Chinas crackdown on the sale of short-term， high-yield investment-linked products is in danger of triggering a liquidity crunch at some insurance companies that may leave them unable to pay policy holders the money they are due.

The risk has been highlighted by Shenzhen-based Foresea Life Insurance， one of the biggest players in the market for so-called universal life insurance products， and which is believed to be among the most exposed to the maturity mismatch between assets and liabilities caused by these shortterm policies.

Liquidity Squeeze could Lead to Mass Defaults and Social Unrest

Foresea Life has issued a stark warning to the China Insurance Regulatory Commission （CIRC） that the liquidity squeeze， which is preventing it from earning new premium income， could lead to mass defaults and social unrest as policyholders fail to get their money back.

In a letter to the commission， it called for a ban on the sale of new policies imposed on the company to be lifted so that it can raise money to repay policyholders and prevent the cash squeeze from spreading to other companies.

The insurer， which has relied heavily on so-called universal life insurance products for its rapid growth over the last few years， saw its premium income slump 70% to 13.5 billion yuan （$1.96 billion） in the first quarter. It also saw a net cash outflow of 9 billion yuan from operating activities， compared with a net inflow of 36.6 billion yuan in the same period last year， a source close to the company said.

Foresea was one of nine insurers censured by the CIRC in last December for problems associated with universal insurance products. These are basically wealth management products offering a combination of life insurance protection， normally in the form of a death benefit， with an investment that offers a guaranteed return far higher than bank savings rates.

They were popular with consumers because they offered high yields and short maturities， but regulators became increasingly concerned about the risks attached to the products because of the maturity mismatch between the short-term policies and the longer-term investments they were funding.The company， whose billionaire chairman， Yao Zhenhua， was banned in February from the insurance industry for 10 years， was ordered to stop selling universal insurance policies altogether and was slapped with a three-month suspension on the issue of other policies.endprint

Many Insurers Unable to Raise Money to Fund Their Liabilities

The December censure marked the beginning of a broader clampdown on short-term， high-risk policies， mostly in the form of universal life insurance， thats now left many insurers unable to raise money to fund their liabilities.

From January to March this year， total premium income raised from the sale of universal insurance for all 81 life insurers in China plunged by more than 61% year-on-year. More than half of the companies reported a decline in sales of universal insurance policies， and the drop was large enough to lead to a decrease in overall premium income for 33 firms.

At the same time， the companies have had to continue making payments on maturing policies and on refunds stemming from cancellations.

Foresea， for example， paid out 18.8 billion yuan in re-funds on cancellations in the first quarter， more than double the amount for the whole of 2016， a source close to the company said.

In a letter to the CIRC in early March， the company warned that it was facing “huge cash flow risks” from its universal insurance business partly because of pressure from cancellations. Most of the stock and real estate assets bought with the premium income were subject to lock-up periods and couldnt be sold quickly， it said.

“We request your favorable consideration of our petition in order to avoid liquidity-related marketwide， systemic and contagious risks， risks to the industry caused by mass policy cancellations， and social unrest，” the company said.

In late April， Foresea wrote again to the regulator， warning of the dangers and repeating its request for the ban to be lifted.

At least 16 other life insurance companies saw a net out- flow of cash in the first quarter， compared with only eight in the same period last year， according to data published by the CIRC and the companies themselves. Those with the highest outflows were the biggest promoters of short-term， high-yield universal insurance policies， including Foresea and Anbang Life Insurance. Their net cash outflow in the first quarter was 13 billion yuan and 5.7 billion yuan respectively.

A source close to the commission said the regulator has ordered all insurance companies to submit reports on their liquidity conditions and management more frequently in order to control risk. “For some companies that merit special attention， they have to report their data in real time，” he said.endprint

The Entire Industry was Facing Growing Pressure from Increased Cash Outflows

Speaking at an internal work conference in April， Chen Wenhui， the vice chairman of the CIRC who is running the commission following Xiang Junbos dismissal on corruption allegations， said the entire industry was facing growing pressure from increased cash outflows， with payouts on maturing policies and cancellations both seeming to have reached a“peak season.”

“For some companies which have operated too aggressively in the past， this means greater potential liquidity risks，”he said.

But some industry analysts say that higher cash outflows wont necessarily translate into a liquidity crunch for an insurance company， and that much depends on the severity of the outflows and how long they last.

Foresea could tap into its capital reserves， which stood at 42 billion yuan at the beginning of the year， a source close to the firm said.

If the outflows persist， it may have to sell assets， as would other insurers facing similar liquidity problems. However， a fire sale of assets by companies to help fund their liabilities could lead to a slump in prices and also lead to instability in financial markets， experts say.

So far， the CIRC has shown little intention of relaxing controls on the sale of universal insurance products. “The commission is determined to keep the brakes on， but it will do so skillfully so that problems can be solved gradually to avoid triggering shocks，” said the source close to the regulator.

Anbang Life Short-Term Products Barred by Insurance Regulator

Chinas insurance regulator ordered Anbang Life Insurance Co. Friday to stop selling several products that violate industry rules， according to a statement posted by the China Insurance Regulatory Commission on its website.

The life insurance company is part of Anbang Insurance Group Co.， the third-largest insurer in China by assets and the owner of New Yorks Waldorf Astoria hotel. Anbang Life was ordered to stop selling several products including annuity contracts and universal life insurance policies. It was also suspended from offering new insurance products for three months， according to CIRC.

Anbang Life is among Chinese insurers that fueled a boom in sales of so-called “universal life insurance” -- a type of short-term policy that combines minimal protection benefits with a high-return investment. These products have become the major target of a government crackdown since late last year. Regulators are concerned that such products helped small insurers raise huge amounts of cash quickly to fund investments in bonds， securities and the property market， creating uncertainty for the insurers cash flow and liquidity management.endprint

CIRC found that Anbang Life violated regulations concerning insurance products with short- and mid-term maturities. The regulator said one of Anbang Lifes annuity contracts was designed to offer quick returns to policyholders， shortening the actual maturity of the product to as little as two years. Such designs deviate from the basics of insurance protection， violate regulations and disrupt market order， the commission said in its statement.

CIRC ordered Anbang Life to work out settlements with existing policyholders for the banned products and to adjust its product development to comply with regulations.

Anbang Life reported a net cash outflow of 5.7 billion yuan （$830 million） in the first quarter of this year， according to a financial statement released in late April. Insurance industry analysts said the outflow indicates the company paid more to clients who redeemed or canceled policies than it generated from insurance premiums.

Anbang Lifes core solvency adequacy ratio dropped to 101.25% in the first quarter of 2017 from 117.65% in the last quarter of 2016. The ratio of a companys core capital to the minimum capital required by regulators is a measurement of a companys capability to cover liabilities.

By the end of 2016， Anbang Life had total assets of 1.45 trillion yuan， 60% of which were overseas， according to the financial statement.endprint