Insights: Participating Insurance

In the current macroeconomic context of low interest rates and interest rate uncertainty, the Chinese life insurance industry may seek to achieve sustainable development through product innovation and risk management. The low-interest-rate environment is not a risk itself, but rather, in my opinion, represents an opportunity to push the industry to return to the core of protection and optimized product structures.

Three core development ideas I put forward are:

1. Reassessing and leveraging the “semi-floating” (partially fixed and partially floating rate) characteristic of participating insurance to its advantage in assets and liabilities
2. Driving innovation in protection-oriented products such as critical illness, medical, and disability insurance toward diversification and stratification
3. Reducing reliance on a single-interest margin and achieving dynamic balance in mortality, expense and interest margins for long-term steady operations.

Low interest rates from a macro perspective

In my observations of the Chinese life insurance industry, interest rates and population structure have consistently been two critical factors. Over the past 30 years, China’s economy has experienced rapid growth, with an average annual GDP growth rate of nearly 10%, creating, in my opinion, a global growth miracle. However, with the Chinese economic growth rate having gradually declined to around 5%, the long-term downtrend in interest rates has become increasingly prevalent.¹
Industry analysis suggests that low interest rates themselves are not terrifying. The real challenge, it appears to me, lies in interest rate uncertainty. When interest rates fluctuate within a reasonable range, insurance companies can manage asset-liability matching and product pricing relatively calmly. However, when interest rates fluctuate sharply over a period of time, whether rising or falling significantly, they pose a systemic challenge to the operational safety of life insurance companies, I’ve observed.

In recent years, according to CEIC data, the 10-year Chinese government bond yield has dropped from 2.9% to 1.6%, before slightly recovering. Market attention is focused on whether China will replicate Japan’s “zero-interest rate long-term” scenario or maintain fluctuations similar to those in the United States, within a low range. Some analysts suggest that the future direction of China’s interest rates is uncertain, and this uncertainty is a key variable that may cause insurance companies to reassess their product structure and business models.

Two international perspectives:

1. Japan experienced persistent 10-year government bond yields that hovered between 0% and 1% after falling into a prolonged period of deflation in the 1990s. Although insurance companies maintained operations through rigorous duration management and dividend mechanisms, the industry’s overall profitability declined, and long-term life-insurance premium growth stagnated.
2. The United States followed a different path in the 1990s. Interest rates remained volatile within a relatively low range, with U.S. Treasury yields oscillating between roughly 1% and 4%. Insurers there sought a balance between return and risk amid that volatility by employing flexible product designs and prudent asset allocation strategies.

Industry observers debate that China may lie between these two models—unlikely to replicate Japan’s prolonged near-zero yields, yet also unlikely to sustain the same pattern of continuous low-range volatility seen in the U.S. This uncertainty around low interest rates is, I believe, likely to become a persistent operating element for life insurance companies. From asset allocation to product strategies, some entities may look to make comprehensive adjustments.

Interest rate fluctuation challenges

In the long-term low-interest rate environment, insurance companies, I believe, could face not only declining investment income and rigid liability costs, but also two major risks:

1. Interest rate decline. The risk of interest margin loss. The root of interest margin loss lies in the asset-liability mismatch risk. During periods of declining interest rates, it becomes more challenging for investment returns to cover the costs of life insurance policies, especially those with long-term guaranteed returns, thereby increasing the risk of interest margin loss.
2. Interest rate rise. Liquidity risk. When market interest rates rise, customers tend to surrender their policies in pursuit of higher returns, which can lead to the risk of concentrated surrender and a “run” on the bank. An example of this is the large-scale wave of policy surrenders experienced by the South Korean life insurance industry in 2021–2022, during a period of significant rate hikes, when some companies saw surrender rates escalate significantly.

In the face of interest rate uncertainty, China’s insurance industry, especially its life insurance concerns, will likely have to respond simultaneously on both the asset and liability sides. It could be best served by safeguarding the risk base of long-term return products while using product innovation to diversify reliance on a single interest margin.

Innovation in savings products

In the low-interest-rate environment, major insurance markets worldwide have generally shifted from fixed income to floating income products. The United Kingdom, as an example, has developed unit-linked insurance, while the United States has popularized index life insurance and variable annuities. Hong Kong has centered its market structure on participating insurance, which strikes a balance between stability and income flexibility.

Adaptation analysis: Under China’s unique financial and sales system, what I would call “semi-floating” participating insurance demonstrates two advantages:

1. Cultural adaptability. Many Chinese consumers tend to favor certainty and guaranteed returns, and fully floating products are difficult for risk-averse individuals to accept. The low-guaranteed rate + floating returns mechanism of participating insurance satisfies residents’ need for security while maintaining income flexibility.
2. Channel and cost structure. The sales model of China’s insurance market remains predominantly based on agents, and products such as unit-linked and universal life insurance, which have low fee deductions, fail to support the development of the sales system. Participating insurance, however, has a more reasonable fee structure, ensuring channel stability.

Asset adaptability: The participating insurance’s special reserve mechanism helps smooth out short-term fluctuations, thereby enhancing the risk-bearing capacity of the participating insurance account in the short term. This allows the company to allocate more long-term quality assets and lowers the long-term spread loss risk, offering greater flexibility and potential for asset allocation.

I believe to truly realize the system advantages of participating insurance, there should be a matching operational logic on both the asset and liability sides—building a stable investment income base while designing a flexible dividend structure.

Asset strategy: Steady and progressive, optimizing allocation

Establishing a sustainable income base on the asset side is typically a first step in initiating participating insurance. Participating insurance is a “semi-floating” product, and its investment income directly impacts the customer dividend levels and sales competitiveness. In practice, the asset allocation strategy for participating insurance is often described as “fixed income base, equity enhancement, and alternative expansion,” although the logic extends beyond these three types of assets and is rooted in the product’s structure and institutional context.

Participating insurance includes a dividend smoothing mechanism, which provides a means for stabilizing short-term fluctuations and enhancing earnings stability. This enables the company to maintain relatively stable customer returns during market fluctuations, while adjusting dividends over time to manage customer expectations and mitigate surrender risks. Moreover, compared to traditional insurance products with fixed pricing rates, participating insurance typically employs a low-guaranteed and high-floating income structure, offering the company greater flexibility in asset allocation, particularly in equities and alternative investments, to pursue medium to long-term return flexibility.

The specific allocation typically proceeds from three dimensions:

1. Asset structure optimization. Long-duration government bonds and credit bonds are frequently used as a base to match the guaranteed return portion of the product to guard against reinvestment risks from interest rate declines. At the same time, equity assets may be used to enhance the long-term return potential over a full market cycle. Additionally, high-quality alternative assets (such as infrastructure, real estate, private equity funds, etc.) can be moderately increased to boost overall returns.
2. Duration management. For long-term participating annuity products, overall liabilities tend to have a long duration; therefore, assets should correspondingly extend their duration, prioritizing medium- to long-term fixed-income assets. This not only helps offset future reinvestment risk but also enhances returns through term premiums. Meanwhile, the volatility of income from equity and alternative assets should be used flexibly to achieve a medium- to long-term steady yield curve, while maintaining a short-term tolerable yield curve.
3. Accounting mechanism coordination. Participating insurance companies can adopt a floating assessment model, also known as a variable fee approach (VFA), under the IFRS 17 accounting standard. This approach allows for the absorption of investment volatility by the contractual service margin (CSM), thereby reducing short-term volatility in financial reports. This mechanism, combined with the dividend smoothing mechanism, allows the company to increase the proportion of equity assets without compromising short-term accounting profit stability, further releasing long-term return potential.

To summarize, the core of participating insurance’s asset allocation is “duration matching + income smoothing + flexible space.” On the investment side, long-term interest rate bonds and credit bonds provide a stable base; on the income side, equity and alternative investments are used moderately to enhance returns; on the management side, the combination of dividend mechanisms and accounting smoothing mechanisms helps absorb volatility. This structure enables the company to maintain stability in solvency and profitability while offering moderate growth flexibility in a low-interest and volatile interest rate environment.

Liability innovation: Product forms and dividend strategies

The sales of participating products present challenges as, in my experience, floating-return products are less intuitive to customers. However, this does not mean they lack market potential. The key lies in advancing from three dimensions: the market, the client and the product.

1. Market side: Enhancing perceived customer returns. Since participating products are floating-return in nature, their competitiveness would ideally be demonstrated through performance on the return side. Through flexible asset allocation and the dividend-smoothing mechanism, companies hope to ensure that dividend rates maintain a relative advantage in the market. At the same time, there’s a need to strengthen customer education to help policyholders understand the long-term value logic of “low guarantee + high floating,” rather than making short-term interest rate comparisons.
2. Client side: Improving transparency and customer experience. I believe that what customers fear most is not understanding how dividends are determined. Therefore, greater transparency in sales communication and policy design is essential. Clearly distinguishing the sources of dividends and emphasizing their link to the company’s investment performance is an example. Furthermore, the timeliness and visibility of dividends are crucial in establishing customer trust.
3. Product side: Diversified liability structures. Participating insurance is not typically positioned as a mere savings vehicle. It offers differentiated solutions aligned with a customer’s life-cycle needs:
   • Short-term savings products. Participating endowment or medium-term annuities that balance liquidity and return.
   • Long-term accumulation products. Participating whole life insurance emphasizes long-term value growth and increasing sum assured.
   • Retirement-oriented products. Long-term participating annuities provide structured cash flows across the life cycle to support retirement funding.

Diversified dividend mechanisms to enhance competitiveness

Within regulatory boundaries, insurers can adopt different dividend methods according to customer needs:

• Cash dividends: Immediately payable upon declaration, they offer strong liquidity and tangible customer experience; however, they reduce the company’s capacity to absorb future risks and thus require prudent asset management.
• Terminal dividends: Payable only upon policy maturity or death, they provide weaker liquidity but enhance the company’s resilience to investment fluctuations.
• Reversionary (compound) dividends: Combine liquidity and stability to balance customer short-term returns with long-term solvency for the insurance companies.

The Hong Kong market provides a valuable reference. For example, in participating products from Prudential and AIA, once cash dividends are declared, they become part of the policyholder’s vested rights and are not reduced upon surrender. Other insurers, such as Everbright Sun Life, adopt an adjustable dividend mechanism, dynamically modifying dividend levels based on annual investment performance. This “multi-tiered dividend system” accommodates different liquidity preferences, enabling insurers to achieve flexible asset-liability management.

Additionally, the management of dividend accounts can be further differentiated. Industry insiders suggest setting up separate dividend accounts for clients with varying risk preferences, allowing each account to adopt a customized asset allocation and demonstration interest rate. For instance, accounts primarily focused on holding assets exhibit low volatility but stable returns, catering to clients seeking principal protection and stability, and may employ a low demonstration rate. Conversely, accounts with a greater allocation to equities feature higher volatility but potentially higher returns, serving clients who aim for asset appreciation, and may utilize a high demonstration rate. This “layered account” model enhances product flexibility and attractiveness while remaining compliant with regulatory expectations.

Promoting participating insurance

Promoting participating insurance is not merely a matter of revealing product innovation—it may also involve a transformation of management philosophy and organizational systems.

Reforming the performance assessment mechanism. Sales and incentive systems would ideally adapt to the unique features of participating products. Given the “70/30 ratio” profit-sharing mode between policyholders and insurers, participating products typically exhibit weaker short-term profit performance than traditional insurance products. This could call for management teams to embrace a long-term perspective, shifting from “scale-driven” to “value-driven” performance evaluation. Key metrics should reflect risk-adjusted returns and long-term value contributions of participating products.

Regulatory policy support. Supervisory and policy guidance are crucial for the industry’s healthy evolution. Recently, regulators narrowed the pricing margin between traditional and participating insurance from 50 basis points to 25 basis points—essentially steering the market toward floating-return models. Some industry observers have suggested introducing differentiated management in valuation rates and reserve assumptions. For example, participating insurance could use a pricing rate of 1.75% but a valuation rate of 2.5% to ease reserve pressure, whereas traditional products might maintain a 2.0% valuation rate for prudence. Such differentiated frameworks can balance capital consumption between product types, promoting structural optimization.

Refining risk-based pricing. The pricing framework should incorporate surrender option costs. One of the major risks fixed-income products face is policy surrender. Therefore, valuation models should consider the cost of the surrender option and potential loss from early termination, ensuring that the true economic value of products is accurately reflected and narrowing the gap between participating and traditional insurance in the valuation system.

I believe the sustainable development of participating insurance depends on a company’s commitment to “long-termism,” which is a stance that prioritizes the distant future over the near future. As industry experts note, fixed-return products are easier to sell, but that doesn’t mean they can endure across cycles. The real challenge is ensuring that participating insurance becomes the stabilizer of the company in a volatile interest rate environment.

Diversified product structure and strategic rebalancing

I believe the life insurance industry is poised for a return to its roots in protection. Under conditions of low interest rates and high volatility, insurers would be best served by building a diversified product ecosystem—one that restores balance among mortality margin, expense margin, and interest margin, thereby enhancing risk resilience and sustainable development. Under this approach, industry enterprises are systematically reassessing the value positioning and development direction of their core insurance products, aiming to rebalance their profit models through structural restructuring.

Critical illness insurance innovation

In recent years, with the reduction in pricing rates, revisions to morbidity rates and the stabilization of risk assumptions, premium rates for critical illness (CI) insurance have generally risen while leverage has fallen. For a 30-year-old male, lifetime CI premiums have increased by 15% to 20%, with the leverage ratio decreasing from approximately 1.8 times to around 1.5 times. This has weakened the product’s sales competitiveness.

Against this background, a redesign of product structure and return mechanisms around CI insurance may be something for companies to consider.

• Shift toward participating CI insurance. Drawing on the experience of Hong Kong’s market, integrating protection with dividends could enhance perceived value. Dividend-paying critical illness insurance can link dividend sources to the company’s overall investment performance, achieving long-term asset appreciation while retaining its protection function.
• Optimizing cash value structure. Appropriately reducing the proportion of early-stage cash value to mitigate early surrender risks and extend policyholder retention periods, thereby stabilizing profit streams.
• Enhancing product flexibility. Introducing non-guaranteed rates or health management participation mechanisms to dynamically adjust pricing assumptions based on disease trends and claim experience, thereby making products more adaptable to risk.

Industry analysts note that future CI insurance will no longer be purely protection-based; it will likely evolve into an important component of household financial planning. This trend could propel CI insurance into a new functional role within life insurance portfolios—one that combines protection with wealth management potential.

Medical insurance: Integration with public health coverage

In the medical insurance segment, China’s commercial health insurance now covers over 200 million people, with Hui Min Bao and Million-Yuan Medical Insurance serving as pillars of inclusive coverage. However, the core challenge lies in unclear tiering and a monolithic structure. Yet the market remains overly concentrated in short-term, low-cost plans, lacking stable mid-to-long-term or high-end product offerings. Future development may advance in two main directions:

1. Customer segmentation. Developing multi-tiered products tailored to clients with varying health conditions and income levels. For instance, creating specialized medical insurance for substandard risk groups or those with pre-existing conditions to address the practical needs of people with elevated health risks or chronic conditions. For high-net-worth clients, develop mid-to-high-end medical insurance and premium medical insurance covering private premium services and international healthcare resources.
2. Integration with public healthcare. With reforms in national medical payment models (e.g., DRG and DIP systems), commercial insurers should assume responsibility for risk segments not covered by public health insurance, particularly in areas like long-term medication, outpatient rehabilitation and specific critical diseases.

In the future, medical insurance will gradually evolve from expense reimbursement toward health management and service-driven models, requiring insurers to build capabilities in medical resource integration, preventive health interventions and data analytics.

Disability insurance: Emerging market dynamics

China’s aging population and the high incidence of chronic diseases have increased long-term disability risks. As a UNESCO report confirms, one in every 16 individuals in China lives with some form of disability, with roughly 60% attributable to illness. The average duration of disability is 8–10 years, implying care expenditures of hundreds of thousands, or even millions, renminbi (RMB) per family. (RMB is yuan, or CNY. RMB is the standard international abbreviation for the official currency of the People’s Republic of China, and for the currency as a whole.)

Disability insurance not only serves as a functional supplement to traditional CI and pension insurance, but also represents a structural innovation within the life insurance industry in response to the “low interest rates + aging population” environment. From an industry perspective, its emergence aligns with the reform direction of the social security system while reflecting the trend of life insurance companies shifting from “death risk management” to “lifetime management.”

From an industry perspective, the rise of disability insurance is a result of risk restructuring and an inevitable trend driven by market demand—its advantages are gradually becoming apparent, yet the challenges it faces cannot be overlooked.

The greatest value of disability insurance lies in meeting clients’ demand for high-quality care. Unlike traditional critical illness insurance, which only covers the occurrence of a disease, disability insurance focuses on maintaining quality of life after illness. For high-net-worth and middle-class clients, disability insurance is positioned as providing sustained cash flow support for family caregiving, rehabilitation services or long-term care expenses, thereby supporting quality of life and independence in the event of disability. Simultaneously, multiple reinsurance companies have introduced standardized disability assessment systems in recent years, providing clear definitions for disability claim criteria. This enables insurers to leverage reinsurance expertise in establishing uniform underwriting logic and claims standards, reducing uncertainty in product development and claims processing while providing technical support for market expansion.

Despite its significant potential, disability insurance has yet to become a mainstream product in the Chinese market due to three key constraints: 1) low market awareness, 2) small average policy size, and 3) inconsistent promotional models. Consequently, I believe the market requires further development through education, driven by the establishment of unified promotional models, standardized claims processing criteria, transparent underwriting procedures, and collaborative distribution channels to foster market maturity.

Overall, innovation in protection-oriented products should not be about piecing together short-term products, but rather reshaping long-term risk structures. Future product systems may transition from a “savings-dominated” approach to a “protection-dominated, income-supplemented” framework, achieving dynamic equilibrium between assets and liabilities.

Conclusion and outlook

Low interest rates are not inherently risky; instead, they offer an opportunity for the insurance industry to focus on value-driven and sustainable operations. In an environment of interest rate uncertainty, insurers might consider enhancing interest margin risk management, shifting toward floating-return product models, and diversifying their product portfolios to lessen reliance on a single source of profit.

Future competition in life insurance could extend beyond product design—it might also challenge insurers’ capabilities in asset-liability management, customer insight and long-term strategic conviction. Together, the rebalancing of participating insurance, the transformation of CI insurance, the synergy of medical insurance and the rise of disability insurance form the “four-wheel drive” of innovation in the low-interest era.

By upholding prudent management, continuous product innovation, and robust risk governance, a life insurance company can discover its own path of sustainable and resilient growth amid an uncertain macroeconomic environment.

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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