SHANGHAI, Aug. 6 -- PARTICIPATING insurance products are losing their luster amid rising interest rates as policy holders can gain higher investment returns from bank deposits.

Unit-linked insurance policies are replacing the dominant position once taken by participating insurance - such as life assurance where dividends are paid if a person dies accidentally or lives beyond a specified age.

Participating insurance sales accounted for three-quarters of bancassurance and two-thirds of individual life insurance last year, estimated industry veterans.

However, sales decreased as interest rates rose this year. The People's Bank of China raised interest rates for the third time on July 21, and sharply cut its tax on interest from bank savings from 20 percent to five percent to fight inflation and ward off overheating in the economy.

The one-year benchmark deposit rates rose from 3.06 percent to 3.33 percent. The latest interest-rate rise, the fifth since April 2006, plus the tax cut, translated into a real after-tax interest rate of 3.1635 percent.

The latest savings rate is higher than the current upper limit of 2.5 percent assumed interest rate for life insurers, slowing sales of savings-oriented products such as participating insurance.

Assumed interest rate (AIR) is the minimum interest rate that must be earned on investments in the policy holder's cash-value account to cover the insurance company's costs and expected profit margin.

The bigger the AIR, the lower the premium prices, and more attractive policies offer a certain returns forecast while protecting against risks.

"The main reason for policy holders to compare their policy with bank deposits is that consumers in China overlook the insurance protection function," said an actuary with an overseas insurer in Shanghai.

AIR is not the only element on setting policy prices, although it is a key point, she said.

"I'm not worried about the current AIR, but I am afraid of a sudden rise of the gauge which may lead to a price war on policies and upset the market," said the veteran with more than a decade's experience in the industry.

Yuan Li, the spokesman for the China Insurance Regulatory Commission, said on July 25 that the insurance regulator is researching adjusting life insurance products' assumed interest rate, adding that the industry is discussing such reforms.

"In the short term, the rate increase brings challenges to the insurance sector as the rate increase will dampen the sales of savings-oriented products and traditional fixed-returns products," Yuan said.

The insurance regulator has collected views from some insurers on increasing the assumed interest rate. However, that doesn't necessarily means an immediate increase.

However, the interest-rate increase will help boost the returns on insurers' bank deposits, which topped 827.41 billion yuan (US$109.37 billion), or 32.66 percent of insurance assets at the end of June, according to CIRC.