House-for-pension program faces hurdles#Oriental Outlook#-Sino-US

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House-for-pension program faces hurdles

On September 26, the Beijing Second Intermediate People's Court held the second trial of a fraud case in which 47 families have been allegedly cheated of their houses as a suspect used the pretext of house-for-pension program to ask them to mortgage their houses.

Such fraud cases have become another psychological barrier for some elderly people who want to have a better retired life but worry about the house-for-pension program causing losses.

After piloting the program in some major cities in four years, the central government has decided to promote the program across the whole country, even though the public is still debating it and there is only one product under the program.

In the 37th issue of 2018, the Oriental Outlook magazine under the Xinhua News Agency ran a cover story on the program, depicting the current situation of the program and analyzing the difficulties in promoting it.

Below is an excerpt of the article.

The China Banking and Insurance Regulatory Commission issued a notice on August 8 that the housing reverse mortgage endowment insurance will be extended from the current pilot cities to the whole country.

The housing reverse mortgage endowment insurance is actually known among the public as “house-for-pension.”

In June 2014, the former China Insurance Regulatory Commission published the guideline on carrying out the pilot house-for-pension program in Beijing, Shanghai, Guangzhou and Wuhan from July.

In July 2016, the commission then decided to extend the program to more cities across the country, and the pilot period was to end on June 30, 2018.

By July this year, a total of 139 senior citizens from 99 families have joined the pilot program to buy the sole product “Fanglaibao” of Happy Life Insurance Co Compared with other insurance products, it is not so successful.

Yuan Xucheng, an official from the banking and insurance regulator, said that the pilot has gained experience and formulated routine procedures, and that some seniors from places not covered by the pilot also wanted to apply for it.

The pilot was successful not because of its scale but it satisfied the demands of a certain group of seniors, said Yuan. Even in the US where such program was carried out earlier, only 3 percent of qualified families joined in, Yuan said.

The original intention of the program is to provide a new pension solution, meeting the core demand of Chinese seniors such as a home to live and life-long pension.

According to regulations, senior citizens aged between 60 and 85 who own a house could mortgage the house to insurance companies to get a certain amount of money every month until death.

After a senior died, the insurance company would take the money it paid to the senior and the interest, and the leftover value of the house will be returned to the people who inherit the senior’s assets.

Currently, there are only two companies - Happy Life Insurance and PICC Life Insurance Co Ltd – participating in the pilot program and got their products approved, but only Happy Life Insurance’s Fanglaibao was launched in 2015.

It is noteworthy that the three-pillar elderly support system, namely social insurance, enterprise annuity and private investment products, mainly targets people under 60 and working population.

But the house-for-pension program targets the seniors already retired, and is a component of the country’s multi-level social security system amid an increasing population aging.

According to the central government forecast, China will have about 118 million seniors who live alone or have no children by 2020.

Dong Keyong, a sponsor of the China Aging Finance Forum, said the house-for-pension insurance products target a small group in many countries, and in China, it has great potential since 75 percent of the urban seniors have their own homes.

But for Chinese parents and children, it is hard to accept such a program of mortgaging the houses to get money instead of leaving the asset to children due to the traditional view of raising children to have support in the old age.

After retirement, Chinese seniors usually live a frugal life, taking basic survival needs in order to leave more assets to the offspring. House is the most important asset, and it is understandable that it is difficult to promote the house-for-pension program.

Home price concerns

The complexity of the insurance product also creates many problems for actual operation to fend off some applicants.

Insurance companies worry about problems such as some seniors not owning a house fully, change of inheritor after buying the insurance, home price drop and administrative costs.

Zheng Bingwen, a social security expert from the Chinese Academy of Social Sciences, said that besides the traditional view and consuming habits, the complicated insurance design, lack of regulations, incomplete mechanism for risk control and narrow margins also impeded the enthusiasm of insurance companies.

Risks also come from longevity, market demand, interest and policies, Zheng said. Especially, the uncertainty of future home price is the greatest concern of insurance companies.

In the long run, the rapid aging would bring the home prices down, and when the rate of the decline of working population exceeds the total population decline rate, the housing market will be influenced dramatically, he said.

The government policies on controlling the property market have also tightened the nerves of insurance companies, Zheng said.

In the design of Fanglaibao, when the senior dies, the leftover value of the house and the value created by home price increase will go to the heir, but when the home price declines the company has to shoulder the loss.

Zhao Shuilong, who is in charge of Fanglaibao, said that though the pilot program extended to more major cities in 2016, the company still focused on applicants from the key cities of Beijing, Shanghai and Guangzhou.

“Home supply in large cities like Beijing and Shanghai are unlikely to decline,” Dong Keyong said. Following the property tax and heritage tax to be implemented in the future, home prices in most cities will be difficult to predict.

Profit is the core pursuit of every business. One reason that insurance companies do not like to join in the reverse mortgage endowment insurance program is that the product will not see any cash income for a long time.

An employee from an insurance company said that companies like the short-term products like the aviation accident insurance in which when the plane lands, the company could get the money.

But for the house-for-pension product, the company has to pay the seniors every month first, and only when the seniors die, the company could get the money, the employee said.

According to data from Happy Life Insurance, by July 31, 2017, the company had to pay nearly 8,000 yuan every month to 139 seniors from 99 families, which means the company has to first spend a lot before getting money.

Risks also exist after a senior dies. In the first case of the death of an insurance buyer in the first half of this year, the heir changed due to the senior’s will.

Zhao said that though the change would not influence the contract, it might prolong the handling of the house and the company could suffer losses as it couldn’t get the money and interest in a short time.

Administrative costs

Even though the applicants have simple family structure and the house values are high, the insurance companies would also face lots of barriers in dealing with the mortgage.

The insurance will need the coordination of many authorities in many fields such as property, finance and tax, and the companies worry about the cost in dealing with the authorities.

Taking Fanglaibao as an example, it needs housing value assessment, lawyer’s due diligence, mortgage registration and business notarization, and the details of the procedures would also vary in different places.

The cost of human power, materials and financial resources in the insurance product far exceeds that of other traditional insurance products.

“In order to do the business better, we have allocated the top talents to the product, but it is still hard to handle due to external factors,” Zhao said.

From receiving the application till the time the applicant gets the monthly pay, it usually takes about two to three months, and in one case it even took about nine months.

The program is a new thing for many places and it needs local governments to make related rules and regulations, standardizing the government procedures for handling the businesses in the program.

Because the program has high market and technical risks, many countries have created the related security system to lower the risks for both the insurer and pensioner, Zheng Bingwen said.

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