Foreign Insurers See Retirement Concerns Driving China’s Variable Annuity Market

Sino-foreign life insurance joint ventures are optimistic about the deregulated variable annuity market in China, as they see growth prospects for financial solutions that can ease consumer anxiety about retirement protection and unlock a potential market with flexible investment returns.

Factors playing into the demand include a growing segment of affluent Chinese, along with increasing life spans and rising costs of living. Chinese citizens "cannot afford the loss of invested capital or accept the low returns offered by bank deposit accounts and fixed-return investments," said Jamie McCarry, president and chief executive of Axa-Minmetals Assurance, a Sino-French life insurance joint venture based in Shanghai.

The China Insurance Regulatory Commission's recent opening of the variable annuity market to foreign players provides more diverse solutions for the market, providing another investment tool to boost the wealth of the Chinese people, according to Bob Pei, CEO of MetLife China, another Sino-U.S. insurance joint venture based in Shanghai.

"We believe variable annuities will eventually evolve to be a huge market in China, similar to what we observed in the overseas market such as United States and Japan," said Pei in an interview. "We will continue to expand our distribution relationships to include more bank partners in 2012."

Variable annuities are a new and complicated product in a Chinese market that hasn't seen that level of sophistication in a life insurance product. "Many listed life insurers appear to be cautious of variable annuities," said Goldman Sachs in a report.

Major concerns include mispricing, bearing higher investment risks related to market fluctuations in order to provide guaranteed benefits for customers, running expensive risk-hedging solutions for the complex and long-term variable annuities, and lacking qualified agents and proper customer education/selection that could create misselling risk, according to the report.

Even if variable annuity sales were to reach an upper limit of 8 billion yuan per insurer, asset management fees would be less than 160 million yuan (US$25.4 million) (assuming a rate of around 2% of assets under management for the insurers). "In such a scenario, the contribution of variable annuities to the profit of China Life, Ping An, China Pacific Insurance (Group) and China Taiping Insurance Group may be limited to an estimate of 0.2% to 5% in 2012," noted Goldman Sachs.

Although domestic insurers are unlikely to aggressively push for variable annuity sales in the near term, foreign players with their global experience are ambitious to redefine standards of the Chinese insurance industry. Their approach is to emphasize offering a "no risk to capital" option to customers who pursue returns substantially higher than fixed-return instruments and deposit accounts.

"It is a golden opportunity for Axa-Minmetals Assurance to introduce the first variable annuity product into the China market to meet local consumer needs," said McCarry. He added a large increase in the country's affluent population and their increasing demand for personalized needs-based advice and innovative products, as well as the current low insurance penetration in China, leaves plenty of room for the industry's further development.

But McCarry indicated that financial instruments in China are "still relatively immature," proving a challenge to market expansion. Purchasing options to hedge risks is a widely-applied method of risk control for variable annuity products around the world, but there is no similar hedge tool in China, he said.

To address this problem and reduce confusion about the product's complexity, the company designed its first Chinese variable annuity product with a seven-year term. McCarry said this is not only the shortest period allowed by the regulator, but is also "an optimum length of time to achieve asset accumulation," potentially giving sufficient time for recovery after the recent financial market turbulence.

He said Axa-Minmetals also conducted strict training for its sales force in the past months to screen and enhance more highly qualified distributors. As of Dec. 19, the company's variable annuity products generated more than 130 million yuan in sales.

In contrast to Axa-Minmetals Assurance's agency channel, MetLife China uses a bancassurance approach to distribute its variable annuity product — a pension product with investment features and retirement protection — through a partnership with Citibank. "It is the first time that the variable annuity offering has been made available for sale through a bank in mainland China," said the bank in a statement.

As the derivatives market is still in a primary stage of development in China, the option-based portfolio insurance model is a risk management model that is relevant to the current situation in China. "If the financial derivatives market is open in the future, we will continue our careful expansion to optimize our model by using some appropriate derivatives," said McCarry.

MetLife China saw that Chinese consumers have become more aware of their risks and financial security, and how insurance products can provide ideal solutions. "We are very optimistic about the growth opportunities that are possible in the variable annuity market in China," said Pei. "However, we must monitor the progress that is made with the pilot and look at how the regulations and tax policies evolve in China."

China introduced a variable annuity pilot program in Beijing, Shanghai, Guangzhou, Shenzhen and Xiamen in May 2011. Permitted distribution channels include qualified agents who have educational level of college and above, more than one year of sales experience and more than 40 hours of training; bancassurance through a wealth management counter; and group insurance.

Axa-Minmetals Assurance and MetLife China were respectively cleared to operate variable annuities in June and July last year. Beijing-based Huatai Life, a local joint venture involving Ace Group, won regulatory approval to offer a variable annuity product last November, with sales subsequently amounting to 4 billion yuan.

CIRC statistics show that 2010 original premium income generated from Axa-Minmetals Assurance, MetLife China (formerly United MetLife) and Huatai Life were 1.6 billion yuan, 3.2 billion yuan and 3 billion yuan, respectively.

(By Rebecca Ng, Hong Kong news editor: [email protected])