On the whole, we're bullish on the fundamentals of the insurance industry next year. In terms of the demand for insurance products, Chinese population aging becomes inevitable, and demand for pension and health insurance are growing. The rapid progress of urbanization also pushed the pension needs of the residents to social security and private markets, offering great opportunities for the life insurance sector. As for favorable policy moves, the "New Ten Guidelines" rolled out by the government made clear the specific target for the development of the insurance industry in China, i.e., 16% CAGR annually. Pursuant to the requirements of the "New Ten Guidelines", the tax deferral policies for health insurance and commercial pension products have been published in 2015 and will contribute to the realization of the target over time.
With regard to life insurance, the aging of the senior citizens with payment capacity and rapid urbanization combining with wide but insufficient coverage of social security have given rise to an unprecedentedly large commercial pension market. The product mix shifts from investment-linked insurance products to protective products with higher embedded value. It's projected that life insurance companies will enter a new era where value growth surpasses scale growth in the coming years. As far as distribution channel is concerned, agent force saw a recovery in 2015, with increased productivity and industry returned to growth mode. Starting from next year, the margin of the bancassurance channel will stabilize and pick up mainly due to the continuous decline in the yields of the financial products offered by banks. This trend will significantly alleviate the competition of similar products the bancassurance channel is faced with. Major challenges for the life insurance industry are: most of the life insurance companies still gain most profit from interest margin, especially short-term interest margin. The contribution from mortality margin and expense margin are low; there are few management fee; insurance companies rely heavily on capital markets; and they are severely affected by the downward trend of interest rates.
With regard to P&C insurance, the reform of the commercial auto insurance pricing launched in 2015 is designed to improve the competitive situation in the Chinese auto insurance market, introducing the mechanism for survival of the most competitive insurer through price liberalization, encouraging competing insurers to deliver highly cost-effective auto insurance services, facilitating product differentiations to encourage less competitive P&C insurance companies to develop non-auto products. Internet insurance companies like Zhong An Insurance suddenly prosper,. Products with low premium amount and risk coverage, including tourism insurance, accident and health insurance and personal property insurance, are developing rapidly. What merits attention is that currently the competition of auto insurance is too excessive, the customer acquisition costs are prohibitively high, the downward pressure on pricing is huge, and differentiation among insurers will continue in the future. E-commerce players with quality customer resources and Internet service providers with big data storage and analytical ability will strongly impact the current P&C insurance market, and may even change the industry landscape as a whole.
In 2016, the insurance industry will also face some challenges. As the Chinese Central Bank continues to inject liquidity into the market, risk-free interest rate will continue to trend down in the foreseeable future and the "crave for quality asset" will persist in the entire financial industry. This means more difficulties for the asset allocation of the insurance industry on the investment side. At the same time, the promotion of interest rate liberalization leads to the declining benchmark rate and accelerated asset de-bubbling, which call for the attention of insurance asset managers. In 2015, many insurance licenses have changed hands, and many new shareholders strived to follow "Warren Buffett" model and invest in listed companies. This has raised the eyebrow of the China Insurance Regulatory Commission (CIRC). In mid-December, the CIRC released the Guidelines for Internal Control on the Utilization of Insurance Funds and the Guidelines for Application of Internal Control on the Utilization of Insurance Funds (Guidelines No.1 to Guidelines No. 3), which provide for internal control standards and procedures for the key steps of bank deposit investment, fixed-income investment, stock investment and equity fund investment, respectively, and require insurance companies undergone stress tests on asset allocation under specified scenarios. At this point, the potential impact of those measures on the whole insurance industry remains unclear, but in the future the business model of investing in long-term equity with rapidly growing universal life premiums might not continue.