Predetermined Interest Rate Market And Its Impact On The Life Insurance Industry In China

On July 9th,2010, Chinese Insurance Regulatory Commission issued "Notice about Personal Insurance's Assumed Interest Rate", making the assumed interest rate liberalization became the focus of insurance industry. Assumed interest rate is one of the three pricing factors (assumed interest rate, assumed mortality rate, assumed fee rate) of life insurance products, also the most important one. Since 1999, assumed interest rate has been regulated to be less than 2.5%(compound interest) for ten years. By all the experience of these years, we think the regulation of assumed interest rate has been playing an important role when life insurance companies are lack of risk-resisting ability, actuarial techniques are poor and inner control ability are not so strong. It also solves the problem of insurance companies surviving in the low interest rate environment and avoids the loss from difference of interest rate. However, as the time passed by, insurance companies'scale expanded, the biggest three insurance companies listed in the stock market, kinds of business organizations established, life insurance industry and business environment have changed a lot. In this constantly changing market, the same assumed interest rate control policy doesn't fit the development of insurance companies in our country any longer. To satisfy the needs of developing life insurance industry and provide more efficient environment, insurance regulatory commission recently starts the interest rate liberalization process. By the other side, some people worry about the risk of assumed interest rate liberalization. It may lead malignant competition, loss from difference of interest rate, problem of insolvent and so on.For the reasons above, this paper chooses the specialized view assumed interest rate liberalization to study. First this paper introduces the meaning of assumed interest rate liberalization, then does some theoretical analysis on this subject, and gets the conclusion that assumed interest rate liberalization will improve social surplus value, consumer welfare and market efficiency when the malignant competition doesn't exit. By comparing the relationship between assumed interest rate liberalization and interest rate liberalization, Combined with international regulatory experience and the reality in China, this paper further amylases the necessity and feasibility of implementing assumed interest rate liberalization, and concludes that under the current market structure and regulatory environment, assumed interest rate liberalization will not cause the malignant competition, by comprehensive theoretical and practical analysis, we find that assumed interest rate liberalization is imperative. Then, considering the concern of people from the industry, this paper analyses the influence of interest liberalization, including the influence on the competitive situation and the incoming scale. Based on the former relative theory, this paper first adds the assumed interest rate into the traditional life insurance demand model, sets up the amendatory insurance demand model. From the empire results, we find that the influence of assumed interest rate liberalization towards to life insurance income scale is not very significant, so it will not reduce the scale of life insurance income, but it indeed increases the risk of interest spread. Finally, the author gives the suggestions the insurance companies should strengthen the risk-control ability and develop their core competitiveness, try to set up monitor system for the process of assumed interest rate liberalization.