The China Insurance Regulatory Commission recently issued the “Notice on Carrying out the Pilot Program of Variable Annuity Insurance” and the “Interim Measures for the Administration of Variable Annuity Insurance”, and began to promote the pilot program of variable annuity insurance. The person in charge of the Personal Insurance Supervision Department of the China Insurance Regulatory Commission answered relevant questions from reporters.
What is variable annuity insurance? What are the characteristics?
Variable annuity insurance refers to a life insurance product that includes the insurance protection function, the policy benefits are related to the price of the investment unit in the linked investment account, and at the same time, it has the minimum policy benefit guarantee according to the policy agreement.
Variable annuity insurance can be simply understood as variable annuity insurance = investment-linked insurance + minimum guarantee + annuity payment
Has the following characteristics:
1. An independent account shall be set up by the insurance company, which shall be isolated from other assets to ensure clear accounting and no encroachment or damage to the interests of the insured.
2. The investment income is entirely attributable to the insured, and the insurance company only charges various fees as agreed in the policy.
3. The price of the investment account is regularly announced to facilitate the insured’s inquiry, and the transparency is very high.
4. The minimum policy benefit guarantee can be provided. It is one of the following 4 types: Minimum Death Benefit Guarantee, Minimum Maturity Benefit Guarantee, Minimum Annuity Payment Guarantee, and Minimum Accumulated Benefit Guarantee.
Take the minimum maturity benefit guarantee as an example, that is, when the policy expires, the insured can obtain the greater of the current account value and the agreed minimum maturity payment.
For other minimum policy benefit guarantees with higher risk, such as the minimum surrender benefit guarantee, from the perspective of risk control, the pilot program is not currently carried out.
5. Provide annuity payment method or annuity conversion right.
Taking the minimum maturity guarantee as an example, when the maturity expires, the insured can convert to an annuity that can be received every year in the future according to the greater of the account value at that time and the minimum guarantee.
6. Insurance guarantee risks are entirely borne by insurance companies, and insurance companies undertake the investment risks brought about by providing minimum guarantees. Investment risks above the minimum guarantee are borne by the insured.
Please briefly introduce the international development of variable annuity insurance.
Variable annuity insurance is a mainstream product in the European and American insurance markets. It first appeared in the 1950s. After the 1990s, due to the development of risk hedging technology and the emergence of various minimum guarantees, it began to develop rapidly. In 2007, before the financial crisis, the premium income of variable annuity insurance in the United States was US$170 billion, accounting for about 68.5% of the annuity insurance market and 20% of the life insurance market, with a total asset balance of about US$1.5 trillion. In Japan, by 2007, the balance of variable annuity insurance assets had reached 16.5 trillion yen, accounting for about 70% of individual endowment insurance products. During the financial crisis, this product was impacted to a certain extent, but it is still the mainstream product in the foreign insurance market. For example, in 2009, variable annuity insurance accounted for nearly 50% of the US annuity market.
How was the variable annuity insurance affected by the financial crisis? What are the lessons learned?
During the financial crisis, variable annuity insurance was hit hard. In 2008, the sales of variable annuity insurance in North America dropped by 15%, and the assets under management dropped by 24%. At the same time, some insurance companies have incurred huge losses due to the sharp rise in hedging costs.
The main lessons learned are the following:
1. There can be no overly radical guarantee interests in product design;
2. Reasonable and sufficient pricing is required for guaranteed interests, and insufficient pricing caused by excessive competition is avoided;
3. A set of practical, relatively transparent, and monitorable risk hedging mechanisms is required;
4. Do not rely too much on financial derivatives provided by third parties (such as banks or reinsurance companies) as risk management tools;
5. The extreme cases of hedging models and capital markets need to be re-examined;
6. Adverse selection behavior of policyholders should be fully considered.
The above experience and lessons form the basis for our drafting of the Pilot Notice and Interim Measures.
The basic drafting spirit of the “Pilot Notice” and “Interim Measures”
1. Support innovation
Innovation is an important driving force for the development of the industry. In recent years, the life insurance industry has experienced insufficient innovation, products have gradually become homogenized, and channel competition has intensified. It is necessary to introduce fresh blood to avoid excessive competition among companies on a single product line and single channel. As a mainstream product in the global insurance market, variable annuity insurance has been introduced and piloted, which is an important practice for regulatory authorities to support and encourage innovation.
2. Control risks
Variable annuity insurance products have complex forms, strong technical requirements, high requirements on the capital market, and careless operation, which may cause heavy losses to insurance companies. But any insurance product has both advantages and risks. The key lies in whether the supporting system is sound and whether the means of preventing risks are effective. By adopting the method of “preliminary specification first, and product approval later”, the risk is controlled. At the same time, in the “Interim Measures”, risks are controlled through the management model and liability reserve, and restrictions are also imposed on the qualifications of pilot companies, pilot areas, and the total amount of pilot projects.
How to control risks in the pilot?
The risk level of variable annuity insurance is relatively high. We have extensively absorbed the experience and lessons from the financial crisis, and standardized the following aspects in the pilot program to control risks:
1. Standardized management mode
The core risk point of variable annuity insurance is to provide a minimum guarantee. This risk is borne by insurance companies. Therefore, the Interim Measures clearly require insurance companies to adopt corresponding management models to control risks and specify two management models approved in the pilot phase: one is internal portfolio hedging, that is, through asset-based hedging. The principle of liability matching management is to manage the minimum guarantee through the internal simulation of put options; the second is a fixed multiplier combination, that is, a fixed investment leverage (multiplier), which takes the value of risk-free assets as the bottom line, and dynamically adjusts funds between risky assets and risk-free assets. The ratio of investment among risky assets.
2. Standardize the withdrawal of liability reserves
Liability reserves are the core to ensure that insurance companies prudently assess risks, fully price their prices, and ensure sufficient solvency, and are also the focus of national supervision.
For the reserves that need to be accrued for the minimum guarantee, we draw on the content of the latest version of the US variable annuity insurance reserve evaluation guidelines and introduce the Monte Carlo stochastic simulation method for the first time. The method requires insurance companies to draw reasonable reserves by simulating several different scenarios (at least 1,000 scenarios) that may generate funding gaps. Each scenario must also be tested and meet certain criteria.
In addition, we have attached a set of safety locks, requiring the traditional static actuarial evaluation method to be used for evaluation under the assumption that the capital market falls by 30%. Compared with the aforementioned random simulation results, the larger of the two is required to fully guarantee Conservative and prudent in the withdrawal of reserves.
3. Pilot product type restrictions
The pilot variable annuity insurance products will be based on the idea of ”mature class, approval class”. Only four types of guarantees with lower risk levels are allowed to be provided in the early stage, and minimum guarantees with higher risk levels are temporarily not allowed.
At the same time, the production period is required to be no less than 7 years.
4. Qualification control of pilot companies
In the pilot notice, we require pilot companies to meet the following conditions: first, they have operated investment-linked insurance for three years; second, they have no record of major administrative penalties in the last one year; third, at the end of the previous year and the last two The solvency at the end of the quarter was insufficient class II; fourth, an information system to support the variable annuity insurance management model was established.
Through the above regulations, it is ensured that the company has certain investment-oriented insurance product management experience and sufficient solvency buffer.
At the same time, each eligible company can only pilot one product to urge the company to do fine work.
5. Pilot sales area restrictions
This pilot is planned to adopt a regional restriction method. Taking into account the maturity of comprehensive insurance consumers, economic development, and past market norms, the preliminary proposed pilot areas are limited to the five cities of Beijing, Shanghai, Guangzhou, Shenzhen, and Xiamen.
6. Total sales limit
Based on restricting the sales area, it is planned to control the total sales volume at the same time, which is directly linked to the actual capital under solvency, to ensure that the risk is within the acceptable range of the company.
The pilot notice requires that insurance companies should apply for the sales amount of the variable annuity insurance pilot program, and the pilot amount should not exceed the lesser of 4 times the actual capital under solvency at the end of the most recent quarter and 8 billion yuan.
7. Sales channel and sales force management
The first is to restrict sales channels, requiring insurance companies not to conduct sales through bank savings counters and telemarketing channels. Second, it is required to establish a risk assessment system to assess the risk tolerance of customers. The qualifications of insurance companies have been restricted, such as more than one year of life insurance product sales experience, no major violations and frauds, 40 hours of special training and examinations, etc.; fourth, the responsibility of insurance companies’ sales management has been strengthened.
Q: How to protect the interests of policyholders in the pilot?
The pilot program mainly regulates the following aspects to effectively protect the interests of policyholders:
1. Customer qualification selection
In general, variable annuity insurance is suitable for insurance consumers who have low-risk tolerance but expect certain investment returns. At the same time, insurance consumers of variable annuity insurance need to have certain insurance and investment knowledge.
The pilot noticed clearly requires insurance companies to ensure that variable annuity insurance is sold to insurance consumers with corresponding risk tolerance through the “risk tolerance questionnaire”.
2. Information disclosure specifications
The pilot program stipulates that during the pilot period, the information disclosure of variable annuity insurance products shall be by the information disclosure system of the China Insurance Regulatory Commission on investment-linked insurance.
At the same time, the unique product features of variable annuity insurance-guaranteed benefit fees and the conditions for a guaranteed payment of minimum policy benefits are required to be disclosed separately.
3. Fee collection restrictions
To effectively protect the interests of insurance consumers and standardize the fee structure and fee level of insurance companies, the pilot program strictly limits the types and upper limits of fee collection.
For example, the fee structure and upper limit of variable annuity insurance products refer to the Actuarial Regulations for Investment-Linked Insurance, and only one additional guaranteed benefit fee can be charged to cover the cost incurred by the insurance company in providing the minimum policy benefit guarantee.
The purpose of these initiatives is to ensure clear, transparent, and reasonable fee collection.
4. Pricing restrictions on guaranteed benefits
From a technical point of view, the pricing of guaranteed benefits depends on the economic environment and needs to rely on stochastic simulation. At the same time, a large number of economic and actuarial parameters need to be determined. There is no direct restriction on pricing in the pilot, but insurance companies are required to be “fair and reasonable”. According to the principle of the minimum policy benefit guarantee, the pricing level can cover the cost of insurance companies in providing the minimum policy benefit guarantee and can obtain a reasonable profit margin to ensure the company’s stable and sustainable operation.
5. Solvency Guarantee
A good level of solvency can ensure the stability of the pilot company’s operation, improve the ability to resist risks, and ultimately ensure that insurance companies can fulfill their minimum guarantee commitments to insurance consumers.
Three aspects are stipulated: First, in the pilot application conditions, there are also clear restrictions on the solvency level of insurance companies. For example, if an insurance company applies for pilot variable annuity insurance, it must meet the conditions that the solvency level at the end of the previous year and the end of the last two quarters before submitting the application is insufficient Class II. Second, in terms of sales, it should not exceed 4 times the actual capital under solvency at the end of the most recent quarter. Third, in terms of reserves, it is required to withdraw guaranteed interest reserves, and strict extraction methods have been formulated for guaranteed interest reserves to ensure a solid foundation for solvency supervision
Q: What is the significance of pilot variable annuity insurance?
1. Conducive to enriching the structure of life insurance products
The pilot program of variable annuity insurance is conducive to enriching the structure of life insurance products, establishing a multi-level product structure that suits the needs of consumers at different levels, and encouraging the balanced development of various products.
2. Promote the development of pension and annuity products
In the past ten years, the development of pension and annuity products has been slow, which is a shortcoming for the long-term and healthy development of the insurance industry. The pilot program of variable annuity insurance will help make up for this shortcoming and is a strategic measure to give full play to the long-term savings function of life insurance.
3. Meet the real needs of insurance consumers
Variable annuity insurance takes into account the three functions of pension, investment, and minimum guarantee, which is more in line with the preferences of Chinese insurance consumers – hoping to obtain investment income to achieve pension purposes, but not willing to lose principal.
4. Explore and accumulate experience to improve the management level of the industry
In this pilot, the dynamic stochastic simulation will be introduced in the actuarial aspect; in the management mode, two management modes, internal synthetic hedging, and fixed multiplier balance, will be introduced, and the capital preservation investment strategy of the investment community will be used for reference; in the sales model, the Introduce a batch sales model. In actuarial, management, investment, sales, and other aspects, new models and new concepts will be introduced, which will help to accumulate experience and lessons, improve the management level and technical strength of the industry, and promote the long-term scientific development of the industry.