China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

The notice said it would protect consumers, encourage the innovation of new insurance products and make life insurance products more competitive. Under this notice, it is stipulated that the assumed interest rate of traditional life policies could be determined by the insurance companies on a prudent basis. The premium for the traditional life polices should be calculated on the basis of general actuarial principle. Nevertheless, according to this notice, the assessed interest rate for calculating traditional life insurance reserves shall not exceed both (1) the assumed interest rate of life insurance policies and (2) the prevailing state interest rate used for life insurance reserve. (the prevailing state interest rate prior to June 10^th, 1999 was 7.5%, current prevailing state interest rate is 3.5%). On the prospective of current and binding assumed interest rate of traditional life policies, it was set on 2.5% ceiling to prevent insurance company from cut-throat competition by CIRC in 1999. This upper limit on the assumed interest rate helped insurance companies avoid the possibility that the actual investment return is lower than the assumed interest rate, which is deemed as “interest spread risk”.

In article 3 of this notice, CIRC said that the assumed interest rate of participating life insurance policies and the guarantee interest rate of universal life insurance policies shall not exceed a compounding annual rate of 2.5%. To understand article 3, we shall know the scope of traditional life insurance products. Generally speaking, it refers to term life insurance products, whole life insurance products, endowment insurance products, pension, and health insurance products, which are known as “protection type” insurance products.

The definition of the traditional life insurance is made on the last article of this notice, stating that it means the life insurance whose premium and policy benefit are uncertain when the policy was issued. But insider said that this definition was a little bit ambiguous and CIRC may need to provide a “clear” definition of traditional insurance products prior to working out a new policy that can reflect the actual market situation of the domestic insurance industry.

As respect to the impact of this notice after its implementation, there are different impacts for different insurance companies, depending on the insurance companies’ in-force business. For example, the proposed new policy may not have a significant impact on Ping An Group as the traditional insurance segment has accounted for "less than 5%" of the group's in-force business, while it would have "the most negative" impact on China Pacific Insurance, where the type of policy affected accounts for more than 40% of in-force business.

For the whole Chinese insurance industry, in a positive scenario, assuming bond yields rise and the assumed interest rate is rising proportionally, higher investment returns will cover the loss from the rising assumed interest rate and ultimately, life insurers will benefit from higher investment returns and the promotion of traditional life insurance products; in a negative scenario, if bond yields are unchanged or go down and the assumed interest rate is rising due to competition, the profitability of traditional life insurance polices will be “squeezed.”

An Incontestability clause is a standard clause in life insurance policies, which stipulates, if a certain period, normally two years of time passes from the inception of the policy to the death of the cestui que vie , the validity of the life policy cannot be contested by the insurer.
From my point of view, the reasons supporting the insertion of an incontestability clause are multiple.

First, in life insurance, there are investment elements and protection elements. When the insured purchased the life insurance, the insured would have constructed a financial plan for themselves or the beneficiaries of the policy. After a lapse of two years, it will be unexpected and will have a fundamental impact on the beneficiary if an insurer is capable of challenging the validity of the policy.

Secondly, if an insurer wants to find a misrepresentation within the application of policy of the insured, two years is adequate. We cannot allow an insurer to speedily take premiums, and process their investigation regarding policy issues in a slow way.
Lastly, even the doctrine of reasonable expectation has not been applied in Chinese Court or Arbitration Institution, the expectations of the insured should be protected, particularly after a two year benchmark.

Notwithstanding reasons mentioned herein, I remain concerned about the incorporation of an incontestability clause within the new Insurance Law of the PRC.

The Chinese insurance market has always been disturbed by the problems of bad faith and fraud, especially on part of the insured. On occasion, the fraudulent action of an agency of an insurance company further compounds the problem. If the new Insurance Law incorporates an incontestability clause, life insurance companies, health insurance companies and accident insurance companies will face huge challenges. Thus, it is my opinion that the new law will not require such a clause, though in practice, if any policy uses an incontestability clause, it should be enforceable in accordance to Chinese Contract Law.