This morning, the LPR rate was announced on schedule: the 5-year rate dropped to 3.5%.
Shortly after, major banks such as ICBC, ABC, BOC, and CCB cut their deposit rates. The 5-year deposit rate fell to just 1.3%, while the 1-year rate dropped below 1% to 0.95%, marking a historic moment… One can’t help but wonder: at this pace, how long until we reach zero interest rates? With these rate cuts, insurance pricing rates will also be affected. The current rate of 2.5% is already a historic low. Further reductions would not only make premiums more expensive and reduce returns but also potentially change the logic behind purchasing insurance. Today, we aim to provide an unbiased analysis with detailed data and real product examples to help you understand the implications of pricing rate adjustments. We also hope to prevent you from being misled by “sales hype” and avoid unnecessary spending. Key questions addressed: – Will there be a new wave of product withdrawals? When? – If rates are cut, how much will the prices and returns of new products change? – For those considering insurance now, which products can wait, and which should be prioritized? – Is a return to the 4%~6% high pricing rate era possible? The article is lengthy, so feel free to skip to sections of interest or bookmark it for later. 1. Will Pricing Rates Be Cut? When? By How Much? Here’s our prediction: A pricing rate cut in Q3 is highly likely, potentially dropping directly from 2.5% to 2.0%, rather than to 2.25%. Why? Whether pricing rates are adjusted depends on the “pricing rate research value,” which serves as a benchmark. According to regulations: If the gap between the pricing rate and the research value exceeds 0.25% for two consecutive quarters, an adjustment is required. In Q1 2025, the research value was 2.34%, only 0.16% below the pricing rate, so no action was taken. However, Q2’s research value was 2.13%, a gap of 0.37%. Thus, Q3’s research value will be critical. If it remains below 2.25%, a rate cut is inevitable. The pricing rate research value is closely tied to deposit rates and LPR, as mentioned earlier. Below is a detailed analysis, including: – How the previous two research values were determined and future trends. – Institutional reports and expert opinions on pricing rates. 1.1 The first two research values were primarily influenced by government bond yields. The formula for calculating the pricing rate research value is as follows: (Source: Caixin)It’s understandable if this seems complex. Essentially, the calculation involves selecting the smallest value among the following three data points:
1. The average of the 5-year LPR and 5-year deposit rate over the past 6 months, divided by 2. 2. The 250-day moving average of the sum of the 10-year government bond yield and the tax premium. 3. The 750-day moving average of the sum of the 10-year government bond yield and the tax premium. The selected value is then multiplied by an adjustment factor, referred to as the k-value. The table below shows the three data points corresponding to the two recent guaranteed interest rate study values: The conclusion is that these two study values primarily depend on the 250-day moving average of the 10-year government bond yield. This is because it is the smallest among the three data points and closely aligns with the study values, differing by only about 0.10%. The discrepancy is likely due to the tax premium. The k-value is estimated to be around 1, with little adjustment observed in these two instances. The k-value is determined based on the asset-liability situation of the insurance industry. If performance is strong, the k-value may slightly exceed 1, allowing for a higher study value. Conversely, if performance is weak, the k-value may fall below 1 to mitigate risks, even if market rates are high. Therefore, future study values can be anticipated by monitoring the trend of the 10-year government bond yield. The table below shows data from this year: Compared to March, April’s bond yields were relatively low, ranging between 1.6% and 1.7%. Some experts predict continued volatility in bond yields. Additionally, the recent reduction in deposit rates may increase demand for bonds, driving prices up and yields down. In summary, based on the guaranteed interest rate study value formula and market rate trends, the study value is likely to decrease in Q3, leading to a reduction in the guaranteed interest rate. 2. Research reports and experts predict a Q3 guaranteed interest rate reduction A review of research reports reveals a consensus predicting a reduction, with no expectations of stability. – Orient Securities: A further reduction of 25–50 bp in Q3 2025 is likely. – Guojin Securities: Given the low and declining interest rate trend, the study value is unlikely to exceed 2.25% in Q3. If the rate drops to 2.25%, another reduction may be needed in Q4, potentially lowering traditional insurance rates to 2%. – Everbright Securities: The maximum guaranteed interest rate for ordinary life insurance products is expected to drop by 50 bp to 2.0%, with dividend insurance falling to 1.75%/1.5% and universal insurance to 1.25%/1.0%.0%.
I also consulted expert opinions, which suggested a higher probability of a direct reduction to 2.0% rather than 2.25%. As Guojin Securities noted, if the assumed interest rate is only lowered to 2.25%, another adjustment might be necessary later. It would be more efficient to make a one-time reduction to 2.0%. Each adjustment of the assumed interest rate is a significant undertaking, involving substantial time, effort, and costs: hundreds or thousands of products are discontinued, new products are filed, marketed, and sold… Regarding the timeline for product removals, some speculate it could be in August or September, though it might happen earlier, as seen with Aviva-COFCO Life: – On April 29, several savings insurance products with a 2.5% assumed interest rate were removed. – On May 13, several participating insurance products with 10-year or longer payment terms were removed. Ultimately, it depends on the insurers themselves. If an insurer operates conservatively and avoids “discontinuation hype,” it may proactively adjust early, sometimes without prior notice… So, how significant would the impact be if the assumed interest rate were reduced to 2%? **II. How Significant Would the Impact Be If the Assumed Interest Rate Were Reduced to 2%?** Over the past three years, the insurance industry has experienced two reductions in the assumed interest rate: – On August 1, 2023, from 3.5% to 3.0%. – On September 1, 2024, from 3.0% to 2.5%. As a result, savings insurance yields have declined, while critical illness insurance premiums have risen. If the rate drops to 2%, what would the specific impact be? We selected some products from the “Deep Blue Insurance Gold List” for comparison to estimate the effects of the reduction, starting with the simplest case: increasing-term life insurance. **1. Increasing-Term Life Insurance: Yields May Shrink** It is evident that a lower assumed interest rate leads to reduced yields. For example, by the 20th year, the cash value drops from 463,000 to 416,000, then to 380,000. However, the magnitude of the reduction also diminishes. The first reduction was 47,000, while the second was only 36,000. This is inherently related to the compound interest formula, as shown below: As the interest rate decreases, the gap after the same number of compounding periods also narrows. In other words, based on a total premium of 250,000, if the assumed interest rate is reduced by another 0.5%, the yield of increasing-term life insurance would decrease, likely by less than 36,000. For smaller amounts, the impact would be even smaller. However, for larger sums like hundreds of thousands, the difference could be substantial. **2. Protection Insurance: Premiums May Increase** This includes three common types: adult critical illness insurance, child critical illness insurance, and term life insurance, as shown in the table below: It is clear that for both adult and child critical illness insurance, a lower assumed interest rate leads to higher premiums.Some observant individuals may have noticed that lower assumed interest rates lead to higher price increases for critical illness insurance. For example, the Darwin series saw a ¥170 increase after the first rate adjustment and a ¥395 hike after the second.
There are two primary reasons for this: 1. The rising incidence of critical illnesses and more comprehensive coverage, such as payouts for minor or moderate conditions after a major claim, have driven up premiums. 2. Many insurers have exited the online critical illness insurance market, ending price wars and contributing to higher costs. Once these factors stabilize, future assumed rate cuts may result in similar price increases, likely around ¥400–500. From a commercial perspective, higher premiums could reduce sales, prompting insurers to streamline coverage to limit hikes. Other products to note: – Term life insurance: Prices fluctuate minimally, sometimes decreasing, due to shorter coverage periods and lower mortality rates in recent years. – Child critical illness insurance (e.g., 30-year terms): Priced around ¥600–700 with minor fluctuations. Million-yuan medical and accident insurance are unaffected as their pricing excludes assumed interest rates. No confirmed rate cuts exist yet; final decisions await early July’s assumed interest rate study. For those planning to buy insurance, prioritizing savings or maximizing value is advisable, especially for these four policies: 1. Critical Illness Insurance: Increasingly expensive but irreplaceable, particularly post-DRG implementation, offering flexibility in medical choices. Consider lifetime coverage if affordable, or opt for reduced/term coverage. 2. Participating Increasing-Term Life Insurance: Gaining popularity over standard products due to added benefits.The mediocre 2.5% return of standard increasing-term life insurance pales in comparison, with only a few exceptions nearing this rate serving as short-to-medium-term financial alternatives. Other advantages are limited.
Now that deposit rates have dropped to 1.3%, these 2.5% increasing-term policies have become more attractive… In the long run, selecting the right participating insurance offers higher potential returns. The reduction in guaranteed interest rates isn’t entirely negative for participating insurance. A 2.0% rate ensures higher guaranteed returns, while a 1.5% rate may increase dividends—lower guarantees allow insurers to allocate more to stocks and funds, raising the profit ceiling. For instance, the participating insurance product “Chuanshi Ruiying Plan B” with a 1.5% guaranteed rate already offers significantly higher expected returns than others. If guaranteed returns are a priority, consider purchasing early. For higher expected returns, the 1.5% guaranteed rate is also worth evaluating. 3. Pension annuities currently offer dual advantages. Retirement planning is unavoidable, and pension annuities play an irreplaceable role: – Converting assets into lifelong cash flow, paying out annually or monthly from a set age (e.g., 60) for life. For retirement planning, allocate a portion to pension annuities as a safety net, supplementing with higher-yield products like high-dividend stocks. Additionally, the fourth-generation life table, yet to be implemented, reflects lower mortality and longer life expectancy. If total annuity payouts remain unchanged but are distributed over a longer period, annual payments will decrease. Thus, buying now leverages “high interest rates + high mortality” for greater benefits. 4. Fast-return annuities: A lifetime 2.5% “rental income.” Surprisingly, fast-return annuities are far more popular than standard increasing-term policies. These products are straightforward. For example, a lump-sum payment of ¥100,000 yields ¥2,500 annually from the fifth year, with the cash value remaining near ¥100,000—no depreciation or maintenance required. This segment is highly competitive, with many quality options, including those from major insurers or nearing the 2.5% cap. If guaranteed rates drop to 2.0%, annual payouts may fall to ¥2,000—a 20% reduction with significant impact.If you are interested in such products, you may want to pay closer attention.
Additionally, do not impulsively purchase insurance solely due to discontinuation or removal from the market. Ensure you have both a genuine need and the budget for it. If your budget is limited, blindly following trends to buy insurance can become a financial burden. I have seen many friends rush to purchase 3.5% increasing-term life insurance, only to later struggle with premium payments and incur losses… Having discussed the present, let us now look to the future. 4. Will the high predetermined interest rates of 4%~6% ever return? Those who have been in the insurance industry for a long time often hold “treasures,” such as annuity policies with 4.025% rates or universal insurance with a guaranteed 3.0% interest rate. These legacy policies are the envy of newer colleagues, but is there a chance they might return? I may have to disappoint you: the likelihood is quite low. The lessons of high predetermined interest rates are numerous. In the 1990s, policies with rates as high as 8% existed. For example, an investment of 100,000 yuan would grow to: 1 million in 30 years; 4.69 million in 50 years; 21.86 million in 70 years. This demonstrates the power of compound interest over time… According to Goldman Sachs estimates, these legacy policies caused losses of approximately 76 billion yuan for insurers like China Life, Ping An, and Pacific Life. While insurers in our region continue to honor these policies, the situation in Japan serves as a cautionary tale. In the 1980s, Japan also had policies with 5%~6% predetermined rates. Later, multiple insurers collapsed, and the rates for existing policies were reduced to 1%~3%. In essence, for an insurer to guarantee a lifelong compound interest of 4%~6%, it must find assets with guaranteed returns of 4%~6% over 50 years or more. Such assets simply do not exist in reality. Even if interest rates rise in the future, insurers cannot guarantee they will remain stable for decades, given economic cycles. Since external interest rates are unpredictable, the best approach is to control internal variables—shifting from fixed-rate to floating-rate products, such as participating or universal insurance. This is common in many developed insurance markets. For example, participating insurance currently has a maximum predetermined rate of 2%. If the insurer profits, policyholders receive a share; if not, a guaranteed minimum is provided. Some describe participating insurance as a risk-sharing mechanism between insurers and policyholders. With lower interest rates, insurers can offer guaranteed minimums to mitigate risks. While this is true, participating insurance also represents a win-win mechanism. If future interest rates rise, policyholders can earn higher returns, with a minimum 70-30 split favoring the insurer.If you purchase a fixed interest rate insurance policy, you will not benefit from potential interest rate increases.
However, the key is to choose a reputable insurance company, as dividend payouts are not guaranteed. In a mature and healthy insurance market, a secure and flexible product system is essential. Once the predetermined interest rate declines, it is unlikely to rebound to higher levels. Even if rates rise, such adjustments are more likely to apply to short- or medium-term products rather than lifetime policies. 5. Final Thoughts Some may believe that a reduction in predetermined interest rates disadvantages consumers. However, this cannot be solely attributed to insurance companies, as the broader market—including deposits and money market funds—is experiencing similar declines. For the long-term stability of China’s insurance market, a robust and reliable product pricing system is imperative. Only through sustainable industry growth can policyholders be assured of claim settlements. I fully support dynamic adjustments to predetermined interest rates and the development of floating-rate products. As rates hit historic lows, we may see more dividend and universal insurance products emerge. This signifies a fundamental shift in insurance purchasing logic—balancing uncertainty with potential gains. If you found this article insightful, please like it. Your support motivates our continued efforts.
