely on expanding their scale without considering the matching of assets and liabilities. For example, they may have sold many long-term policies but invested in short-term, high-risk assets, resulting in liquidity issues.
Given these changes and the government's emphasis on strengthening the linkage between assets and liabilities, the old regulations are no longer suitable.
More Flexible Governance Structures
The new measures make two important adjustments to the management structure:
1. Relaxation for smaller companies: Previously, smaller companies were required to establish separate asset-liability management departments; now, they can choose to either set up such departments or designate existing departments to handle this responsibility, reducing their operational costs.
2. Enhanced role of asset-liability management departments: These departments have been given additional responsibilities, such as capital planning and risk tolerance setting, to ensure a comprehensive approach to managing assets and liabilities.
3. Industry self-regulation: In addition to regulatory oversight, industry associations will also play a role in management, creating a two-tiered system involving government regulation and industry self-discipline.
4. Focus on long-term performance: Insurance companies are required to establish long-term evaluation frameworks to avoid short-sighted expansion or investment decisions that could harm their long-term financial health.
Significant Changes in Regulatory Indicators
The most significant change relates to the regulatory indicators for life insurance:
- Previous indicator: The "duration gap" was used to measure the difference in the average maturity of assets and liabilities (e.g., if assets mature in 5 years and liabilities in 10 years, the gap would be 5 years). There was a strict requirement that this gap should be within ±5 years, which many smaller companies struggled to meet.
- New indicator: The "interest rate risk hedge ratio" is now used to assess the ability of assets to protect against interest rate fluctuations on liabilities. The ratio should fall within the range of 50%-150%:
- A ratio of 100% indicates perfect interest rate risk protection, meaning that changes in interest rates have no impact on the company's financial performance.
- A ratio below 50% suggests that the assets have a short duration, and a decline in interest rates could lead to insufficient investment returns to cover liability costs (higher risk of interest rate spread losses).
- A ratio above 150% indicates that the assets have a long duration, and an increase in interest rates could result in asset depreciation (e.g., falling bond prices).
This new indicator provides more flexibility, allowing insurance companies to adjust their dividend policies or settlement rates without strictly extending the duration of their assets. For property insurance, the focus is on indicators such as the coverage ratio of settled funds and liquidity coverage, primarily to prevent liquidity risks.
Transition Period and Its Implications
A three-year transition period has been established to ensure a smooth implementation of the new regulations. Larger insurance companies will be less affected in the short term and will likely gain a competitive advantage in the long run due to their better asset-liability management. Smaller and medium-sized companies, on the other hand, need to quickly transform their business models. This includes selling products with lower fixed costs and higher potential for returns, as well as adjusting their asset portfolios (e.g., investing in high-dividend stocks, long-duration alternative assets, or using derivatives to hedge against interest rate risks).
In summary, the new measures aim to make the insurance industry more sustainable by encouraging a focus on long-term stability rather than mere scale expansion. The changes are explained in plain language, making them accessible to non-financial professionals as well.