Drivers of the credited interest rate on universal life insurance: Evidence from the Chinese insurance sector

Given the adverse impact of the prolonged low-interest rate environment on the long-term business of Chinese life insurers, this study focuses on Universal Life (UL) insurance, a representative product in the sector, to examine the determinants of credited interest rates. It emphasizes the interplay between insurers’ strategic behavior, financial constraints, and market interest rate dynamics. Leveraging monthly data from 38 Chinese life insurers from January 2015 to December 2021. The empirical investigation is carried out in the context of the pooled mean group (PMG) estimator and panel autoregressive distributed lag (PARDL) model, with proper consideration of the potential presence of cross-section dependence and structural breaks. Our findings indicate that the investment-type premium ratio (ITPR), financial leverage (LEV), and reinsurance cession ratio (REINSUR) of insurance companies have a long-term negative effect on the credited interest rate, whereas the 1-year Treasury bond yield (TBY) has a long-term positive influence on it. Additionally, the short-term adjustments in UL rates are primarily driven by TBY fluctuations. Dumitrescu and Hurlin (2012) causality test further identifies bidirectional feedback between ITPR and UL, highlighting insurers’ strategic trade-offs between market expansion and financial stability. The results underscore that excessive reliance on investment-driven liability strategies exacerbates long-term solvency risks. This study contributes to the literature by integrating insurers’ operational imperatives into UL pricing frameworks, offering insights for policymakers to balance market growth with systemic stability in China’s rapidly evolving insurance sector.