Capital constraints squeeze transformation space; small and medium insurance companies "disenchant" dividend insurance

Southern Finance & Media Reporter Lin Hanyi Intern Xu Ruoxuan

Spring 2026 marks a new chapter in the story of dividend insurance’s “center stage.”

Over the past two years, this floating yield product, once regarded by the entire industry as a “cure” for the low-interest-rate era, has made the leap from the fringe to the mainstream. Regulatory guidance, leading insurance companies’ promotion, and the market rebound since 2024 have collectively pushed dividend insurance into the spotlight.

In the first half of 2025, dividend insurance accounted for over 50% of new policies for most insurers, with some transformation-focused companies exceeding 90%. Far Eastern Credit Research pointed out that in 2025, the premium income of large insurers like Taiping Life and New China Insurance saw a leap in the proportion of dividend insurance, and the industry-wide consensus on “full shift to dividend insurance” has already formed.

However, as the spotlight’s glare gradually dims, a calmer, even divisive, reflection is emerging deep within the industry. During interviews, reporters found that unlike the high-profile top institutions, more and more small and medium insurers are beginning to “disenchant” with dividend insurance.

Conflicts Over Shareholder Value Reduce Willingness to Follow

In 2025, when investment returns generally rebounded, a previously overlooked contradiction surfaced within small and medium insurers. Dividend insurance was designed for “benefit sharing and risk sharing,” but this mechanism, when equity markets perform well, becomes a financial burden for smaller insurers.

According to the “Regulations on Actuarial Standards for Dividend Insurance,” insurance companies must allocate at least 70% of distributable surplus as dividends to policyholders. This means shareholders can only share up to 30% of the surplus. When an insurer’s investment performs excellently, most of the profits actually flow to customers, not shareholders.

Shizhi International Financial Consulting Partner Shi Zili told 21st Century Business Herald that over the past two years, stock investments significantly boosted returns. The surplus distribution mechanism of dividend insurance shares profits while bearing risks, which reduces the insurer’s rigid cost pressure but also diminishes the potential gains from high investment returns later.

Far Eastern Credit data shows that by the end of September 2025, insurance funds’ stock investments reached 3.62 trillion yuan, a substantial 50% increase from the end of 2024, far outpacing the growth rate of other asset types. Against this backdrop, many insurers’ investment contributions to profits have increased in recent years. This change in profit structure directly impacts the product development logic of small and medium insurers.

For those with outstanding investment performance, they prefer to retain excess earnings at the company level rather than distribute them to policyholders.

Renyuan Law School Professor and Vice President of the Insurance Law Research Association, Ren Zili, told 21st Century Business Herald that regulatory requirements limit the share of surplus dividends to policyholders to at least 70%, leaving limited returns for shareholders. Stronger investment capabilities tend to trigger shareholder doubts.

Zili also pointed out, “Some small and medium insurers, optimistic about future investment returns, are reluctant to fully transition to dividend insurance.”

Meanwhile, the smoothing mechanism of dividend insurance also raises the bar for insurers’ financial adjustment capabilities. Insurers store excess investment income and release it during downturns to ensure stable dividends across cycles. For small and medium insurers, balancing short-term performance with long-term operations is highly challenging.

Ren Zili said that small and medium insurers often lack long-term investment performance support and smoothing reserves, making it difficult to maintain stable dividend payout rates. If sales mislead customers, it could directly trigger reputational risks. This capability gap makes small and medium insurers cautious about transitioning to dividend insurance.

Capital Constraints Limit Transformation Opportunities

If shareholder returns concern internal stakeholder interests, then capital constraints are a visible red line determining whether small and medium insurers can participate in this game.

Although dividend insurance can effectively ease rigid payment pressures on the asset side, it is capital-intensive in terms of capital consumption. Zili noted that dividend insurance consumes capital relatively more, and some small insurers with tight solvency capacities cannot vigorously develop dividend insurance.

Data shows that by the end of Q4 2025, the average comprehensive solvency adequacy ratio of insurers was 181.1%, down 18.3 percentage points from the end of 2024. The core solvency adequacy ratio was 130.4%, down 8.7 points. This decline in capital buffer is especially pronounced in the life insurance sector. According to a research report from Zhongtai Securities, for small and medium institutions, capital replenishment channels are relatively narrow. Due to small business scale and unstable profitability, some companies’ solvency ratios are close to regulatory limits. However, low market recognition and limited financing channels make capital replenishment very difficult.

Ren Zili also shared this view, believing that capital constraints are a major practical consideration for cautious small and medium insurers. Under the “second-generation solvency regulation,” the high capital occupation of dividend insurance further squeezes the already tight solvency margin.

Additionally, the professional barriers in asset-liability management also pressure small and medium insurers in their transition to dividend insurance. A non-bank securities analyst pointed out that dividend rates are positively correlated with expected investment yields, which are closely linked to market performance and investment capabilities. For small and medium insurers, their investment teams, risk control, and capital strength are no match for large insurers, making it difficult to push forward with dividend insurance investments.

Zili noted that small and medium insurers face greater challenges than large companies in cost control, investment capacity, and capital replenishment channels. Their talent and technical strength in asset-liability management also lag behind larger firms.

Ren Zili believes this divergence is not a short-term fluctuation caused by declining interest rates but a profound, long-term structural reshaping of the life insurance industry. Over the past decades, the industry has followed a “high interest rate, high guarantee, scale-driven, channel-driven” extensive model. Now, it is entering a new phase of “low interest rates, strict regulation, heavy capital burden, and emphasis on stability.” Dividend insurance, aligned with declining interest rates and regulatory guidance, will become a mainstay of long-term savings. However, future competition will shift from “guaranteed interest rates” to “investment ability, dividend stability, and operational robustness.” The resource barriers of leading insurers will continue to strengthen, intensifying the Matthew effect.

A senior analyst from a securities firm further stated that, in the long run, the Matthew effect will dominate in various segments. With the development of AI and increased regulatory focus on risk control, this trend will accelerate, and the market share of small and medium insurers is likely to continue shrinking.

Dividend Insurance Competition Returns to “Long-term Trust”

In fact, the obstacles for small and medium insurers to fully embrace dividend insurance are not only internal capital constraints and shareholder interests but also the implicit thresholds of clients. As the core logic of savings insurance shifts from “rigid payment” to “floating returns,” the essence of this competition becomes a battle for “long-term trust.”

Dividend levels heavily depend on insurers’ long-term investment capabilities and profit distribution policies. Customers are essentially buying trust in the insurer’s future credit performance. Ren Zili pointed out that large insurers can leverage their brand, channels, and dividend strength to continuously attract mid-to-high-end savings customers.

Small and medium insurers, due to limited brand influence and lack of long-term dividend track records, face natural concerns from clients about the sustainability of future dividends over decades. How to bridge this trust gap? Zili suggested that small and medium insurers need to develop three core capabilities:

First, extreme professionalism and transparency. Establish clear product disclosure mechanisms, explain coverage, claims processes, and risks in simple terms, and minimize or eliminate sales misguidance to earn customer trust through professionalism.

Second, stable and efficient service and claims capabilities. Trust mainly manifests in the claims process. While small and medium insurers may be at a disadvantage compared to top brands, they can compete on service speed, attitude, and certainty. For example, leveraging technology to enable small-amount direct payments, instant claims, and clear procedures for complex cases, prioritizing policyholders within regulatory limits, and building reputation through reliable claims experiences.

Third, deep cultivation of niche scenarios. Instead of competing with top insurers on “full market, all demographics,” they should focus on specific customer groups, scenarios, or regions—such as seniors, children, new residents, flexible workers, or small and micro enterprises—and offer integrated “insurance + services” solutions like chronic disease management or medical green channels, creating differentiated value and an irreplaceable trust bond.

Deepening Differentiation to Build “Moats”

Faced with the dominant position of large insurers in mainstream savings markets, small and medium insurers are seeking differentiated survival paths.

Zili pointed out that due to disadvantages in brand, channels, and investment capacity, many small insurers can only compete through high-cost models. This extensive competition cannot sustain once “reporting and compliance” are implemented. Therefore, small and medium insurers must focus on specialized operations and differentiation. Whether through customer segmentation, product positioning, or service innovation, these are inevitable paths under the new environment.

Transitioning to health, accident, and other protection-oriented businesses offers space for differentiation.

Zili analyzed that protection-type businesses present both opportunities and challenges for small and medium insurers. Opportunities lie in aligning with the “insurance for protection” regulatory focus, with market demand growing along with the Healthy China strategy. They can target niche scenarios like county-level inclusive medical care or specific occupational accident insurance, entering blue oceans with scenario-based, customized products. Additionally, protection businesses require lower capital and have more stable profit structures, easing capital pressure.

However, a securities firm analyst warned that, before clear turning points in income, expected income, and wealth effects, both large and small insurers face difficulties accelerating breakthroughs in high-value, high-price insurance types like health insurance. Compared to large insurers, small and medium ones have less space due to product line, pricing, bargaining power, and channel disadvantages.

Zili also believed that the agility of small and medium insurers is an advantage. Their smaller size means lighter existing business burdens, and if they can establish flexible mechanisms, they can respond and adapt more swiftly to market changes. Rapidly transforming product structures and pricing, seizing capital market opportunities, and escaping interest margin pressures could help them find their place in the new market landscape.

Looking ahead three to five years, the product strategies of small and medium insurers will further differentiate rather than converge. Zili predicts that some well-capitalized and capable small insurers will focus on niche savings or protection tracks, creating a portfolio of specialized products; most will shrink their scope, deepening regional or customer segment focus, pursuing a “small but refined” approach; those lacking core capabilities may gradually exit the market.

(Edited by Qian Xiaorui)

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