New regulations on annuity sales force insurance companies to rethink their big new year sales.
Photo by Kuang Da
By LU Wenqi
In the insurance industry, whoever wins the new year sales wins the whole year. Customers buy annuities when year-end bonuses hit their accounts. Better sales in Q1 mean more cash to spend and to invest later in the year. Promotions start in Q4 and some make preparations as early as August.
Insurance companies have high expectations for the 2024 new year sales, given low bank interest rates and the stock market malaise. To attract customers, many pay dividends or offer guaranteed returns of 3 or 4 percent if customers do not withdraw their payouts. At the same time, regulators are scrutinizing some long-standing practices of the industry, making companies wonder whether it’s time to wean themselves off their reliance on the new year boom.
The big change this year is that banks, traditionally the most important sales channel for annuities, are banned from charging high commissions. A regulation issued in August capped commissions at 18 percent for ten-year annuities, lower for shorter-term products, a huge cut from the usual 40 percent plus. Liu Sheng, of the National Administration of Financial Regulation, estimates that overall, commission has been slashed by about 30 percent across the industry.
What sounds like good news for insurance companies has turned out to be a killer of sales. Banks are by far the biggest source of customers for annuity sellers. Insurance companies, especially smaller ones, used to get into bidding wars with one another and hide the exorbitant commissions from regulators. The increased costs were then folded into premiums or became a loss if the insurance companies were unable to raise prices.
The new rule bans under reporting, on the grounds that annuity prices and insurers’ financial disclosures must truly reflect sales costs. It also limits the number of insurance companies each bank branch can work with to three at any time. Many small insurance companies, as a result, lost contracts. Some banks have suspended annuity sales while they renegotiate.
The same regulation in August addresses other practices associated with early-year activities. Insurance companies sometimes tap customer accounts when they are short on cash later in the year. It’s not uncommon either to charge premiums in Q4 for policies that don’t take effect until the new year in exchange for higher returns.
Both practices are now banned. Insurance companies are told to price their policies judiciously, manage their capital more cautiously, and leave enough of a buffer for future risk events.
The industry still relies heavily on the new year sales – premiums in January sometimes contribute 20 percent of the annual total – but talks about phasing it out have become louder. CAI Qiang, General Manager of Pacific Insurance said during the midyear earnings call that his company hopes to even out sales throughout the year and would forgo the 2024 new year sales.
Most other companies are not ready, but the industry is concerned about the huge financial and operational costs of the new year promotion.
“The industry is unable to generate sustained revenue all year round. The sales force is not well trained. Customers still need to be more educated. And the companies need clearer strategies and better execution,” said ZHANG Hui, an operations manager at a large insurance company.
LU Min, founder of online insurance marketplace Dongbaohui, says the new regulation will force companies to rethink their sales strategies, which may entail an operational overhaul.
To attract millennial customers, now the biggest group of retail investors, companies must move sales online and replace their aging sales force with younger ones that are more financially sophisticated and social media savvy.
Insurance companies also need to come up with products tailored to the new generation’s needs instead of resorting to discounts and freebies, as they have done up to this point.