The stage seems set for further liberalisation and more effective supervision of the Chinese insurance industry, with the emergence of a new regulatory watchdog – the Insurance Regulatory Commission (IRC). A consequence of the ministerial shake-up earlier this year, the new insurance regulator is expected to take over the reins of the insurance business from the People's Bank of China (PBOC) by the end of 1998.
"Having an independent supervisory body is being seen as an important step forward for the domestic insurance industry's regulatory environment. A clear outcome of having industry experts on board would be a more technical and professional supervision of the players," says Mr. David Kang, head of Shanghai operations at Winterthur Life Insurance.
Thee winds of change can already be felt in the fastest growing and the most promising segment of China's Yn108bn insurance industry – the life insurance business. Encouraging new competition, widening the industry and introducing important structural changes are expected to figure high on the IRC's priority list.
The first salvo expected to be fired from IRC's arsenal will be the approval of a new private sector life insurance company – Minsheng Life Insurance Company. It will be launched by the All-China Federation of Industry and Commerce (AIFIC), a trade body which lobbies for the private sector in China. Minsheng Life will cater to a new market niche: increasingly affluent AIFIC members, private entrepreneurs and employees of the non-state firms. Indeed, private sector employees who are not covered by China's social security network form a high-potential segment of the insurance business in China today. And the likely establishment of Minsheng Life is being viewed as a result of greater market insight within the IRC's professional management.
Some room for growth
Moreover, the industry is expected to undergo a sea-change with the announced hiving off of the state-owned monolith People's Insurance Company of China (PICC) into three independent businesses: life insurance, property insurance and reinsurance. With more than 70 percent of the total insurance market and 66 percent of the life insurance business, PICC has been the most formidable competitor and stumbling block for new and, especially, foreign market entrants into China. Its restructuring is yet another step towards making the domestic insurance industry lean, mean and competitive, says Kang.
With the dismantling of the state social welfare and insurance system in China, tremendous potential for private sector life insurance is becoming apparent. Remarks Mr. Raymond Chan, general manager of Zhong Hong Life Insurance in Beijing: "With the breaking of the iron rice bowl, the insurance market in China is expected to assume a three-tier structure over the next five years: a basic state insurance layer topped by employers' insurance and, finally, the private sector insurance companies."
Over the past two years, the life insurance business has notched a strong 76 percent compounded growth rate, reaching Yn60bn by the end of 1997, according to PBOC figures. Yet per capita annual premiums in China of US$5 remain one of the lowest among developing countries, allowing huge room for growth. Total premiums, even with impressive growth rates, remain a mere 2.5 percent of GDP. However, these figures are set to rise rapidly as affluence and individual levels of awareness increase. Even in affluent cities such as Shanghai, life insurance penetration among private individuals is currently as low as 15 percent. With an increasing awareness of the need for retirement planning among average Chinese, PICC predicts that the life insurance industry will exceed Yn300bn (US$36bn) by 2000.
Changing the rules
Industry sources believe that an insufficient understanding of the business on the part of regulators, along with restrictive licensing and investment policies, have been the main limitations to the growth of Chinese life insurance business up until now. By bringing in a high degree of industry representation, the new regulator is expected to be better equipped in this area than the central bank, despite being formed as a government agency under the State Council.
The shortlist for chairmanship of the IRC contained several leading figures from the. PICC. A clear example of the government's commitment to making use of industry experience was to bring in the industry veteran and ex-chairman of PICC Ma Yongwei as one of the key formulators of the IRC earlier this year. It was recently confirmed that Ma would head the new body and this would pave the way for further growth and a brand new regulatory regime for the Chinese insurance industry.
Foreign insurers plan to lobby the IRC for a relaxation of the licensing regime in China, even though they do not expect overnight results. To begin with, changes in the land-mark 1995 Insurance Law, which lays down the operational framework for the industry, are being discussed. At the moment, the law restricts foreign participants in the life insurance business to just two cities ?Shanghai and Guangzhou. The IRC is likely to widen the geographical scope, say industry sources, in line with the government's intentions of opening eventually 24 cities to overseas insurers, including wealthy coastal areas such as Dalian, Qingdao and Chengdu.
Another area of reform may be the non-life insurance segment. Currently, overseas non-life insurers can offer services only to foreign-invested companies or to Sino-foreign joint ventures, which leaves out the most promising markets. "Shanghai primarily hosts the service industry and not much in the way of manufacturing facilities," laments Kang. "And foreign firms only have their headquarters, not plants in the city. This limits foreign players significantly."
Moreover, the existing Insurance Law prohibits overseas (and domestic) companies from getting a single business licence covering both life and non-life insurance. Insurers in China find this rule cumbersome, and also want the licensing process to be made speedier. Their grievances are exacerbated by the fact that business licenses are difficult to obtain, and foreign companies must have had a representative office in China for two years before they can apply for one. Even though this waiting period was slashed to two years from three years in 1996, it had little practical benefit, says Mr. Ian Lancaster, chief representative of the US insurance group Chubb Insurance in Beijing. Despite having had representative offices in China for more than four years, Chubb has yet to obtain its first business license in the country. Nor is that all: while the first branch can be set up with a Yn200m investment, foreign insurers need to reach an annual turnover of Yn100m before they can establish a second branch on the Mainland.
Like in other sectors, representative offices of insurance firms cannot generate insurance business on their own. So they are primarily used to collect market data and to liaise with local government officials in China. Nation-al Mutual Insurance's six-year-old representative office in China, for example, conducts only market assessment, preparing the groundwork for its entry into the Chinese market by networking with the regulators, says Ms Rosanna Oz, head of its China operations in Hong Kong. Chubb's Beijing, Shanghai and Shenzhen representative offices conduct risk assessment for several industrial parks and for the power generation industry in China. The company is now teaming up with the State Bureau of Hydrology and other overseas insurers to conduct a syndicated study of flood maps in southern China.
Finally, insurance companies face severe limitations in terms of investments and returns. Insurance premiums earned by both foreign and domestic firms are required to be deposited in state-owned banks and government bonds, where interest rates are often lower than can be derived from other forms of investment, such as equities. "The new regulator should look at giving more investment avenues in China to overseas insurers in China," says Chan of Zhong Hong.
Increasing foreign presence
The restrictive regulatory environment has not deterred foreign life insurers from honing their entry strategies into China. In the past year alone, six global insurance giants including Aetna, Allianz and AXA-UAP, received business licences to underwrite life insurance in Shanghai and Guangzhou. Since the 1992 opening of the domestic insurance industry to foreign competition, more than 80 international insurers set up 140 representative offices in China. Consequently, total premium incomes have grown at a 33 percent compounded rate since 1993, exceeding Yn108bn (US$13.1bn) last year, on the back of rising wealth and awareness of insurance among urban Chinese. The World Bank predicts that the revenues of China's insurance industry will exceed Yn200bn (US$24bn) by 2000 and US$63bn by 2005, making China the second-largest insurance market in the world.
The US giant American International Group (AIG) remains the leading foreign insurer in China, with almost seven percent of Shanghai's life insurance market. The company was the first foreign insurance player to be allowed entry when China opened its doors to external competition in 1992. It now provides life insurance and accident coverage to Shanghai residents, and non-life insurance to foreign companies in the city. In 1995 AIG bagged another two licences from PBOC to operate both life and non-life insurance services in Guangzhou. This makes it the only foreign competition in the city's lucrative life-insurance market.
Other foreign players have chosen to link with local insurers in order to expedite their learning curve in China. Last year, the German insurance major Allianz Insurance, joined hands with Dazhong Insurance Company of Shanghai to form a Yn200m joint venture. This brought together Allianz's global insurance management skills, mathematical know-how and actuarial expertise with Dazhong's four years of experience and established client base in the Shanghai market, according to Mr. Hans-Joerg Probst, Allianz's chief representative in China.
Entering into partnership with domestic insurers gives foreign players an understanding of buying patterns and the trust of local consumers, which is essential when selling insurance products. Moreover, it gives them access to ready-made nationwide distribution networks, which would otherwise take years and considerable investment to build in a vast country like China. An example is Zhong Hong Life Insurance, the first Sinoforeign insurance joint venture, formed in 1996 by Canada-based Manulife International and China Trust and Investment Corporation for Foreign Economic Relations & Trade (Fotic).
It took Zhong Hong just two years to build an impressive portfolio of personal life insurance, medical, pension and savings-related products in Shanghai. A veteran financial institution itself and the financial arm of state-owned monolith Sinochem, Fotic brought to the partnership links with almost 100 state financial institutions in the country along with experience in most financial activities, including government loans, forex markets and lease financing. Earlier this year, Zhong Hong pioneered China's first-ever combination product, ?whole-life coverage plus retirement benefits' in Shanghai. Extremely well received by the Shanghainese, the product offered what the existing ones lacked flexibility in terms of premium payment periods, retirement age and duration of annuity payments.
The latest entrant in the market is Aetna
International, which started selling life insurance products to local and foreign nationals in Pudong, Shanghai in mid-October 1998. Its joint venture with the China Pacific Insurance Company (CPIC), the country's third-largest insurer, has a strategic edge: CPIC's formidable distribution network includes almost 80 branches and affiliates across China. The local partner even has two offshore subsidiaries in Hong Kong and New York, which are expected to bring in additional business. Additionally, CPIC already has a finger in all segments of the national insurance market – life insurance, commercial insurance and property insurance – which gives Aetna an established client base to tap into. Meanwhile, two new players – Australia's Colonial Mutual Group and UK-based Royal Sun Alliance Insurance – have been granted life insurance business licenses by PBOC this year.
Local players wake up
Interestingly, the foreign heavyweights have steadily lost their market share over the past three years, despite having advanced insurance skills and brand equity. By the end of 1997, they collectively held a mere seven percent of the total individual life insurance business in China, according to PBOC figures. Between 1992 and 1995, foreign firms including AIG, had cornered a significant share of the life insurance market 20 percent in Shanghai alone. But by last year, the domestic tigers had sharpened their mathematical skills, marketing strategies and distribution systems, and succeeded in relegating their foreign counterparts to an eight percent share in Shanghai.
In addition to formidable competition from PICC with its network of 110,000 insurance agents and over US$6bn in premium income, a new breed of aggressive private sector Chinese insurers have been taking the life insurance market by storm. "It's interesting to see how fast the domestic insurance firms have learnt international practices like actuarial skills and strategies, which until recently were looked upon as ?foreign' concepts in China," says Probst.
Chinese companies have also copied the highly successful direct selling and agency distribution system pioneered by MG in the early 1990s. AIG's initial success is partly attributable to the thousands of agents it dispatched for selling policies door-to-door. Moreover, these domestic insurers are building in convenience systems such as automatic money transfer and bank drafts for premium payments, modelled on those introduced by MG. With strong local agent networks and close relationships with clients, such distribution strategies have brought rapid success.
Perhaps the best example of this trend is Ping An Insurance, which now controls 26 percent of the country's life insurance market, having recorded a whopping 191 percent growth in revenues last year. The Shenzhen-based company in which Morgan Stanley and Goldman Sachs have an equity interest, brings an adherence to sophisticated business practices. For example, it was the first Chinese insurance firm to meet international accounting standards and to hire international actuarial consulting firms to perform reserve and profitability studies.
Ping An and China Pacific Insurance have posed the first real threat to the monolithic PICC and to the foreign companies. Encouraged by their performance, even provincial governments and enterprises are setting up specialised insurance companies, such as Shandong Province Insurance Company. The battle will intensify with the entry of Minsheng Life into the life insurance arena.