With around 70% of its 1.3 billion people living in rural areas and already struggling with low incomes and growing apprehensions about tomorrow, the country's safety net is stretched to breaking point.
Those who can are beginning to take their security into their own hands, driving the rapid growth of China's nascent insurance industry and providing a powerful lure for domestic and foreign insurers, banks and financial conglomerates alike.
China Insurance Regulatory Commission (CIRC) figures show insurance premium revenues rocketed to US$61.6 billion in 2005 from just over US$9 billion in 1996. Life insurance accounted for the bulk of the growth, expanding from US$3.76 billion to US$46.25 billion in premium revenues, or 75% of the market. Non-life premiums grew more modestly from US$5.38 billion to US$15.2 billion over the same period.
Low insurance penetration – 2% of GDP in the life sector and just 0.7% in non-life – and a rising middle class are fuelling expectations that the good times will continue for insurers. China is forecast to become the fourth largest life market in the world by premiums in 2008, after the US, Japan and the UK.
Financial services research and advisory firm Celent LLP expects the market to expand to over US$100 billion by 2009. Growth will be driven by the non-life insurance market, which Celent estimates will account for around 40% of all premium revenues by 2009, up from 25% now.
China's insurance sector is still a domestic story, and a limited story at that. Just three domestic players dominate 70% of the life industry, while the top three non-life insurers claimed 72% of their market.
Foreign insurers accounted for only 8.78% of the life insurance market in 2005 with US$4.05 billion in premium revenues, up from 2.3% in 2004. But subtracting a one-off US$2.4 billion premium group life transaction undertaken by Generali China Life puts the market share at a much more modest 3.75%. In the non-life segment, foreigners only won 1.31% of total revenues, or US$212.2 million.
Part of the domestic dominance can be explained by restrictions on geographic expansion of foreign insurers, which until December 2004 were only entitled to operate in 15 major cities. In places that were opened up earlier, such as Shanghai and Guangzhou, the market share of foreign-invested insurance companies had reached 15.3% and 8.2% respectively in 2004.
But these are also the areas where people are most likely to already have insurance, making it harder for new entrants to capture market share.
Shanghai represents 1.3% of China's population but accounts for 6.8% of premium revenues. Guangzhou is home to 0.8% of the people and 3.2% of the national revenues, while Beijing generates 10% of the revenues from 1.1% of the population.
As a result, most foreign insurers are now surveying China's second and third tier cities, although consumers tend to have less disposable income in these areas.
Geographical expansion is not the only growth strategy firms can follow, with distribution channels taking on increasing importance. Bancassurance is leading the way, with premiums sold through banks growing 121% in January and February of this year alone to US$3.2 billion. This equates to 34% of China's total life insurance premiums for the period.
There is also potential to grow market share through differentiated product offerings. The industry is dominated by simple single premium, short-term, low-protection products, which do little to develop a strong long-term base for the industry.
Given the shortage of suitable long-term investment vehicles in China with which insurers can offset their liabilities, there is little appetite for higher-yield and higher-risk products. Chinese insurers had about US$200 billion in gross assets by the end of April, most of it in low-yielding government bonds and bank deposits.
Invest for success
The regulator has been working to liberalize investment classes for two years and is now looking to raise the cap on investment in the domestic stock market, currently set at 5% of total assets. In addition, insurers will be able to put money into asset-backed securities, property, and venture capital projects, and take stakes in strong-performing local banks.
Investment will also be permitted in state-level infrastructure projects to 15% of total asset value.
In April, insurers received the green light to buy foreign exchange quotas in order to invest in overseas fixed-income and money market instruments, capped at 15% of total assets. This is expected to be expanded to cover other overseas products, including equities and funds.
To offset the increased investment risk, the regulator is also considering moving to a risk-based capital framework in which solvency requirements are matched to asset risks. This is likely to encourage smaller players to raise more capital, opening up opportunities for foreign investors looking for China insurance assets. Domestic listings are also on the cards.
With domestic players already well in the lead, and progressively given more leash by the regulator, it remains to be seen what share of new growth foreign players can nab. What is certain is they need to move quickly if they want to insure a slice of the pie.