China life insurers slash guaranteed payout risk

Participating policies share company profits with customers instead of relying only on fixed promises.

Chinese life insurance companies are expected to sell significantly more participating products over the medium term, as it lowers their guaranteed payout costs and reduces the risk of investment returns falling below promised rates. 

Participating products are insurance policies that share a portion of the company's profits with the policyholders. 

Fitch Ratings views this shift as a positive development for the insurers' financial stability.

The country's largest life insurers have already begun increasing sales of these products. 

This trend is primarily driven by prolonged low investment returns in the market and recent regulatory actions designed to push down guaranteed interest rates.

By utilising participating policies, insurance firms can reduce their fixed financial liabilities and manage long-term return assumptions with greater flexibility. 

This strategy allows them to stay competitive in the consumer savings market whilst lowering their reliance on high, unsustainable guaranteed returns.

New international accounting rules, known as IFRS 17, are also encouraging this transition. 

Under these rules, participating contracts are measured in a way that reduces short-term fluctuations in company earnings, better reflecting how risk is shared between the insurer and the customer. 

Whilst this shift means that insurance companies will share more of their surplus cash with policyholders—resulting in lower upfront profit margins on new sales—Fitch notes that these products offer more stable and resilient value over time. 

Their long-term performance is less vulnerable to sudden changes in discount rates, investment yields, and interest-rate spreads.