Asia Insights: Managing Life Insurance Companies for the Long Term

Drawing on the long-term nature of life insurance operations, industry practices and corporate transformation exploration, this article focuses on interest rate risk management. It proposes robust management mechanisms and offers long-term development recommendations to serve as a reference for high-quality industry growth.

THE NATURE OF LIFE INSURANCE AND THE PRIMACY OF INTEREST RATE RISK

Life insurance creates long-duration obligations, and interest rate risk often sits at its core. Life insurance companies are often characterized by long-term operations and contractual guarantees that are difficult to adjust, which can make their risks complex. Among them, interest rate risk, due to its long-term, interactive, and compounding nature, is distinct from risks such as expense spreads and mortality spreads and is the most prominent risk affecting operations. Six characteristics of interest rate risk that deserve particular attention:

1. Long-term nature. Interest rate risk persists throughout the entire policy cycle. Over long periods and with compounding, even minor fluctuations in interest rates can have a massive impact.¹
2. Asset-liability interaction. Interest rates simultaneously affect both assets and liabilities. They directly impact the evaluation of liability reserves and the investment returns of fixed-income products on the asset side, thereby affecting profit realization and exerting a systemic effect across both sides of the balance sheet.
3. Compounding effect. Interest rate risk grows through compounding rather than linear changes; risk can compound over time.
4. Exposure to external market forces. Interest rate risk is directly affected by fluctuations in the macroeconomy and financial markets. This may significantly increase the operational and management challenges faced by companies, requiring them to make forward-looking judgments, adjust internal operating strategies in a timely manner and plan ahead.
5. Adjustment lag. Because liability terms are largely fixed, insurers may not be able to adjust quickly after interest rates move, and asset reallocation also requires time and market space. These characteristics suggest that interest rate risk management should be proactive rather than reactive.
6. Risks in both rising- and falling-rate environments. Interest rate movements and policyholder options can amplify interest rate risk. The three-factor pricing method does not measure the customer’s surrender option, potentially resulting in insufficient measurement of interest rate risk. When interest rates rise, policyholders are more likely to surrender their policies and shift to high-yield products; the insurer may lose expected spread income and face liquidity pressure from concentrated surrenders. When interest rates fall, customers typically are less willing to surrender, and investment returns may find it difficult to cover rigid commitments, forming a negative interest spread. Customer selection behavior will increase the difficulty of long-term risk management.²

INCORPORATING INTEREST RATE RISK INTO A MANAGEABLE FRAMEWORK

The essence of a life insurance company’s operations is long-term risk management, centered on asset-liability management (ALM). Building an integrated asset-liability linkage management system that leverages the core characteristics of interest rate risk and incorporates interest rate risks into an identifiable, quantifiable, and manageable framework can help achieve profitable growth, sustainable profits, and manageable risks. Based on the requirement of long-term sustainable development, we introduced the “1352” value management framework, designed to embed interest rate risk into management architecture. Figure 1 illustrates the “1352” value management framework, which has among its goals value maximization.

Here are three guiding factors to consider for long-term value maximization:

1. Strategically adhere to long-term discipline and avoid short-term profit seeking and rapid expansion focused primarily on premium volume. Incorporate interest rate risk management into the company’s long-term development strategy and fully consider the impact of interest rate cycle fluctuations.
2. Establish internal governance and evaluation mechanisms that match long-term operation, guiding business growth and asset allocation to serve long-term sustainable development.
3. Pursue profitable growth, sustainable profits and manageable risks in operation.

Profitable growth. Growth is the foundation of sustainable development and provides a resilient foundation for the company’s active transformation and upgrading. I believe profitable growth should be prioritized; a sole focus on premium scale without profitability is not sustainable. On the one hand, it is necessary to improve sales capabilities focused on customer acquisition and conversion efficiency; on the other hand, it is necessary to ensure adequate pricing, the control/reduction of liability costs and improve the resilience to interest rate risk.

Sustainable profits. Strengthening stable profit management requires promoting diversification of profit sources, evolving from dependence on interest margins to a balanced development of the three sources of margin, interest, mortality, and expense, and strengthening the more granular management of mortality and expense spreads to improve profit resilience. At the same time, interest rate risk management may be placed at the core. Prudent forward-looking management of asset-liability duration matching and management of the spread between liability costs and asset returns would be performed. Long-term asset allocation would be planned in advance to resist short-term market opportunities and peer-comparison pressures, ensuring that long-term interests are not sacrificed for short-term returns.

Manageable risks. Life insurance liabilities are long-term and difficult to reprice. When interest rates fall, the resulting risk can become significant and difficult to manage. Interest-rate-sensitive assets, for example, could be allocated to the hedge reserve to hedge interest-rate risks. Actuarial and risk management technologies, such as duration management, could be applied to control interest rate risks within the company’s tolerance range, responding to bidirectional interest rate fluctuations through asset-liability linkage management.

POSSIBLE STEPS TO AN INTEGRATED ALM SYSTEM

1. Strengthen business planning management and emphasize asset-liability matching calculations. ALM could be incorporated from the product design stage, focusing on cost-benefit trade-offs and accounting for the asset-liability structure and duration to improve risk absorption and risk-bearing capacity under long-term interest rate shocks. Drawing on the research in China Re Life’s product methodology and considering the different risk characteristics of products, the liability structure could be planned and improved based on liability funding costs and duration to enhance matching with the asset structure.³
2. Strengthening asset allocation and building a solid foundation for interest rate risk hedging. The core of insurance fund utilization is allocation rather than trading. Life insurance companies may want to strengthen strategic asset allocation (SAA), focusing on controlling long-term interest rate risks within a tolerable range through the allocation portfolio, and coordinating the three major matches of liquidity, maturity structure and cost-benefit. Note in Figure 2 that the bottom layer would prioritize allocating fixed-income products that effectively match fixed liabilities to provide basic interest rate risk hedging, with the hedging ratio set according to the company’s risk tolerance. On this basis, appropriately allocate equity assets and conduct trading operations at the top layer, thereby achieving the matched management of assets and liabilities as a whole.

LESSONS FROM CHINA’S LIFE INSURANCE INDUSTRY

In the history of the Chinese life insurance industry, risk events stemming from an insufficient understanding of interest rates have underscored the importance of interest rate risk management. Here’s a look at three risk events:

1. Before 2000, life insurance companies launched products with pricing interest rates of over 8.8% ⁴. Coupled with continuous interest rate cuts by the central bank, this led to investment yields being significantly lower than the pricing rates, resulting in a negative interest spread. The initial interest spread gap expanded over time due to the compounding effect, bringing long-term operational pressure to certain companies.
2. From 2013 to 2017, some companies used an asset-driven model to issue short-term products to raise funds, then invest those funds in high-return projects. Liability costs continued to rise due to competition for market share, and, in the long term, low-liquidity, nonstandard assets were allocated in pursuit of high yields, resulting in severe mismatches. When regulatory policies and the market environment changed, companies faced immense liquidity pressure; furthermore, investments failed to meet expectations, leading to losses due to an inverted cost-benefit structure.
3. The continuous decline of interest rates from 2021 to 2025 ⁵. In 2013, regulators relaxed the 2.5% cap on interest rates, forming a pricing landscape dominated by a 3.5% rate.⁶ As long-term interest rates continued to drop, long-term treasury bond yields fell below the assumed interest rates of life insurance products. Negative interest spread risks continued to accumulate and manifest, reducing the operational certainty of life insurance companies.

These experiences, or events, exposed common industry problems, including these three:

1. Pursuing scale for its own sake, while neglecting ALM;
2. The formulation of short-term growth strategies lacking consideration for the long-term nature of life insurance, as well as an underestimation of management for the long-term compounding effect and massive impact of interest rate risk; and
3. A disconnect between assets and liabilities, failing to establish an integrated risk management system for asset-liability linkage.

At the same time, the industry learned valuable lessons from these experiences. Life insurance operations may want to cease short-term scale thinking and firmly pursue profitable long-term growth; the investment of insurance funds could focus on long-term stability and sustainability, emphasizing interest rate changes and their impact on profits; overall ALM may be strengthened, with proper control of liability costs and hedging of interest rate risks on the asset side.

CORPORATE PRACTICE: THE RISK MITIGATION AND TRANSFORMATION EFFORTS OF FUNDE SINO LIFE

Drawing on my experience with Funde Sino Life, many insurance companies have also experienced operational states such as rapid scale growth and asset-driven liability growth. In Funde Sino’s case, the strategic transformation launched in 2016 consistently took strengthening ALM as the core starting point for improving interest rate risk management capabilities across multiple dimensions.

In terms of mitigating liquidity pressure, Funde Sino has, on the one hand, strengthened business growth and utilized cash flow from new business to meet maturity payments. On the other hand, it has firmly adjusted the business structure, actively developed long-term regular premium business, and gradually reduced single-premium and short-term business. Currently, the renewal premium proportion has approached 70%, effectively mitigating liquidity risks.

In the reconstruction of strategy and governance systems, the company determined the direction of high-quality development, formulated the “3-6-9 years”⁷ development strategy, and established a long-term operational philosophy. The “Three Ones” project was implemented, using renewal premiums, operating profit, and new business value as core operational indicators, transforming its scale-centric orientation, delivering marked improvements in business structure and quality. An evaluation system centered on new business value was constructed, balancing and constraining scale and value through a combination of long- and short-term indicators.

In the optimization of asset allocation structure, the company has taken the enhancement of interest rate risk hedging capability as an important goal of asset allocation, distinguishing between the allocation portfolio and the trading portfolio, setting evaluation indicators by category, continuously increasing the allocation to fixed-income assets, and gradually increasing the interest rate risk hedging ratio to achieve matching of cost-benefit and duration with new liabilities.

The company has gradually reduced its interest rate risk exposure by optimizing its business mix and building a liability structure more aligned with interest rate risk management. This shift has supported the redevelopment of protection, annuity and increasing whole life insurance⁸ products. In 2025, as an example, the share of whole life insurance in new policies was reduced to 40%, helping reverse a business structure previously dominated by that product line.

The company pursues a balanced product mix between protective and interest-sensitive products, implementing a “two-equal-half” product strategy, with each segment targeted at 50%. The company is exploring the integration of products and services in the health and elderly care fields as part of a broader effort to diversify value creation.

RECOMMENDATIONS FOR CHINESE REGULATORS AND INDUSTRY

The following four suggestions reflect my perspective on possible measures that Chinese regulators, industry associations and companies could consider to strengthen long-term interest rate risk management.

1. The industry evaluation system and its role in guiding companies to establish a long-term operational orientation. From my perspective, regulatory authorities and industry associations could consider increasing the weight of long-term development indicators in industry evaluation systems, promote the optimization of companies’ internal evaluation systems and guide the industry to emphasize long-term operations. I also suggest that policymakers could consider gradually adjusting industry access and evaluation standards that have historically emphasized scale and develop a broader set of quality-focused evaluation metrics. At the same time, emphasis could be placed on listening to the opinions of small- and medium-sized insurance companies, formulating differentiated evaluation standards tailored to their development characteristics and balancing overall industry development with individual company differences.
2. Four possible measures to support healthier market development in a low-interest-rate environment.
   • Be involved in the “Alignment of Reported and Actual Expenses”⁹ reform, which further standardizes fixed expense management methods, optimizes the market competition structure, controls the increasingly prominent “Matthew Effect”¹⁰ and enhances the industry’s sustainable development capability, especially for small and medium-sized companies.
   • Regulators could consider differentiated regulatory treatment or policy support for protection-type products, where appropriate. Differentiated regulatory requirements can be formulated in terms of product pricing, cash value, and “Alignment of Reported and Actual Expenses” to support the development of protection-type products and reduce industry-wide concentration of interest rate risk.
   • Standardizing the development of participating products and unifying and lowering the upper limit of illustrated dividend rates. I suggest that regulators could consider timely updates to industry guidance on illustrated dividend-rate limits. The current market mainstream of 3.5% could serve as the industry-wide cap, guiding the industry to shift from competing on illustrated rates to competing on dividend achievement rates, thereby preventing sales mis-selling and negative interest-margin risks caused by the rigidity of illustrated dividend rates across banking channels and other platforms.¹¹
   • The industry and regulators could explore whether lower guaranteed interest rates for participating products would support a shift toward a “lower guarantee, higher dividend-participation” model. I suggest that regulators clarify rules in a unified manner and coordinate efforts to reduce rigid guarantee costs for participating products to enhance long-term interest rate risk management capabilities.
3. Strengthening ALM implementation and considering clearer constraints for industry interest rate risk management. At the regulatory level, authorities could continue strengthening oversight of ALM implementation and promote the effective implementation of new ALM regulations to establish clear constraints. Meanwhile, strengthen industry-wide SAA management and guide management and market analysts to increase focus on SAA. At the company level, fully leverage actuarial advantages by applying quantitative analysis and stress testing to the entire ALM process. In links such as planning and budgeting, performance evaluation, product design, and asset allocation, fully consider the impact of interest rate cycle fluctuations to improve the refinement and analytical rigor of interest rate risk management.
4. Supporting the development of innovative reinsurance business, utilizing the international reinsurance market to prevent and mitigate industry negative interest margin risks, while promoting the development of China’s reinsurance market.
   • Innovative reinsurance possesses mature mechanisms for ceding market risk and interest rate risk. China’s life insurance industry has a huge scale of existing high-interest-rate liabilities, which are difficult to match with sufficient assets in the domestic low-interest-rate environment¹². Utilizing the international reinsurance market could effectively mitigate negative interest-margin risks, representing a massive demand.
   • Life insurance companies mainly cede market risk and interest rate risk to reinsurance companies through innovative reinsurance. I suggest that policymakers could clarify the treatment of innovative reinsurance arrangements, including how such arrangements are distinguished from capital outflows or overseas investment.
   • In my view, reinsurance arrangements may also help insurers manage certain cross-border market and political risks, although these structures would require careful regulatory oversight. Therefore, I suggest that regulators could consider supporting appropriately structured mechanisms for ceding market and interest rate risk through reinsurance, subject to adherence to regulatory standards. It is also suggested that the industry actively cooperate with regulatory authorities to clarify the permissible scope of innovative reinsurance, refine regulatory and management mechanisms, and promote orderly market development.

IN CLOSING

Interest rate risk is at the core of life insurance operations. I believe that only by constructing a risk management system centered on asset-liability linkage, incorporating interest rate risk into an identifiable, quantifiable, and manageable framework, and achieving effective hedging can we truly navigate economic cycles. In my view, coordinated efforts among regulators, industry participants, and companies could help the industry enhance flexibility, resilience and adaptability, with the goal of achieving true long-term sustainable development.

Statements of fact and opinions expressed herein are those of the individual authors and
are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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