Insurance usage rates are extremely low, and the huge changes that China has experienced over the past 25 years have included the dismantling of the state welfare system, pushing more and more responsibility for welfare and health care onto individuals and families. Insurance services help fill the void, fueling extremely fast market growth.
For much of the late 1990s and early 21st century, the annual growth rate for the industry was around 30%. In 2004, growth dropped to a mere sizzling 11.3% increase in total premium income. But the total assets of the insurance sector at the end of 2004 was still nearly 30% up on end-2003 at RMB1.18trn. Property insurance is growing particularly fast due to growing private car and home ownership – auto insurance premiums were up 36% year-on-year in 2004.
The changes spurred by WTO requirements and China's need to open its economy continue to multiply. From January 1, 2005, for instance, China has allowed foreign banks to act as agents for insurance products. Meanwhile, the number of insurance joint ventures continues to grow. Samsung Life Insurance Co, the biggest player in the South Korean market, will launch a joint venture with Air China's parent company, China National Aviation Holdings, in June 2005. And in February, 2005, the China Insurance Regulatory Commission (CIRC) gave approval to China Reinsurance Asset Management Co, in which a unit of Swiss Re, one of the top global reinsurers, holds a 10% stake.
A major change in the offing is investment by China's state insurance firms in overseas markets. They all have huge foreign currency holdings and the CIRC has announced in principle that they will be able to invest up to 80% of their forex holdings in government and corporate fixed income products outside of China. Ping An Insurance (Group) Co Ltd became the first insurer to be given specific offshore investment quota (up to US1.75bn) only in January.
Insurance is a huge battleground between the state-owned insurance companies and foreign insurance companies, operating largely through joint-venture vehicles. The foreign companies have an advantage in terms of experience, efficiency and expertise, but the local companies know the local market better, and have branches in all corners of the country – a key distribution advantage now, but perhaps less of one as more business migrates to electronic platforms.
The penetration rate of insurance services in China is still low, the industry accounting for a much smaller slice of the economy than in the developed world. The value of China's insurance premium market is roughly equal in size to the market in Spain. But projections indicate China's insurance market will become the second largest in Asia after Japan by 2010, and one of the world's top five a few years thereafter.
After two decades of no insurance companies before and during the Cultural Revolution, the People's Insurance Company of China (PICC) was revived in 1979. It was joined by the other state-owned insurers – Ping An Insurance in 1988, and China Pacific Insurance in 1991. In 1996, the PICC was split into a number of smaller entities, forming a community of state-run insurers that still own around 90% of the market. One of those, China Life, was listed in New York and Hong Kong in 2003, while Ping An was listed in Hong Kong in 2004.
But the domestic insurance companies lag behind international standards of business practice and service. China Life, just months after its IPO, saw its share prices slide after revelations of accounting irregularities amounting to US$652m. Another problem yet to be resolved is that many Chinese insurers during the 1990s sold fixed-rate, dividend- earning policies. Interest rates have since dropped well below the fixed rate, giving the insurance companies massive debt exposure.
The first foreign life insurance firm to open in China in the current era was AIA, the local unit of insurance giant AIG. AIA originally started in Shanghai in the 1920s, with a small office in the building it now owns on the city's famous Bund – the AIA Building, once the headquarters of the North- China Daily News. AIG received approval to return to the Shanghai market in 1992. There are now more than a dozen life insurance foreign joint ventures operating in different cities, under specific geographical limits on their business operations. These are gradually being relaxed in the lead up to 2007, when all remaining restrictions on foreign insurance companies are due to be lifted.
The insurance market, like a number of others in China, suffers from a credibility problem. A survey in 2000 found that over 50% interviewed would prefer a foreign insurance company for reasons of trust and reliability. CIRC took the unusual step in December 2004 of issuing a statement on its website pledging to "deepen reform, enhance risk control, improve corporate governance and actively promote the process of opening of the insurance".
"There is a lack of trust between insurer and insuree," says a foreign expert. "Fake vouchers, fake medical certificates … it is an environment of mutual suspicion."
To facilitate a smooth transition to a liberalized market, the CIRC was created in 1998 to oversee all elements of the industry. New laws allow both foreign and domestic insurance companies a wider business scope, more options for the development of new insurance products and more diversified investment of assets. Non-life insurers, still prohibited from offering life insurance products, are now permitted to offer shortterm accident and health insurance products and are no longer required to reinsure a percentage of each policy with the state-owned China Reinsurance Company.
As in so many fast-developing areas in China, regulation in the insurance sector is in flux, a patchwork of new rules that are constantly added as new problems and situations present themselves. But rules that might appear immutable, or even draconian, can often be matched by reluctant enforcement. Just last month, for example, a CIRC official warned that the commission would not balk at forcing insolvent insurers to go bankrupt if they did not quickly get their books squared. To the outsider, that might seem like threatening the obvious. But threats in China are ferociously sounded in the hope they will not have to be acted on.