China's Insurance Market: Opportunity, Competition and Market Trends

Transcription

1 The Geneva Papers on Risk and Insurance Vol. 25 No. 3 (July 2000) 335±355 China's Insurance Market: Opportunity, Competition and Market Trends by Yiming Shen China represents the largest insurance market in the world that is both closed and underserved. With more than 20 per cent of the world's population and a high level of domestic savings, China is considered an ideal opportunity for foreign insurers: one quarter of the world's population accounting for less than 1% of its premium spending. For the past two decades, the highly centralized planned economic system and the state social insurance system has operated to prevent commercial insurance from ful lling the role that it plays in countries where insurance is highly developed. This situation is now changing. While the insurance industry in China is still, in essence, a new and developing industry (having just under two decades of insurance experience as compared to more than a hundred years' experience for developed countries). Chinese regulatory authorities predict the market will double by 2004 to more than $30 billion. From 1992 until 1999 only nine foreign companies were granted licences and their operations were restricted to the city of Shanghai, with the exception of one American company permitted to operate in Guangzhou. In 1999, four more foreign companies were selected by the government for business in China. 1 In November 1999 the U.S. Government completed bilateral talks on China's accession to the World Trade Organization (WTO). It is expected that China's WTO accession will lead to an elimination of geographic restrictions, greater market access, and more lines of business permitted for foreign insurers over the next several years. Life insurers strongly praised the agreement, as American Council of Life Insurance President Carroll Campbell said, ``it gives insurers the opportunity to grow into a new and largely untapped market.'' 2 This article starts with a general introduction of the Chinese insurance market with statistic reports, that offer a basis for further analysis of market pro les and prospects. The second part it provides an overview of the market competition status in China with special focus on the entry and operating issues for foreign insurers. The third part summarizes the insurance aspects of the U.S.±China WTO agreement and predicts its implementation. The article concludes with a general discussion of relevant legal and regulatory issues, followed by a projection of development trends and strategic recommendations to foreign insurers who want to tap this emerging market. Dr Shen LL.B., LL.M. (Fudan University, China) JSD (Osgoode Hall Law School, Canada), is a Director and Associate Counsel at Manulife International based in Hong Kong. Prior to joining Manulife Financial, he interned with the People's Bank of China during 1995± In April 1999, licences were awarded to four companies ± the Chubb Group and John Hancock Mutual Life Insurance of the U.S., the U.K.'s Prudential and Canada's Sun Life Assurance Company. 2 See S. Brostoff, `Insurers Praise Pact For China To Enter WTO', National Underwriter (Life & Health/ Financial Services Edition), 22 November Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK.

2 336 SHEN 1. Market pro le 3 The emergence of powerful local players and the arrival of foreign insurers are transforming China's insurance industry at a remarkable speed. The industry is gearing up to meet the unprecedented demand for insurance generated by continuing market reforms. It is estimated that the market could reach RMB 250 billion (US$ 30.1 billion) by the year 2004, and RMB 420 billion (US$ 50.6 billion) by the year 2010, with projected annual increases in the region of 20 to 30 per cent and possibly even more for life insurance. Even though the market share captured by foreign insurers is not expected to exceed 5 per cent by year 2000, this tiny slice of the Chinese insurance market could be worth RMB 10 billion (US$ 1.2 billion) to RMB 12.5 billion (US$1.5 billion) annually ± a highly attractive prospect for foreign insurers with saturated domestic markets. Year Table 1: Major China Economic Indicators (1995±1999) GDP growth (%) GNP (US$) (billion) Per capita GNP (US$) Source: China Statistical Yearbook. The insurance industry has shown rapid growth within the past few years, particularly in the life insurance market, as Chinese citizens' average annual income grew an average of 23 per cent during the past four years. In addition, the increase in private businesses, coupled with the decline of job opportunities in the state sector as a direct result of China's state reforms, has sparked people's interest in buying all types of insurance ranging from property to life. In 1998, the total amount of life and property insured was RMB billion (US$ billion). China's insurance sector reported a premium income of RMB139.3 billion yuan (US$17.07 billion) in 1999, up 10 per cent from Among these premiums, 52.1 billion yuan was from property insurance, up nearly 3 per cent from 1998, and 87.2 billion yuan from life and health insurance, up 15 per cent. Insurers paid out 28 billion yuan in liabilities on property policies and 23 billion yuan for life and health policies. Ma Yongwei, chairman of the China Insurance Regulatory Commission (``CIRC''), attributed the stable growth of the insurance sector to the regulators' efforts to improve market order. China's insurance sector is expected to earn total annual premium of US$30 billion by the year 2004, as estimated by Wu Xiaoping, Vice-Chairman of CIRC. 5 3 See P. Lim and E. Bai, `China ± Insurance Industry', National Trade Data Bank, Market Reports, 1 August `China's Insurance Sector Reports Double Digit Premium Growth', Asia Pulse (26 January 2000). 5 `China Insurance Premium will reach $30 billion at 2004' (12 December 1999) on line: khttp:dailynews.- muzi.coml

3 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 337 Table 2: China's Insurance Premium (billion yuan) 1994±1999 The recent rapid growth in insurance premium is due in equal parts to growing competition within the industry, that has thereby resulted in better services, and a growing awareness of insurance, along with a growing need to protect against the reduction of bene ts and the downsizing of state-owned rms, resulting in loss of employment for a large number of workers. Life insurance, in particular, is booming as state-owned enterprises cut back on coverage for their employees and lay off workers as part of the reform process. Chinese citizens, especially urban dwellers, have taken it upon themselves to purchase private life insurance, either to extend the minimal coverage offered by their employers or to provide coverage for themselves as private enterprises sprout up. Life insurance premiums in Beijing, China's second largest city, have jumped in 1997 to about RMB 9 billion (US$1 billion), about 5 per cent of Beijing's GDP, an almost twofold jump over Although the Beijing market is still closed to foreigners, the rapid increase in the life market re ects the growing awareness among China's citizens of the importance of enhancing the limited coverage offered by their state-owned employers. Life policies emerged as most popular in Beijing, with life premiums comprising 75 per cent of the total insurance market. In Shanghai life insurance captured 65 per cent of the market. A recent study by the Gallup organization indicated that 15 per cent of Shanghai's local citizens currently hold life insurance policies, while another study showed that 80 per cent want to cover their own risks by themselves. The reinsurance business, in which insurance companies offset layers of risk to another insurance company in exchange for a portion of the premium, is an area where foreign insurance companies may participate without holding a licence. Since the last insurance law was passed in October 1995, fronting, the process whereby 100 per cent of the risk can be covered by a reinsurer, became illegal. Now a minimum of 40 per cent of the risk has to be covered by the underwriting company, so up to 60 per cent of the risk may be reinsured by another company. However, 20 per cent of the reinsurance business automatically goes to China Re, a subsidiary of state-owned People's Insurance Company of China (``PICC''). At least another 10 per cent of any reinsurance must be offered to other local reinsurers. Whatever part of the risk still remains may be covered by foreign reinsurers. This is likely to be a very small portion, as Chinese reinsurers traditionally take more than the minimum allocation. Domestic reinsurers only steer clear of commercial projects where the risk involved is regarded as too high or unquanti able (such as satellite or nuclear power plant

4 338 SHEN projects). Foreign reinsurers face other nancial disincentives including a tax of 8.55 per cent on any business that goes offshore. China's non-life insurance market, on which reinsurers must subsist, only amounted to RMB 45 billion in In the absence of a sophisticated reinsurance infrastructure in China, a large number of domestic non-life insurance rms do not reinsure at all. Foreign reinsurers would like to get involved, but cannot because the law prevents them from engaging in local currency or RMB business. Due to the fact that the Chinese local currency is not convertible, the reinsurance business is also not convertible on the international market. Catastrophe is one coverage in which local underwriters have huge exposure in local currency and must absorb heavy ooding insurance losses every year. Most catastrophe reinsurance is for foreign currency exposure. China's reinsurance business is fuelled by the growth in large-scale projects in which multinational companies have been deeply involved, especially in the construction, energy, satellite, aviation, and power sectors. The bottom line is that foreign reinsurers must make do with China's non-life, foreign currency-denominated insurance business, which was a ballpark US$1 billion at the end of Actuarial services are still primitive, with many companies going to Hong Kong for actuarial expertise. The brokerage market is still restricted, as there is only one licensed foreign broker, U.K.-based Sedgwick Group, along with several Chinese brokers. 2. Competition in China's insurance market Domestic competition Insurance in China is still dominated by domestic companies, due largely to the protectionist policies of the central government. Of the 13 domestic companies, the top three, PICC, China Paci c and Ping An are national companies with the freedom to operate all over China. Other local companies such as Huatai and Guotai have more restrictive business licences, limiting them to particular regions. In 1994, only three Chinese local companies and one foreign insurer, AIA, competed in Shanghai. Three years later, PICC's lion's share was deducted as a result of increased competition. The local companies, until recently, were accustomed to loose oversight by the Chinese insurance regulator. In order to ensure that the local companies remain solvent and to prepare for the increase in competition from the newly-licensed foreign companies, the People's Bank of China (``PBOC'') has enforced stricter adherence to its guidelines. For example, on 1 PICC China Pacific Ping An AIA Figure 1: Shanghai insurance market in 1994 (total insurance premium 3.2 billion yuan)

5 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 339 PICC China Pacific Ping An AIA Tian An Da Zhong other Figure 2: Shanghai insurance market in 1997 (total premium income 9 billion yuan) October 1997, the domestic insurers signed an agreement stating that they will follow guidelines on premiums, agents' commissions and operational limitations. Although commission rates were limited to 10 per cent of the premium, actual rates paid to agents were much higher, due to some cut-throat competition. Later in the year, on 1 December, PBOC set new life interest rates that fell below the national savings interest rate, and for the rst time, required all Chinese insurers to conform to those rates. Returns on life products previously averaged between 7.5 per cent and 9.0 per cent, two to three percentage points higher than the interest paid on a one-year savings deposit. Further rate cuts in early 1998 have had little impact on the sales of life insurance policies, but they have squeezed the potential for corporate pro ts. Domestic companies still enjoy certain freedoms unavailable to foreign companies. For example, domestic companies are able to offer various kinds of products, with a minimal approval process, whereas foreign companies are required to submit an application for each new product. Furthermore, vehicular insurance, a lucrative market due to the growth in private ownership and mandatory compliance by all owners, is off-limits to foreign companies. Vehicular insurance accounted for 55 per cent of PICC Property's total income, and they captured 80 per cent of the domestic market for auto insurance in People's Insurance Company of China Since its resurrection in 1979, the People's Insurance (Group) Company (PICC) has continuously dominated the insurance industry throughout China. After the promulgation of the 1995 Insurance Law, PICC divided its operations into three divisions: life, non-life and reinsurance. Rather than suffer from the competition of foreign companies into the Shanghai life market, PICC has actually bene ted as their total premiums have risen, despite the loss in market share. PICC (Life) captured 44.7 per cent of the Shanghai life market in 1997, compared to 79.7 per cent in Premium income, in both life and general grew from RMB 1.1 billion (US$133 million) in 1991 to RMB 6.7 billion (US$810 million) in Taking a cue from its foreign competitors, PICC is seeking growth by improving its services and offering more products. In 1997, PICC (Life) Shanghai recently expanded its business distribution by signing agreements with local banks empowering them to provide services on behalf of PICC. As the largest insurer in China, PICC was also involved in covering US $57 million worth of risk in the Three Gorges Dam project, the world's largest hydroelectric project. PICC was

6 340 SHEN given a BBB credit rating by Standard & Poor's Corporation and was recently listed as the 15th largest insurance company in the world. Ping An Insurance Company of China Headquartered in Shenzhen and founded in 1988, Ping An has been quick to follow in PICC's footsteps. It has already surpassed PICC as the number one life insurer in Beijing and Shenzhen. In addition to overtaking China Paci c Insurance Company as the number two insurer in China, Ping An possesses the unusual ability to deal in other nancial services. Because it began operations as an insurance company offering other types of nancial services, Ping An retained these rights although the Insurance Law of 1995 strictly prohibits this practice. Consequently, Morgan Stanley and Goldman Sachs have each taken a 6 per cent stake in Ping An Insurance Company. Morgan Stanley views Ping An as a strategic partner and is working with Ping An to research asset management, human resource management and improve products. Ping An has also set up a joint venture company with Lincoln National to develop an annuity project. Ping An's chairman states that Ping An, unlike PICC, welcomes competition, as Ping An itself was founded in order to offer a choice to the then monopolistic PICC. China Paci c Insurance Company Rounding out the top three national insurers is China Paci c Insurance Company Ltd (``China Paci c'') which started operations in 1981 and is headquartered in Shanghai. China Paci c is also a state-owned enterprise as it was founded by the Bank of Communications. Like the other two national companies, China Paci c has split into separate life and non-life subsidiaries. In 1997 its premium income was RMB 732 million (US $85.5 million). Regional insurers include companies such as Tai Kang Life Insurance Co. Ltd, Xin Hua Life Insurance Co. Ltd, and Hua Tai Insurance Co. Ltd, which were given approval to operate in Xin Hua and Tai Kang, both life insurers, quickly gained 16 per cent and 15 per cent Table 3: Annual premium income (RMB billion yuan) by PICC, Ping An and China Paci c in 1994±1997

7 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 341 Figure 3: Life insurance market share by PICC, Ping An and China Paci c in 1997 Figure 4: Property and casualty insurance market share by PICC, Ping An and China Paci c in 1997 market shares respectively in Beijing during the rst half of Xin Hua Insurance even has a website selling life policies. Foreign players in China 6 At the beginning of 1998, there were a total of 106 foreign insurance companies from 15 foreign cities and regions with 189 representative of ces in China waiting for regulatory approval. Most of the companies are from Japan, followed by European companies. Most representative of ces are located in big cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Qingdao, Dalian and Tianjin. The China Insurance Regulatory Commission claims that the sector will open once Chinese companies have matured enough to compete fairly with their foreign counterparts. In addition, the CIRC also wants to build up its own supervision system and set up industry guidelines. Since granting licences to American International Assurance Company Ltd. and AIU Insurance Company, member companies of American International Group (AIG), in 6 See Goldman Sachs, `China Insurance Market', 1998 [unpublished report].

8 342 SHEN Guangzhou, the government has recently only granted licences to companies in Shanghai's Pudong New District, which has been declared a test site for nancial experiments. This area is also being developed as China's nancial centre, so banks and insurance companies are required to set up home bases there. Consequently, the CIRC (Shanghai) will step up supervision of the insurance industry. Guangzhou, by contrast, has been designated a manufacturing centre and may be best considered as a secondary entry point for companies following a licence granted rst in Shanghai. China realizes that opening its insurance market to more foreign competition is a requisite for eventual entry into the World Trade Organization. However, the opening of the market may proceed slowly as China embarks on an ambitious three-year plan to overhaul its nancial sector in order to reduce debt risk and improve nancial management. China cannot deny that foreign companies have helped to promote the reform of the entire insurance system and advance the development of the insurance market. Not only have foreign companies brought in new business products, marketing systems, and management experience, they have also helped to increase total insurance premiums for the industry. It remains to be seen whether China will reconsider the positive bene ts of competition and weigh them against its current conservative policies. Foreign companies are all vying for the coveted licence to provide underwriting services in China. So far, at least one company from each of the large countries has a licence. Decisions are politically motivated as the State Council seems determined to spread out licences in fairness to the different countries. In order to secure a licence, companies undertake activities to show their long-term commitment to China. When coming to China foreign insurers bring a wealth of information, experience, and know-how which China's young and immature insurance market desperately needs. In their bids to land operating licences many foreign insurers have tried to make this point, and taken measures to address it by setting up or endowing various insurance training programs and institutions. The Chinese government uses various criteria in deciding which foreign rms will be granted a licence, and one of the important ones is a demonstrated commitment to the country by the applicants. Hopeful foreign insurers have attempted to demonstrate their commitment to China by getting involved with these training institutes, but not all have restricted themselves quite so narrowly. Other means of building goodwill have included investing in Chinese industries and contributing to museums and schools. For example, one company has invested money in both energy and infrastructure projects. Another has also provided free medical treatment to impoverished children. Yet a third company has provided money for university scholarship funds while another one has set up investment funds for investing in China. In China, the building of good relations and goodwill is essential at all stages of doing business, and if a foreign insurer is to be successful in the Chinese market it cannot afford to ignore this way of doing business. After China's accession to the WTO, it is likely that licences will be given on the basis not of a political trade-off, but according to size, international experience, business plan and overall competence. There are restrictions on the type of investment vehicle foreign insurers can use to enter the Chinese market. A foreign insurance company is allowed to incorporate as a joint stock limited company. It is also allowed to take the form of either a branch of ce or an equity joint venture. However, the relevant government departments are said to be reluctant to allow foreign life insurance companies to establish branches in China, preferring to see them establish joint ventures or take up equity shares in joint stock insurers. The government has, however, continued to allow non-life insurers to set up branch of ces, although they are restricted to underwriting policies for foreign-invested operations.

9 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 343 Company Country Table 4: Foreign insurers entering China's market in 1990s Year licence Granted Life/P&C Chinese partner Ownership City AIA Tokio Marine & Fire AIA United 1992 Life Branch Shanghai States P&C Japan 1994 P&C Branch Shanghai United States 1995 Life P&C Branch Manulife Canada 1996 Life SinoChem 51% joint (49%) venture Winterthur Switzerland 1996 P&C Whollyowned branch AXA-UAP France 1997 Life China Minmetals (51%) 49% joint venture Guangzhou Shanghai Shanghai Shanghai Allianz AG German 1997 Life Dazhong 51% joint Shanghai venture Aetna United 1997 Life China 50% joint Shanghai States Paci c venture Royal & Sun United 1998 P&C Branch Shanghai Alliance Kingdom Colonial Australia 1998 Life China Life 50% joint Shanghai Mutual (Shanghai) venture AIA United 1999 Life Branch Shenzhen States P&C AIA United 1999 Life Branch Foshan States P&C Prudential United Kingdom 1999 Life CITTC 50% joint venture John United 1999 Life Tian'an 50% joint Guangzhou Hancock States venture Chubb United 1999 P&C Branch Shanghai States Sun Life Canada 1999 Life China Everbright 50% joint venture Tianjin Note: P&C ˆ property and casualty. Equity investment in Chinese domestic joint stock insurers will conceivably give foreign companies a simpler and quicker route into the market, as approval for equity companies is relatively more rapid than that for joint ventures. Currently, the maximum equity stake possible for foreign insurance companies in joint ventures is 50 per cent, and at least one of the

10 344 SHEN partners must be a Chinese insurance company. 7 As for equity investment, current policy allows foreign insurers an ownership stake of up to 25 per cent in domestic insurance companies with, however, each individual overseas insurer restricted to a maximum 5 per cent share. 8 Representative of ces are a relatively cheap and easy way of establishing a presence in China. However, they are only permitted to engage in a restricted number of non-business activities including liaison work, market research and technical exchanges. They are not allowed to actually conduct any direct business activities, having to refer any business to their Figure 5: Establishing a joint venture insurance company in China (Source: The Insurance Industry in China, 1999) 7 Some foreign life insurers were allowed to take 51 per cent equity share in the joint ventures, however, China began to only permit 50 per cent joint venture in 1997 and will continue to restrict foreign life insurer take majority equity stake in a joint venture. 8 Morgan Stanley and Goldman Sachs have each taken a 6 per cent stake in Ping An Insurance Company.

11 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 345 parent companies. The incentive for establishing a representative of ce is the legal requirement that a foreign insurer to maintain a representative of ce in the country for a minimum of two years before being eligible to apply to set up formal business operations. Equity joint ventures are limited liability companies incorporated and registered in China, having legal person status and their own independent management structure. The Chinese and foreign parties in equity joint ventures share the risks and pro ts in proportion to their respective capital contributions in the joint venture. As Chinese authorities have clearly indicated that all future foreign life insurance operations must be in the form of a joint venture, foreign insurers have been obligated to seek out prospective local partners to boost their chances for approval. No clear written rules governing the establishment of joint venture insurance companies exist. When the rst Sino-foreign joint venture insurance company, Manulife-SinoChem Life Insurance Company Limited (formerly known as Zhong Hong Life Insurance Company Limited), was established in November 1996, its approval set many of the precedents for subsequent applications by foreign life insurers. Figure 5 brie y summarizes the procedures involved as derived from the Manulife-SinoChem precedent. 3. Insurance aspects of the U.S.±China WTO agreement 9 On 15 November 1999, World Trade Organization Director-General Mike Moore warmly welcomed the U.S.±China accord on Chinese accession to the WTO. Although substantial work remains before China becomes a member of the organization, the Director General expressed con dence that this work could be completed in a relatively short period of time. The bilateral agreement on market access is signi cant, Mr Moore said, given the size and importance of the two economies: ``This is a major step forward in China's accession to the WTO. I have said many times that we are not a World Trade Organization until China has joined. China must still reach agreement with other member governments and we need to complete important technical talks before China can take her rightful place at the table of great trading nations. A door to history has been opened and now member governments must walk through it together.'' 10 The following is a summary of news releases from the White House, American Council of Life Insurance and CIRC, and information placed on (a Chinese language website on insurance in China) concerning China's commitment to opening its insurance market on accession to the WTO. Some uncertainties still remain, and await further clari cation by the CIRC. 11 Number of licences There will be no economic needs testing or numeric/quantitative restrictions on the number of operating licences to be issued to foreign insurance companies on accession. 9 This section was presented by the author at Global Insurance Forum (American Council of Life Insurance) on 6 December 1999 in San Francisco. 10 Press release of the World Trade Organization (emphasis added). On line: khttp:// press148.html 11 Clifford Chance, Asian Financial Market Newsletter (December 1999 edition).

12 346 SHEN Licencing requirements: In order to qualify for a licence, foreign insurers must meet the following criteria: (a) 30 years of experience as an insurer; (b) US$ 5 billion in total assets; and (c) a representative of ce in China established for the past two years. Operating licences will not, however, be issued in an uncontrolled manner; the CIRC will utilize ``prudence'' based assessments in conjunction with the qualifying requirements to provide a further re ned evaluation of which foreign insurers will be suitable market participants. Geographic restrictions Until now, life joint ventures and non-life branches have been restricted to operating in Shanghai and Guangzhou, though China has recently indicated that it is prepared to open the rst group of cities: Dalian, Chengdu, Chongqing, Fuzhou, Xiamen, Ningbo, Wuhan, Shenzhen, Tianjin, Shenyang, and Beijing. Immediately on accession, foreign non-life insurers will be allowed to write ``large-scale risks'' on a nationwide basis. Cities which American insurance companies are primarily interested in will be opened within two to three years after accession. Opening the market in the north-western region will be given priority. All geographic restrictions on the market for foreign insurers are to be eliminated within three years of China's accession. Ownership and form of establishment Life insurers may have a 50 per cent joint venture partnership with a Chinese partner of their own choice upon accession (some Chinese reports suggest that 51 per cent may be available within ve years). Non-life insurers may have a 51 per cent joint venture or branches upon accession, and 100 per cent wholly owned subsidiaries within two years after accession. Internal branches will be permitted consistent with the phase-out of geographic restrictions. Scope of business/insurance lines Foreign life insurers may sell individual products to both Chinese and foreign nationals upon accession. Foreign non-life insurers are currently only allowed to write business for foreign invested enterprises. Restrictions on the scope of business and geographic operations of foreign invested property insurance companies will be relaxed gradually. For example, they can insure large-scale commercial risks with no geographic restrictions and provide insurance for enterprises abroad, property insurance, related liabilities insurance and credit insurance for foreign rms upon accession. Foreign insurers may sell health insurance within four years of China's accession. Foreign insurers may sell pension and group lines of insurance within ve years of China's accession. Reinsurance This market will be fully opened (100 per cent, with no restrictions) upon accession. It is not clear whether this refers to abolishing restrictions on reinsuring offshore or allowing 100 per cent ownership of subsidiaries/branches in China by foreign reinsurers, or both. The CIRC

13 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 347 is reported to be considering lowering the statutory reinsurance rate (20%) and preference for reinsuring with domestic companies, as well as establishing a national reinsurance market, possibly in Shanghai, with the participation of domestic and foreign insurers, reinsurance companies and brokers. Grandfathering China will grandfather all existing current market access and activities including ownership in insurance sectors. This will protect existing foreign insurance services in China, including those operating under contractual or shareholder agreements or a licence, from restrictions as Chinese commitments phase in. Some insurers comment that the elimination of geographical restrictions is crucial and will have a huge effect on the development of the market. However, most insurers think the biggest impact will be the expanded scope for insurance business. The Agreement opens up group, health and pension lines within ve years. These lines account for 85 per cent of total premiums in China. Opening group insurance lines is particularly important because bene ts in China are commonly supplied through employers, especially for large state-owned enterprises. It will provide foreign insurers tremendous opportunities in this particular niche market after China's WTO accession, since most Chinese companies would rather use foreign insurers like AIG, or Manulife, on employee bene ts than their own domestic insurers. 12 If China joins the WTO as expected, possibly by the end of 2000 will have to make substantial changes to its insurance regulations, particularly those regulations governing access to the market by foreign insurers. In the same way that Mexican regulators had to end barriers to foreign access to Mexico in the years following the implementation of the North American Free Trade Agreement in 1994, Chinese regulators will have to remove many of the restrictions on foreign insurers. Currently, a handful of foreign insurers have limited licences to sell insurance in a few areas of the country. After China's accession to the WTO, the regulators will likely, among other things, have to give foreign insurers access to all areas of Chinawithin three years, permit 100 per cent foreign ownership of domestic insurers within two years and end within two years the 20 per cent compulsory reinsurance cessions to a Chinese state-owned reinsurer for companies that are fully foreign-owned. ``There will be a huge change'', commented Kevin Cronin, president and chief executive of cer of the International Insurance Council. 13 Already, the CIRC is making changes in order to bring domestic and foreign insurers and brokers into compliance with its existing regulations. In conclusion, the CIRC has made it clear that during the forthcoming ve years licensed foreign insurers in China will be given national treatment in terms of product variety, clientele and operating regions. 4. Transparent regulation and fair regulatory standards The new regulatory regime began in November 1998 when the CIRC took over insurance regulation from the People's Bank of China. The new regulator has a much larger staff than the insurance regulator at the PBOC, and many of the staff have insurance experience. Until November 18, 1998, in accordance with the stipulations of the Insurance Law, the PBOC was 12 See Gene Linn, `US Insurers Expected To Bene t When China Wins WTO Admittance', Journal of Commerce (3 May 1999). 13 Gavin Souter, `Changes seen in China; Regulatory crackdown anticipates WTO membership', Business Insurance (14 February 2000).

14 348 SHEN the primary authority in charge of regulating the insurance industry. However, in a move to implement the principle of separate regulatory and business functions for government units articulated during the National People's Congress in March 1998, the PBOC's powers over the insurance industry were withdrawn and transferred to the newly created China Insurance Regulatory Commission. Created under the State Council, the CIRC is mandated to formulate policy for the insurance industry, enforce laws, penalize wrongdoing, protect the rights and interests of policyholders and establish a risk evaluation system. It will therefore be responsible for vetting application to establish new insurance institutions and supervising existing domestic and foreign-invested insurance companies. The new regulator has eight departments, including international, legislative, life insurance and property insurance departments, and employ approximately 100 of cials at its headquarters in Beijing. Most of those of cials come from the former insurance department of the PBOC and the PICC. 14 The creation of a specialized body to supervise the insurance industry has been welcomed by all players as it promises to centralize and simplify regulation. Under the old system the PBOC had primary responsibility for overseeing the industry, but the Ministry of Finance and the State Auditing Administration also had some input, contributing to a sometimes fragmented and inef cient regulatory regime. With one single specialized regulator the system should become more ef cient and having the CIRC report directly to the State Council should also serve to raise the pro le of insurance at the highest levels of government. There is an urgent need for effective implementation of the Insurance Law, 15 and for the promulgation of detailed implemention of regulations to enhance the enforceability of the Law and establish an integrated insurance market in China. The Insurance Law was the culmination of approximately ve years' work by various committees which involved liaison and in-depth observations and visits to some 13 countries to study various approaches to insurance legislation in both Western and Asian environments. The Insurance Law was the rst statute passed in an effort to bring order to the country's commercial insurance operations, and marked the rst step in constructing a much-needed legal framework for the industry. Overall, most people who have studied the nal result give it high marks as a major step forward in transforming insurance regulation in China towards: (1) international standards of accountability of management; (2) balance in protecting insured and insurer rights; and (3) de ning the role of the regulator. 16 As a senior executive of a major Chinese insurance company noted, ``the competitiveness of Chinese domestic insurers can only be achieved when a properly regulated market which embraces fair competition rules is in place.'' The Insurance Law provides that insurance companies shall observe the principle of fair competition (Article 7). It prohibits insurance companies from engaging in improper competition by promising to pay the policyholders, insured and bene ciaries premium rebates and other bene ts in addition to those provided in the insurance contracts (Article 105). It also provides that the basic terms for policies and premium rates for the main types of commercial insurance shall be set and regulated by the Supervisory Authority. The terms of policies and premium rates provided by the insurance companies for other types of insurance shall be reported to the Supervisory Authority for the record (Article 106). 14 A. Allen, The Insurance Industry in China (Hong Kong: Asia Information Associates Ltd, 1999) at The Insurance Law was promulgated on 30 June 1995 at the Fourteenth Session of the Standing Committee of the 8th National People's Congress of China and became effective on 1 October Ian Lancaster (Chubb China Operation), `Insurance Law Commentary', article online: China/laws/inslaw-commentary.htm.

15 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 349 It is widely accepted that the competition rules are unlikely to be complied with and a well-regulated market cannot be expected to emerge if there are no follow-up procedures or detailed implemention guidelines in place. For example, the liquidity requirements promulgated in the Insurance Law have not yet been effectively implemented. In the words of an executive director of a major Chinese insurance company, ``the compulsory reinsurance of any unit risk whichexceeds 10 per cent of the actual assets plus accumulation funds has been hardly supervised, while supervision has been skewed towards 20 per cent compulsory reinsurance.'' As a result, to capture a bigger market share, some Chinese local insurance companies, and especially those new insurers, diverted reserves and accumulation funds into underwriting liabilities which are sometimes more than ten times their actual assets and accumulation funds. ``The guarantee reserve (20 per cent of the total amount of an insurance company's registered capital) for repaying the debts of the company upon liquidation will be a far cry from saving an insurance company from bankruptcy once struck by natural or man-made catastrophes.'' Among measures being urged for implementation are regulations on social insurance, regulations on reinsurance and regulation on insurance intermediaries. China is still formulating the regulations and creating the mechanisms needed to supervise the industry. The accompanying supporting legislation and implementing regulations are still in the process of being drafted and promulgated. Since the Insurance Law, the government has only issued the Regulations for the Administration of Insurance Agents (for Trial Implementation), the Provisional Regulations for the Administration of Insurance, and the Provisional Regulations for the Administration of Insurance Brokers, as well as a small number of minor pieces of legislation. Much remains to be done ± and some of the legislation will require continued amendments and improvements as it is implemented. On 13 January 2000 the CIRC issued a decree on regulating insurance rms, which was due to take effect from 1 March There are ten chapters in the decree. These include provisions on the establishment of insurance rms, the operation of insurers, insurance policies and premium, the use of premium income and reinsurance, as well as supervision. According to the decree, the establishment of insurance rms and branch of ces by insurance rms must be approved by the CIRC. Insurance rms must have a customer service department and lines that will look after potential complaints. The terms and premium of major insurance policies must be xed by the CIRC. Other policies must also be approved by the CIRC. Foreign-funded insurance rms shall also be subject to regulations stipulated in the decree. 17 Since China resumed insurance business in the early 1980s, it has come forth with an insurance law and decrees on the management of insurance brokers and insurance agents. Most foreign insurance companies welcome this latest step taken by China in improving its insurance law system. According to related sources, the CIRC is now working on ``Regulations Governing Foreign Insurance Companies'', while additional regulations on business scope for foreign insurance companies will be drafted separately. 18 The rst regulation on foreign insurers ± the Provisional Measures on the Administration of Insurance Institutions with Foreign Investment in Shanghai ± was issued in CIRC has already made changes to bring domestic and foreign insurers and brokers into compliance with its existing regulations. In May 1999, it suspended the activities of several foreign brokerages in China, alleging trading irregularities, including the operation of unlicensed businesses. The commission ordered Jardine Insurance Brokers Ltd to close its 17 `China Issues Insurance Firm Regulations', KPMG Insurance Insider (13 January 2000). 18 See `China Paci c Insurance to Invite Foreign Investment for JV', Asia Pulse (21 February 2000).

16 350 SHEN Beijing and Guangzhou of ces, and banned for life the chief representatives at each, Wang Jiacong and Chen Jiehong, from any future work in the industry. Jardine was the second British-based brokerage accused of exceeding the terms of its licence. London-based Sedgwick Insurance & Risk Management Consultants (China) Ltd was suspended for three months earlier in 1999 after being found guilty of several infractions. Sedgwick is a unit of Marsh & McLennan Cos of New York. The regulator also sent a letter to all insurers, agents and brokers, stating it would enforce existing laws that previously had been outed by many domestic and foreign organizations. Later in 1999, American International Assurance Co. Ltd, a Chinese unit of American International Group Inc., stopped writing life insurance policies marketed to employees of companies after it was instructed by the CIRC that its policies were considered group life coverage, which the AIA was not licensed to sell. Four domestic insurers have been penalized by China's Insurance Regulatory Commission for engaging in illegal practices and other misconduct. Two are units of People's Insurance Co. of China, the state-run giant of the industry, in Guizhou and Shandong provinces. The others are branches of Shanghai-based China Ping'an Insurance Co. in Hunan province and Beijing. Of cials said the four companies had chaotic management, incomplete procedures and offered outdated policies or obsolete nancial systems in providing vehicle coverage. Both PICC units and one of Ping'an's were ordered to suspend business for three months. The Ping'an rm in Beijing was criticized in a public notice. ``The aim of standardizing the market is to prevent risks and strengthen management, and the effort will help spur the sound development of China's insurance industry'', said Wu Dingfu, Vice-Chairman of the regulatory body. 5. Market trends A survey of 14 Chinese cities showed that 25.7 per cent of the residents intend to buy insurance policies in 2000, 10.1 percentage points more than in The number of people buyinginsurancepoliciesisexpectedtogrowby64.7percentover1999, AsiaPulsereported. 19 The number of people buying home property insurance, medical insurance and female serious sickness bene t insurance will double and people buying endowment insurance, serious bene t insurance and accidental bene t insurance will increase by over 70 per cent. The survey showed that 39.9 per cent of the residents had bought commercial insurance policies by the end of The people bought policies mainly for endowment assurance, life insurance and medical insurance. Of the people in the 14 cities, 19.3 per cent bought endowment assurance, 17.5 per cent bought life insurance, 17.2 per cent bought medical insurance, 7.0 per cent bought insurance for children, 5.1 per cent bought accident and death bene t insurance and 4.9 per cent bought serious ill bene t insurance, 3.8 per cent bought property insurance and 2.0 per cent bought motor insurance. Life insurance is one of the best sales prospects in China Registered foreign companies are allowed to sell life policies to both locals and expatriates. Furthermore, the market potential is quite large, as 99.5 per cent of the population still does not own any life insurance, other than the minimal amount that the state will provide. 19 `More Chinese Intend to Buy Insurance Policies in 2000' (18 March 2000) on line: khttp://dailynews.muzi.coml

17 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 351 China's current population stands at 1.22 billion people. According to the Gallup study on the insurance industry conducted in 1997, 13 per cent of the upper income group in urban areas owned life policies in Only 9 per cent of this group had life insurance in The average cost of a life policy is RMB 300 (US $36) per year. Life insurance is growing most quickly in cities such as Beijing and Shanghai. Part of this is due to the door-to-door sales approach which was introduced by AIA in the 1990s. Consumers expect life insurance to pay for children's education, protect against illness or nancial disaster and provide for retirement. Surveys indicate that Chinese consumers favour products tailored to their speci c needs, reasonable prices, solid reputation, and good service. Reinsurance offers yet another opportunity for foreign companies to enter the market Local companies often cannot cover all the risks associated with large-scale projects, so they need to reinsure part of them with foreign companies. One potential winner is Hong Kong and its role as a reinsurance centre. The opening up of the enormous mainland market may provide opportunities for Hong Kong's reinsurance market. China's deal for gaining membership to the WTO allows even quicker market access for foreign reinsurers than other insurance categories. According to the terms of the agreement, the reinsurance sector will be ``completely open'' when China accedes to the WTO. One positive development in the direction of a free market was the decision by the CIRC to establish a China Reinsurance Exchange Centre. The move is in anticipation of the entry of foreign reinsurance companies to China. The chosen location will be a ``cosmopolitan city with a highly developed insurance market'', probably Shanghai. Along with the of cial stance on deregulation, several senior foreign reinsurance representatives are optimistic that their rms will soon be allowed to open branch of ces in China and engage in renminbi business. It is rumoured that at least one continental European reinsurer is likely to receive a branch of ce licence in From the CIRC's point of view it makes sense to allow at least one foreign reinsurer in order to assess the effect on the domestic industry. CIRC is also making plans to lower the ratio for compulsory secession to China Re at the appropriate time. Such a move will weaken the monopoly of China Re, reveal Beijing's sincerity in opening up insurance markets to foreign investors, and also minimize the risk of China's insurance carriers. Property insurance is growing due to reforms in the state industrial sector Immediately upon China's accession to the WTO, foreign non-life insurers will be allowed to write ``large scale risks'' on a nationwide basis. Foreign non-life insurers are currently only allowed to write business for foreign invested enterprises. Restrictions on the scope of business and geographic operations of foreign invested property insurance companies will be relaxed gradually. For example, they can insure large-scale commercial risks with no geographic restrictions and provide insurance for enterprises abroad, property insurance, related liabilities insurance and credit insurance for foreign rms upon accession. Possible future growth may include social insurance If the government opens the social security system to insurance companies, foreign issuers may eventually participate and play an important role in helping China to set up a comprehensive social security system. About three years ago, the government followed the

18 352 SHEN Singapore model and established a social insurance bureau, so now every province and city has its own social insurance bureau. Government, employer, and employee are all supposed to pay part of the premium for pensions, medical insurance and unemployment insurance. The government recently announced that not only state-owned but also collective and private enterprises with three or more people must join this plan. Insurance from the social insurance bureau is expected to replace the security once offered by the state-owned enterprises. The central government recently decreed that a system guaranteeing welfare, unemployment, medical and pension payments will not be in place for another ve years. Once this market opens up, social pension and medical bene ts may also be considered to be among the best market prospects. More channels of investment for insurers China's insurance regulator is moving to allow rms to invest in corporate bonds instead of only state bonds or simple bank deposits. While accepting the need for prudence in investment, underwriters say falling interest rates require them to nda higher yielding alternative, since the interest rate has been cut by the government seven times in last three years. The governing State Council drew up rules on investments in corporate bonds issued by central enterprises, or companies directly under government control. They appear for now to be ruling out purchases of bonds from other companies, which are the fastest-growing and often most pro table sector. The bonds that insurers can buy must have credit ratings of at least AA-plus, among the highest gradings according to established regulatory stipulations. Insurers will be allowed to buy corporate bonds listed on the Shanghai and Shenzhen stock exchanges, said a research report by Minfa Securities. Since October 1999, China's State Council has allowed insurance companies to raise much-needed funds by permitting them to invest up to 5 per cent of their total assets indirectly in the national's stock markets via securities investment funds. The Tongsheng Securities Investment Fund was the rst securities investment fund to open to insurers. Four days after its debut, 11 insurance companies bought 900 million of the fund's 3 billion units, with China Life Insurance and Ping An Insurance taking the lead at 300 million units apiece. More recently, Chinese regulators have allowed two insurers to invest more in stocks in a bid to gradually open the securities markets to more in ows of insurance funds, as set out in the China Securities newspaper, citing unidenti ed industry executives and of cials. In future, Taikang Life Insurance Co. and Huatai Property Insurance Co. will be allowed to invest up to 10 per cent of their assets in stock funds, up from a cap of 5 per cent. 20 The move shows the authorities' willingness to gradually liberalize stock investment by insurers, adding that there is room for further raising the cap. 6. Suggestions for foreign insurers China's approach towards foreign insurance business has historically been very cautious, and with good reason. Remember, China restricted the presence of foreign insurers in their market for a long time, so the foreign insurer enters that market with an subconscious strike against them. China will not automatically be willing to ``trust'' the foreign insurer, even after having let them into their market; that trust must be earned slowly and patiently. As a 20 `China Allows Two Insurers to Invest More in Stocks' (15 March 2000) khttp://dailynews.muzi.coml

19 CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 353 consequence, do not expect a rapid expansion of business in the Chinese market. By opening its market to foreigners, China has not said ``come and jump right in to our market''. It has instead said ``come into our country and let us see for ourselves if we can trust you enough to do business with you.'' Allowing a widespread foreign insurance presence into their market is not something that will happen automatically. Membership of the WTO is not a magic formula; it will not automatically erase those prejudices/cautionary measures that kept China's market closed for so long. Choose your market and local partner carefully The key to opening the Chinese market is not acquiring a licence ± it is understanding the Chinese: their way of doing business, their way of behaving, the place that honour, compromise, conciliation and long-term thinking have in their relationships (business and personal). Foreign insurers that recognize this will also recognize the need to establish themselves in a manner that allows China and the Chinese to view them as more than foreign entities. By adopting a business format that Chinese insurance regulatory authorities seem to have already given preference to (with a Chinese partner, and in the format of a Joint Venture), the foreign insurance company should not consider that they are making a necessary compromise to satisfy regulators. They are making a very important investment in acquiring a teacher who will help them learn about the market that they wish to enter. In China acquisitions are not possible because comparable enterprises do not usually exist. This almost inevitably means that a business must be started from scratch. When it comes to partnering, it is critical that your partners share your goals and that what each brings to the table does not overlap with but complements the other. Several years ago, China's central bank would usually suggest which partner a licensed foreign insurer should consider. According to the WTO agreement, foreign insurers will have the freedom to choose their own joint venture partner. This is a positive development because a foreign insurer now can resist the Chinese regulatory authority's ``arranged marriage'' if it is inconsistent with the entrant's approach. Long-term commitment requires patience It is no secret today that the key factor in winning a licence in China is to demonstrate that the company can provide supports and assistance in developing China's insurance market. For example, in 1995 Chubb group founded the Chubb School of Insurance at the Shanghai University of Finance and Economics, the rst foreign invested training centre in China. China may scrap geographical restrictions on foreign insurance rms within ve years, in its latest effort to show that it is ready to join the World Trade Organization. Still, some foreign insurers said they do not expect any quick gains in China, where they are also limited to selling either non-life or life insurance, not both. Nor should they. Cultivation of such huge and untapped market requires and deserves that foreign insurers invest effort in building relationships that will help their presence in China to be understood as one of mutual bene t and not as sudden occupation by opportunistic corporate raiders. ``The easy part is to say the market will be opened. It is the implementation that is dif cult,'' said Russ Miller, managing director and chief representative of Principal Life Insurance Co. in Beijing. ``There's still no de nitive answer as to how they are going to do it.'' That has not prevented foreign insurers from trying to enter the $15 billion China market, potentially the world's most lucrative. The CIRC predicts premium income will more than double by 2004, to 260 billion yuan ($31 billion). Miller said it takes at least 17 months after a

20 354 SHEN foreign rm gets a licence to set up a joint venture with a Chinese insurer to sell the rst insurance policy. Part of the time lag could stem from the fact that there are many foreign insurers, but only 13 Chinese insurance companies. It is essential to approach international markets as investments, not as expenditures. This requires patience. As Mr Dominic D'Alessandro, CEO of Manulife Financial said, ``I have frequently said that I will probably be retired from Manulife before our Chinese joint venture pays its rst dividend.'' Such a remark has had two effects: it has dampened Board expectations and it has spurred people in Hong Kong and Shanghai to a frenzy of activity. The establishment of mutual trust is the key to success Manulife set up the rst China±foreign joint venture life insurance company in One of Manulife's competitors approached a Chinese government of cial after its opening ceremony. They told her they too, were a big North American insurer and why did they not get the licence? Here is how she responded: ``It is not important to be big or the biggest. It is important to be rst. And Manulife was rst.'' She went on to say: ``You have to set up the friendship rst. You have to have good relationships rst for mutual trust.'' This is the rst and foremost factor of success in the international arena ± in fact, in any business venture. It is so simple that it is sometimes overlooked. The establishment of mutual trust. Manulife has worked hard to establish this trust with the Chinese in different ways over the past several years. They opened representative of ces in various cities in the country and diligently set out to cultivate relationships and make themselves known to key decision-makers. For example, in 1992, Manulife established a comprehensive training programme for the People's Insurance Company of China. A year later, Manulife began sponsoring an actuarial exam centre ± the rst and only such centre in the entire country. A year after that, Manulife launched a training programme in Canada for of cials from the People's Bank of China. Each year, four promising PBOC employees are brought to Toronto for a year during which they are exposed to various facets of the life insurance business Concluding remarks Today, more and more companies are facing the reality of a global economy and an environment characterized by international operation. For some companies, this new reality means the opportunity to vastly expand their market. For others, it means being faced with more and more competition at home. For most, both possibilities are demanding attention and causing a re-evaluation of traditional approaches to the insurance market. If your company wishes to win over the world's insurance market, you had better put China into your strategy. Today most international players are convinced that several trends seem to be encouraging their expanding efforts into China. These factors include greater political stability in China, opening of its market, growing privatization of the insurance industry and greater uniformity in solvency regulation. China's relatively low penetration and density indicate that the 1.2 billion population may be using their dollars to provide for more basic needs, such as food and housing. But things have been changing in the past few years and will eventually reach a stage where Chinese citizens generally understand, value and purchase insurance. The premium growth rate of China is another measure of its market's attractiveness. There are, however, 21 Dominic D'Alessandro, `Competing in Asia: The Manulife Story' (22 January 1997).