Eight years after regulators gave American International Group (AIG) the first foreign licence to sell policies in the People's Republic, China's insurance market remains mostly closed and highly uncompetitive.
With the inclusion of ING Insurance and Assicurazioni Generali, which received the government's approval to start joint ventures in June, Beijing has allowed a total 15 foreign companies to start business from the more than 100 companies that have established representative offices in the Mainland.
Almost all sell a limited number of policies and, with the notable exception of AIG, operate in the city of Shanghai. Their market share comprised less than 5 percent of the Yn139.3bn in industry premium revenues last year.
Broad market-opening concessions agreed to by Beijing in talks with Washing-ton and Brussels over China's entry into the World Trade Organisation have established a timetable for greater participation. However, foreign insurers caution that the government will continue to actively protect the country's emerging insurance industry, even as it nurtures this sector.
"Don't expect a mad rush of people selling new products overnight," says one Hong Kong-based European executive. "There is no way the authorities are just going to allow a slew of companies to start operations."
Among the regulations most likely to stall rapid advances for foreign insurers after WTO are minimum paid-in capitalisation requirements of Yn200m for each Mainlandcity branch licence, and a further Yn50m for each of a maximum of two sub-branch licences. That can make the price of admission for doing business outside the largest markets prohibitively expensive. Moreover, overseas life insurers are required to partner 50-50 with local companies for at least five years after accession. At the moment, approved joint venture partners are few and far between.
Nevertheless, some foreign insurance executives regard the WTO agreements as nothing short of historic. "[They] lead inexorably to more competition, more product numeration and more distribution strategies," says Mr. Patrick Cranley, Cigna Corp's managing director for China.
Loosening the restrictions
Among the most important concessions, Beijing has agreed to grant licences on a prudential basis, without numerical restrictions or discretionary `economic needs' tests. The only rules governing licensing approval are that a company should have more than 30 years experience in a WTO member country, a representative office in the Mainland for two consecutive years and global assets exceeding US$5bn.
Beijing also agreed to gradually loosen geographic restrictions, allowing foreign companies access to more of the market. Presently, the government has opened only Shanghai, Guangzhou and Shenzhen. In the coming months, the cities of Tianjin and, perhaps, Dalian, may be added to the list. Within two years of accession, Beiiing.
Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang and Wuhan are also to be opened, followed by the entire Mainland within three years of WTO entry.
Other WTO-related changes allow foreign vendors to sell health coverage to domestic and foreign clients within four years, and group, pension and annuities policies with five years of accession. On the non-life side, the WTO provisions are likely to make a more immediate and dramatic impact. According to the agreements, foreign vendors upon accession will for the first time be allowed to underwrite master policy and co-insurance policies, further reducing the impact of geographic limitations and allowing Mainland-licensed foreign vendors to increase sales to their natural customer base, foreign-invested enterprises.
Overseas non-life companies will also be given the ability to underwrite large-scale insurance for property or projects above Yn500m or when insurance premiums exceed Yn1m and special insurance, to cover aircraft, energy projects, satellites and nuclear plants.
How quickly foreign non-life players will be able to develop their share of the Mainland market is anybody's guess, although executives agree that more business is expected. In Shanghai, for example, the Mainland's only truly competitive market, total foreign non-life premium income last year amounted to only Yn234m, representing less than 7 percent of the city's total non-life market.
Even with changes to the rules, industry insiders are warning their implementation is likely to be a contentious process. Standing at the centre is the insurance regulator the China Insurance Regulatory Commission (CIRC), which has indicated it intends to control WTO rules changes with the same kind of activism it has used since it was spun from the central bank in November 1998.
In comments earlier this year, commission chief Ma Yongwei said CIRC would apply the "principal of prudence" when granting foreign licences, among other things. How that principal is to be applied has been the subject of rigorous debate and many non-life foreign insurers believe CIRC is prepared to throw up regulatory hurdles when domestic business becomes threatened.
Ultimately, much of what foreign insurers are allowed to do will depend on the ability of domestic companies to meet prudential solvency requirements. They point to Beijing's ban four years ago of the sale of domestic earthquake policies, a step that was taken because domestic companies lacked the policy and reinsurance know-how to write policies according to recognised due diligence standards.
"[The ban] was about protecting local companies," said a Shanghai-based insurer. "Large foreign companies need earthquake coverage on property, but if you open up the market [to foreign insurance companies], domestic brokers would immediately be out of the tender."
At the heart of the issue is the ballooning long-term risk now overshadowing the entire industry. Wu Jinglian, government economist at the Development Research Center of the State Council, estimates overall capital assets of China's insurance industry stands at no more than "several dozen" billion yuan, while its current risk valued probably amounts to Yn15,000bn.
Part of the problem can be attributed to government regulations requiring Mainland insurers to invest the bulk of their premium income in short-term government bonds and bank deposits. As the central bank has successively cut interest rates, fiscal conservatism has come at a heavy price. Zhong Hongtao, director of the insurance department of People's University, estimates that losses incurred between policy and bank interest rate imbalances over the next 10 years at Yn 162.3bn.
Cutthroat pricing is also to blame, particularly in the non-life sector, where industry experts believe that policy exposure is probably increasing at 20 percent a year, while premium income growth remains in single digits. Only last year, China's non-life premium income reached Yn52.lbn, representing growth of 2.9 percent over 1998.
In an effort to address the shortfall, main-land regulators have been slowly rewriting regulations to allow insurers to invest a greater portion of their premium income in the stock market. In March, CIRC announced that Mainland insurance companies would be allowed to increase their securities investment from 5 to 10 percent of their previous year's capital assets. One local insurer, China Pacific Insurance, has received CIRC permission to invest 15 percent of its total capital in stocks.
"The financial strength and stability of the domestic insurance industry is one of the biggest issues facing regulators," points out Mr. Ian Lancaster, Greater China regional manager for Chubb Group. It is an issue that influences not only what policies are sold and how they are priced in the market, but also in which vehicles insurance companies can invest their premium income.
While achieving international standards of due diligence will probably take years to accomplish, foreign insurers are eyeing the Mainland with anticipation. The explanation, said Cigna's Patrick Cranley, is simple: insurance penetration in the Mainland remains nominal, representing 1.5 percent of gross domestic product.
"There is much room for upside and the growth drive will be led by foreign players."