Future of Variable Annuity Market in China
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31 May 2011Wenli Yuan
China's insurance regulator introduced a variable annuity pilot program in five districts recently. In China, basic pensions can't provide sufficient retirement income, corporate pensions are not well developed yet, so there is strong potential demand for investment products that can provide people with periodic income after their retirement. But since inflation in China is rising the actual purchase power of traditional fixed annuities will decrease, hence fixed annuity products are not so popular in China at present. Variable annuities can provide retired people with periodic income, and can hedge against inflation. The potential market for variable annuity is potentially very big. The regulator evaluated the level of economic development, the maturity of insurance consumers, the record of responsibility of insurers, and then selected five regions for pilot program: Beijing, Shanghai, Guangdong, Shenzhen and Xiamen. These five selected regions have many wealthy consumers, so there is big market potential in those regions; people are relatively mature in choosing insurance products, and insurance companies have acted responsibly in the region, so there less chance of questionable sales processes. Since the requirement for effective risk management is high for variable annuities, companies that are experienced in selling variable annuities in other (global) markets are proactively entering into this market, but most other insurance companies are adopting a wait-and-see approach. The challenge lies in the risk management of insurance companies. Celent would suggest that the pilot insurance companies develop products that do not have high guarantee features, and put hedging or reinsurance procedures in place to control risk effectively. The distribution channels for variable annuity products will be limited. For example, sales will not be allowed via savings counters at bank branches, and also not allowed via tele-marketing. It is therefore likely that the variable annuity market has large potential in China, but will not grow fast over the short term.