China lifts cap on life insurance interest rate

China's insurance industry regulator said Friday that it will relax controls on interest rates for standard life insurance products, marking the country's latest effort to deepen market-oriented reforms in its financial system.

The 2.5-percent upper limit on pre-determined interest rates of standard life insurance products will be removed starting Aug. 5, according to a notice posted by China Insurance Regulatory Commission (CIRC) on its website.

The measure represents China's freshest effort in interest rate liberalization, following the central bank's key move on July 19 to loosen its grip on bank lending rates.

Under Friday's new regulation, insurance companies can set their own rates in line with prudent principles, but for risk prevention purposes, a new cap of no more than 3.5 percent will be applied for the statutory reserve requirement assessment ratio of standard life insurance products.

Official CIRC data show that the assets of China's insurance industry totaled 7.88 trillion yuan (1.27 trillion U.S. dollars) at the end of June, up 7.2 percent from the level at the beginning of 2013.

The new regulations are expected to encourage innovation within the industry to spur products that satisfy consumers' real demands, said Yuan Xucheng, an official at CIRC's life insurance department.

The rigid 2.5-percent cap, made valid since 1999, has resulted in severe homogeneity in life insurance products, according to Tuo Guozhu, professor of insurance at Capital University of Economics and Business.

The proportion of standard life insurance products in China's total life insurance business declined from 44 percent in 2002 to 9.2 percent in 2012, "a result of consumers' voting with their feet," said Tuo.

Since the pre-determined interest rates are largely considered the rate of return offered to consumers, Friday's new regulations will be very positive news for those seeking insurance, according to Tuo.

To mitigate potential risks and balance the industry, the CIRC also rolled out a string of accompanying measures on Friday, including a differentiated policy to boost old-age pension business and moves to support risk prevention insurance business.