Insurance. Foreign insurance companies in China

Transcription

1 Insurance Foreign insurance companies in China September 2009

2 Table of contents Foreword 1 Executive summary 2 Market environment 12 Human capital 33 Risk management 41 Competition and positioning 43 Products and market segments 52 Market expansion 60 Regulation 67 Peer review 75 Appendices 86 Methodology 88 Participants 89 Premium income for domestic life insurance companies, June Premium income for foreign life insurance companies, June Premium income for domestic property and casualty insurance companies, June Premium income for foreign property and casualty insurance companies, June Background comments on participants 94 American Chamber of Commerce in China White Paper Insurance section European Business in China Position Paper Insurance Working Group Partners in success 114

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4 Foreword Welcome to the third PricewaterhouseCoopers 1 survey on foreign insurance companies in China. This year we had even stronger participation in our survey, with 29 of the foreign insurance companies currently active in China taking part. We would like to thank the chief executive officers and senior executives who participated in this survey for their time and effort in making this publication possible. We would also like to thank Dr Brian Metcalfe for his research and analyses. The objectives of the survey continue to be: Find out how companies themselves see the market issues facing them in China; Get a consensus view on industry trends; Understand the thinking of chief executive officers in the China insurance industry; Provoke discussion and debate on the best options open to foreign insurance companies for capitalising on current trends; Provide industry views on how insurance in China may evolve over the next three years. The survey includes observations on the changes in China s market place, the risks, the development of the regulatory environment, future opportunities and how the participants in the survey view their competitors. Foreign insurers still have advantages from their global experience and scale, and can add significant value to the Chinese market through their expertise. However, in China, foreign insurers are still challenged by a lack of critical mass and in aggregate still only account for a market share of less than 5% of life and 1% of property and casualty. The expectation coming out from our 2009 survey is that the foreigner s share of the life market will grow to just 8% in 3 years time, which is much less optimistic than reported a year ago has been a difficult year for foreign insurers in China, not only because of the general slowing of the Chinese economy, but also because (in many cases) the large domestics have proved more resilient to the slowdown versus their foreign competitors. There are a number of reasons for this, including the shift in consumer demands from investment linked to protection based products (an area of strength for the domestics) and also our survey respondents are seeing their domestic competitors as increasingly innovative and continuing to improve their operations, as well as enjoying in-depth local market knowledge. There are also many challenges on the horizon. One of the most significant being that a number of banks have reportedly been granted special approval from the State Council to invest in insurance companies. Bancassurance has become a major distribution channel for many insurers in the last several years and these new bank owned bancassurers will introduce new dynamics in the market. Many insurance players anticipate significant changes in distribution systems and we all look forward to seeing what happens during this upcoming challenging year. To obtain further information, please contact our insurance industry partners listed at the back of this survey. Shu-Yen Liu Actuarial Practice Leader, Asia Peter Whalley Insurance Industry Leader, Hong Kong 1 PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PricewaterhouseCoopers 1

5 Executive summary PricewaterhouseCoopers 2

6 Background This survey focuses on the strategic and emerging issues surrounding foreign insurance companies in China. The survey attempts to bring together diverse viewpoints and offer insights into this fast changing investment market. The survey is based on interviews with CEOs and senior executives of 29 foreign insurance companies. Confidentiality is protected by not identifying individual responses. The interviews were approximately one hour in length and were conducted in Beijing, Shanghai, Hong Kong, Guangzhou and Chongqing in June and July Life insurance companies AEGON-CNOOC Life Insurance American International Assurance Allianz China Life Insurance Aviva-COFCO Life Insurance AXA-Minmetals Assurance CIGNA & CMC Life Insurance CITIC Prudential Life Insurance Generali China Life Insurance Great Eastern Life Assurance Haier New York Life Insurance Heng An Standard Life Insurance HSBC Life Insurance John Hancock Tianan Life Insurance Manulife-Sinochem Life Insurance United MetLife Insurance Nissay-SVA Life Insurance Pacific-Antai Life Insurance Samsung Air China Life Insurance Sino-US MetLife Insurance Sun Life Everbright Life Insurance Property and casualty insurance companies AIG General Insurance Allianz Insurance AXA General Insurance Liberty Mutual Insurance Mitsui Sumitomo Insurance Royal & Sun Alliance Insurance (RSA) Sompo Japan Insurance Tokio Marine & Nichido Fire Insurance Zurich Insurance Company PricewaterhouseCoopers 3

7 Overview Difficult year Foreign insurers have faced a difficult market in China over the last year. Although their commitment to the Chinese market remains extremely strong and resolute, many are finding it difficult to secure economies of scope and scale. Many of the foreign companies participating in this survey have been in China for seven to 10 years. Those involved in joint venture relationships have experienced challenges working with domestic partners who have limited experience in the insurance business. The global financial crisis and the severe drop in the equity market in 2008 added to these tensions. In the opinion of those surveyed, these developments resulted in a much more cautious and measured approach by the regulators. Market share pressure Evidence of the slow progress made by the foreign insurers is provided by the market share statistics. In June 2009 the market share for foreign life companies was 4.7% and for foreign property and casualty companies, 1%. The participants in this survey predict that market share for the foreign life companies will be around 8% by 2012 and that the foreign property and casualty insurers may reach 2% by that time. Impact of the domestic insurers For the first time, foreign insurers have identified the key driver of change in the marketplace as the domestic insurers. The scope and momentum of the domestic insurers is reported in several places in this report. In the peer review section, foreign insurers frequently placed companies such as China Life, Ping An, China Pacific Insurance Company (CPIC) and People s Insurance Company of China (PICC) at the top of the list. It is clear that the large domestic insurers represent a major competitive threat to the foreign entrants. Foreign life insurers pointed out that the joint venture structure required following the opening of the Chinese market is therefore unnecessary, given the dominant market position of the domestic insurers. Strict regulatory environment Foreign insurers expressed the view that the global financial crisis will have an impact on future regulations. Indeed, most participants predicted that it would be significant or very significant. They believe that the new insurance law which comes into effect on 1 October 2009 is a major step in this direction. One foreign life insurer commented that in the first five months of 2009 there had been 750 China Insurance Regulatory Commission (CIRC) notices and 650 of these had required written responses. PricewaterhouseCoopers 4

8 Tighter controls are anticipated across a broad platform. Solvency, risk management, corporate governance, consumer protection, product supervision and pricing are some of the areas expected to attract attention. The foreign insurers are focused on expanding their geographic presence in China. However, all 29 participants agreed that the license granting process had slowed down. There was a general consensus that no new licenses had been granted since October A relaxation is anticipated in late Eighteen of the 20 foreign life participants would like to see the 50% ownership restriction abolished. Thirteen of whom believe it will take 10 years or more for this to happen. Bank entry into insurance On top of the strong domestic competitors and the strict regulatory environment, the foreign insurers are about to face a new and unpredictable force the entrance of several large and mid-sized banks into the market. Foreign insurers are taking this threat very seriously. Nine foreign life insurance companies assigned a score of 8/10 or greater while six of the nine property and casualty insurers assigned a score of 7/10 or 8/10. Ten foreign life insurers in this survey indicated that currently 50% or more of their new premiums originate in the bancassurance channel. While in the first instance they anticipate that the banks will manufacture and distribute more commodity-like insurance products, the future of this critical channel remains unpredictable. This report also documents some of the concerns associated with other channels such as agents, brokers and direct channels such as telemarketing and the internet. Human resources Human resources remain a key concern to the foreign insurers. Although staff turnover rates declined in 2009, the expectation is that they will pick up as the economy rebounds. There is still a skill shortage in some functional areas. Sales personnel and sales managers remain in high demand. Several participants also highlighted the prevalence of staff poaching by both domestic and foreign insurers. One foreign life insurer even revealed that staff costs in Shanghai are on a par with Hong Kong and Singapore. There continues to be a very high turnover rate for life insurance agents. Termination rates are positioned typically in the 20% to 40% range. PricewaterhouseCoopers 5

9 However, one foreign life insurer engaged in a detailed review of its agent network, revealed that it expects to terminate 70% of its agents in Another suggested it planned to recruit 10,000 new agents in Future growth Despite these challenges, the foreign insurers anticipate solid growth. They predict increased demand for a range of products. Among opportunities highlighted by life insurers were universal life, participating products, guaranteed annuity products and health insurance with critical illness products being particularly important. Group medical insurance and personal accident is also expected to develop. On the property and casualty side, growth is expected for small and medium-sized enterprise (SME) coverage, travel, health, bonds and export credit, renewable energy, cargo and marine and national catastrophic insurance. Premium growth projections are lower in 2009 when compared to 2008 with about half of the life insurers predict growth of 20% or less in These projections increased for 2012 when only five companies anticipate annual premium growth below 20%. The foreign property and casualty insurers predict around 15% for By 2012 these growth rates also increase, three companies predict 20%, two predict 30% and another 40%. PricewaterhouseCoopers 6

10 Main findings The following findings are based on interviews with 29 foreign insurance companies 2 who are considered to provide a valid representation of the 45 or more foreign insurance companies, currently active in the Chinese market. 2 A foreign insurance company refers to one based outside mainland China. 3 Big Four banks refer to Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China. Drivers of change The most influential driver of change in 2009 was identified by the participants as the domestic insurers. This factor moved ahead of regulatory changes were in turn followed by the economic cycle. The scope and dynamism of the major domestic life and property and casualty insurers surfaced in a number of places in this report. The decline in market share of the foreign insurers provides evidence of the increasing proficiency and competitiveness of the large domestic insurers. In 2009 existing foreign insurers as a driver of change dropped from 5 th place in 2008 to 14 th position. Pressing issues Although human resource issues continue to make demands on the foreign insurers, the most pressing issues in 2009 were premium growth and management of the ever increasing demands of the regulator. The foreign insurers are also becoming more conscious of cost reductions. This issue moved up five places in 2009 to 6 th position. Although the foreign property and casualty insurers expressed strong concern about domestic economic downturn, the life insurers felt it was a subject that became less important, dropping from 7 th position in 2008 to 16 th position in Bancassurance and changes in distribution The movement by the Big Four banks 3 and some mid-sized banks into the insurance field, implies an increasing uncertainty in the future configuration and weighting of the different distribution channels. Bancassurance remains a critical part of the foreign insurers distribution strategy. It is expected that the banks will initially offer less specialised, more generic products to their customer base. However, an area of uncertainty is the extent of the linkages between insurers and banks. Some shareholding ties already exist but this will develop and expand in the medium-term. Some of the participants contend that the increased participation of the banks will force the insurers to move toward more direct sales including telemarketing. As foreign property and casualty insurers have strong direct sales and agent and broker networks, they may be able to fend off the direct participation of the banks more effectively. PricewaterhouseCoopers 7

11 Human resources In previous reports, discussion centred on the restricted skill base and the high levels of staff turnover. The global financial crisis has changed the nature of the human resource challenge. Staff turnover has dropped in Twenty companies had turnover that fell below 20%, indicating less movement among foreign insurers employees who appear to be waiting out the current economic downturn. Some participants predicted an upswing in movement once the market becomes more predictable. Although turnover has declined, foreign insurers are using the opportunity to shed less productive employees. They still find it very difficult to recruit in some key areas. Sales employees remain in high demand. Other areas where recruitment is challenging included investment management, telemarketing, claims management, agency management and head office marketing. Although turnover has dropped salaries continue to rise. Nineteen of the participants indicated they will increase salaries in 2009 while two participants said they will decline. While bonuses are expected to be more modest in 2009, ten companies predicted that their 2009 bonuses would increase over Five companies said that they planned to reduce human resource costs in 2009 and three of these were property and casualty insurers. Only one participant had an unpaid leave programme in place. Product growth Foreign life insurers expected increased demand for a range of products. On the retail side this included, universal life, participating products, unit-linked products, guaranteed annuity products and health insurance with an emphasis on critical illness. Group medical insurance and personal accident insurance is also expected to grow. Property and casualty insurers foresee opportunities in the SME segment, travel insurance, health insurance and homeowner insurance. They also predict growth in financial lines such as bonds and export credit, renewable energy, cargo and marine and national catastrophe insurance. About half the participants believe that the global financial crisis has had an impact on the roll out of financial products. They believe that the CIRC has adopted a more conservative stance following the crisis. PricewaterhouseCoopers 8

12 Joint venture relationships When asked to reflect on their own joint venture relationship, foreign life insurers comments were rather muted. However, when participants were asked to comment on joint ventures at an industry level, they reviewed that many domestic joint venture partners would like to leave their relationships. A major concern focused on profitability. Many joint ventures have existed for seven years or more and participants suggested that domestic shareholders believed they would have become profitable at this stage. Agent management The majority of companies are reevaluating the effectiveness of their agent network. Termination rates for foreign life insurers were typically found to be in the 20% to 40% range but extended to 70%. Risk management The primary sources of fraud for the foreign insurers remains brokers and intermediaries (including agents) followed by policyholders. Market share On a national level, foreign life insurers had 4.7% market share in June They predict that this share will increase by Only one company believes that it will not be above 5%, eight companies think will be 8% or greater. The market share of the foreign property and casualty insurer in June 2009 was 1%. The participants anticipate that market share will reach 2% by More foreign entrants The current number of foreign insurers is around 50. This is expected to grow with the primary source of new entrants being Korea, Taiwan and Japan. More consolidations Over three quarters of respondents predict consolidations in the insurance sector. Commitment of foreign parents to the Chinese market The level of commitment remains strong. Nine of the 20 respondents assigned the maximum score of 10/10 and a further five companies assigned 9/10. These scores are only slightly below those expressed in The level of commitment by the foreign parents of the property and casualty companies is lower than the life companies. Nevertheless, both groups predict increased scores by PricewaterhouseCoopers 9

13 Distribution and sales concerns Concerns over the lack of sales expertise, mis-selling of some products and enforcement of distribution controls in different channels were some of the comments made by foreign insurers. The magnitude of concern differed depending on the channel being used. Present success and future importance The foreign life insurers recorded modest overall success in seven key markets: traditional savings insurance, investment-linked insurance, protection, health, personal accident, group life and group accident and health. Going forward, all of these markets were considered critically important. Twelve markets were examined by the foreign property and casualty insurers. They recorded success in product liability and cargo and transportation but in general, scores were disappointing. Looking forward to 2012, only one of the 12 markets was assigned a low score by the participants homeowner insurance. Cargo and transportation and auto insurance recorded the highest scores for Premium growth Half of the 20 foreign life insurers predict 20% or below in premium growth in Two companies predicted above 200%. These growth rates increase in 2012 when only five companies predicted 20% or below. Growth targets in 2009 were lower than those in Annual growth predictions for the foreign property and casualty insurers are much lower than the foreign life insurers. All are placed around 15% for By 2012, three companies expect to grow by 20%, two at 30% and another at 40%. Once again 2009 predictions are below those made in Future regulations The foreign insurers believe that the global financial crisis will affect the scope and nature of regulations laid down by the CIRC. Areas highlighted by foreign life insurers to have tighter control include risk management, solvency, consumer protection, corporate governance, bancassurance, telemarketing and universal life. The foreign property and casualty insurers also cited risk management and solvency. In addition they suggested claims management, pricing, compliance, product supervision and corporate management including mergers and acquisitions. Shanghai as a world financial centre The finance market needs to be further deregulated before this can take place. Convertibility of the Renminbi will be a key step in the process. PricewaterhouseCoopers 10

14 Peer ranking summary A summary of peer ranking (top three positions) of all insurance companies is shown in the table below. Peer rankings are based on the opinions of CEOs and senior executives that participated in this survey. Please refer to page 76 for full details. First Second Third Life insurance Traditional savings Ping An Life China Life AIA Life insurance Investment-linked CITIC Prudential Ping An Life Skandia-BSAM Life insurance Protection Ping An Life China Life AIA Health insurance Ping An Life China Life AIA Personal accident insurance AIA/AIU Ping An Life China Life Auto insurance Ping An CPIC PICC Homeowner insurance Ping An PICC CPIC Enterprise property insurance PICC Ping An CPIC Cargo, transportation insurance Tokio Marine & Nichido Fire AIG General Mitsui Sumitomo Group life China Life Ping An Life Generali Group accident and health Ping An Life China Life CPIC Customer relationships Ping An Life China Life AIA/AIU Geographic expansion Aviva-COFCO CITIC Prudential Manulife-Sinochem Innovation Ping An Life AIA/AIU Chubb Distribution effectiveness Ping An Life AIA/AIU Aviva-COFCO Marketing strategies Ping An Life Aviva-COFCO AIA/AIU Technically competent staff AIA/AIU Ping An Life Manulife-Sinochem Brand awareness Ping An Life China Life AIA/AIU Corporate social responsibility Ping An Life China Life PICC PricewaterhouseCoopers 11

15 Market environment PricewaterhouseCoopers 12

16 Background profile Projected growth in employment by Under CIRC regulations a branch of a foreign insurance company can only conduct business within the territory of the province, autonomous region or municipality where the branch is located. However a foreign insurance company may also apply to establish a central sub-branch or sub-branch, operating office or marketing service office. Number of employees The 20 life companies currently employ 14,354 employees and this is anticipated to increase by 31.4% to 18,858 by This estimate includes three companies that were unable to project their employment totals to To provide an estimate for these companies, the anticipated increase of 31.4% for the 17 reporting companies was applied. Four of these life companies anticipate an increase of 100% or greater by Six companies expect employment to grow by less than 20% over the next three years. As in the 2008 report, five companies reported that they have 1,000 or more employees. The 2009 projections are much lower than those forecasted in In 2007, 19 life companies expected a base of 14,370 people to grow by 69% to 24,281 in The 20 companies in this survey as noted above expect to employ 18,858 by Nine property and casualty companies employed 2,200 people in In 2008, the total was 3,480. This change is explained by the reclassification of Bank of China Insurance as a domestic company. In last year s report, Bank of China Insurance indicated it had 1,700 employees. The same nine companies project an increase of just 6.7% over the next three years. This figure includes an estimate for one company. As a result, they expect to employ 2,347 people by One company anticipates a significant reduction in staff by Only one company expects to exceed 100% employment growth by 2012 and this will be from a small base in In 2008 five companies expected growth above 100%. In the 2008 report, nine property and casualty companies expected to employ 6,580 people by 2 an 89% increase. These changes suggest that all the foreign insurers have dramatically lowered their employment growth for the next three years. Non-PRC employees Nine property and casualty companies employ 149 non-prc employees and expect this to remain the same until Five companies predict slight decreases in their non- PRC employment. One company runs against this trend and plans to increase its non-prc total by 33% over the next three years. Number of branches and subbranches and offices 4 Twenty foreign life companies reported 119 branches in In 2008 a slightly different group reported 115 branches. PricewaterhouseCoopers 13

17 Twenty companies expect an increase of 65% to 196 branches by This suggests that the freeze on new license approvals discussed later in this report has in effect postponed the foreign life insurers distribution network by one year. Nine property and casualty companies had 17 branches in 2009 and expected this number to more than double to 40 by In 2008 they operated 33 branches and expected the number to expand to 75 branches by The removal of Bank of China Insurance from the foreign group this year had a major impact on this number. The group of 20 life companies in the survey reported that they had 496 sub-branches and service centres in 2009 and projected this number to grow to 1,080 by 2012 a 118% increase from 2008 where participants predicted a 101% increase to 705 branches by This optimism suggests that life companies are intent on expanding their distribution networks, perhaps as a result of the banks market entry into insurance. Number of agents The 20 life companies had 103,377 agents in 2009 and expect a 125% increase to 232,720 agents by This includes estimates for four companies based on the group average. In 2008, 19 life insurance companies recorded 108,250 agents, growing by 107% to 224,500 in Four companies employed more than 10,000 agents in By 2012, eight companies plan to employ more than 10,000 agents. Eight property and casualty companies recorded 623 agents in 2009 and plan to more than double this number to 1,359 by This compares to 632 agents in 2008 increasing to 1,730 by Once again the reclassification of Bank of China Insurance affects this total. Number of individual policyholders It was estimated that the 20 foreign life insurers had 6.19 million policies in This included estimates for three companies that were unable to provide data for Fourteen companies provided projections for 2012 and this increase of 74% was applied to all 20 companies data from As a result the number of policyholders is expected to reach million by Five property and casualty companies provided data on policyholders. The mix of respondents differs from those in In 2009 five companies had 101,800 policyholders increasing to 199,000 by PricewaterhouseCoopers 14

18 Number of corporate policyholders Fourteen foreign life insurers indicated that they had 16,898 corporate policyholders in This is expected to grow by 140% to 40,637 by This is a much higher number than the figures provided in the 2008 report. Seven foreign property and casualty companies indicated they had 56,150 corporate policyholders increasing to 67,700 by Assets under management Seventeen foreign life insurers provided estimates for their assets under management at the end of 2009 and The seventeen companies estimate RMB billion growing to RMB billion by Four foreign property and casualty companies projected that the 2009 total of RMB 2.5 billion will almost double to RMB 4.9 billion by Gross premium income Eighteen foreign life companies indicated that gross premium income will grow by 96.1% from RMB 36.3 billion in 2012 to RMB 71.2 billion in Although the mix of companies is different from 2008, the projected increase of 96% in 2012 is much lower than the 2008 to 2011 projection of 173%. All participating foreign property and casualty companies provided estimates for 2012 totalling RMB 3.2 billion, that is, below the 2008 estimate which included Bank of China Insurance. It is expected to grow by 95.4% to RMB 6.3 billion by Again this number is below the 2011 projection and is influenced by the change in the mix of respondents. PricewaterhouseCoopers 15

19 Market share of foreign life and property and casualty companies in China between 2004 and The adjacent chart illustrates how market share for the foreign life companies expanded in 2005 to reach almost 9%. Although the market share increased in 2007 to 8% after dropping to below 6% in 2006 it has suffered a decline since. At the time when the survey was conducted, market share for foreign life companies was 4.7%. Similarly, the situation remains very challenging for the foreign property and casualty companies as market share has hovered around 1.2% for the past five years. Market share of foreign life companies Market share % 2004 Source: CIRC 8.9% % % % 4.7% The first six months of 2009 suggest it may decline further and even fall below the 2004 figure. Market share of property and casualty companies % 1.3% 1.2% 1.2% 1.2% Market share % Source: CIRC PricewaterhouseCoopers 16

20 Life insurance Traditional savings In previous reports the traditional savings segment of the life insurance market has been viewed as intensively competitive. This changed in 2009 when eight companies indicated that competition was either moderate or light. Over half the respondents, 65%, said they had made either no change or only minor change to their strategy over the last year. Intensive Moderate Light None Competition 10% 25% 15% 10% 10% 15% 5% 5% 5% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 20 companies Shading represents greater than 20% Life insurance Investment-linked product Although investment-linked products were considered to be virtually dormant in the first half of 2009, 70% of participants viewed this market as intensively competitive. The 20 respondents were split evenly between 10 companies that had made no change or minor change and 10 companies that had made significant or fundamental change. Intensive Moderate Light None Competition 25% 5% 25% 15% 5% 5% Response No Minor change change 10% 5% 5% Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 20 companies Shading represents greater than 20% Life insurance Protection Life insurance in the context of a narrowly defined protection function, continues to be a difficult sell for the foreign life companies. Only 20% consider the market to be intensively competitive, 55% indicated it is moderately competitive and 25% said it presented only light competition. None of the 20 respondents have made fundamental changes to strategy over the last year. Intensive Moderate Light None Competition 5% 10% 5% 5% 40% 10% 5% 5% 15% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 20 companies Number adds to 101 because of rounding Shading represents greater than 20% PricewaterhouseCoopers 17

21 Health insurance Around half of the respondents classified the health insurance market as intensively competitive. Of those were two companies that have made fundamental changes to their strategies. One company envisaged opportunity for high-end medical coverage. Intensive Moderate Light None Competition 6% 17% 22% 6% 11% 17% 6% 6% 6% 6% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 18 companies Shading represents greater than 20% Personal accident insurance Personal accident is one of the least competitive market segments for the foreign insurers. Almost one third of respondents classified the competition as light. Most companies have made either no change or minor change to their strategies. Competition has declined in this segment when compared to the results from last year s survey. Intensive Moderate Light None Competition 18% 6% 24% 12% 6% 6% 29% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 17 companies Shading represents greater than 20% PricewaterhouseCoopers 18

22 Group life Sixty percent of respondents view group life as intensively competitive while the remaining 40% view it as moderate or light. As in the 2008 report, the majority of respondents have made little change to their approach to this segment. Intensive Moderate Light None Competition 20% 20% 20% 26% 7% 7% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 15 companies Shading represents greater than 20% Group accident and health Around 80% view group accident and health to be intensively competitive although nine companies have made minor or no change to strategy. This intensively competitive assessment was also evident in the 2008 report. Intensive Moderate Light None Competition 14% 29% 36% 7% 7% 7% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 14 companies Shading represents greater than 20% Homeowner insurance Only five property and casualty companies answered this question and four companies viewed the segment as moderately competitive. Several participants mentioned that homeowner insurance remains a relatively unattractive segment because Chinese consumers perceive little benefit in this type of protection. Intensive Moderate Light None Competition Response No Minor change change 20% 20% 40% 20% Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 5 companies Shading represents greater than 20% PricewaterhouseCoopers 19

23 Auto insurance As in the 2008 report, three companies viewed the segment as intensively competitive. Foreign insurers remain restricted in this segment. They continue to be denied the right to offer mandatory third party liability (MTPL) insurance. Several participants commented that the market is highly competitive and doubted whether many of the active domestic companies were generating a profit in this segment. Intensive Moderate Light None Competition Response No Minor change change 33% 67% Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 3 companies Shading represents greater than 20% Enterprise property insurance Similar to the 2008 report, enterprise property was viewed by all eight respondents as a highly competitive market. Intensive Moderate 37% 37% 26% Light None Competition Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 8 companies Shading represents greater than 20% Cargo, transportation insurance Cargo and transportation insurance is also believed to be highly competitive. The global economic downturn has had a major impact on exports from China and this has increased competition. Intensive Moderate Light None Competition 14% 43% 29% 14% Response No Minor change change Significant Fundamental change in operational and organisational change strategy and positioning Note: Based on responses from 7 companies Shading represents greater than 20% PricewaterhouseCoopers 20

24 Q Can you identify three major concerns of the Chinese insurance business at present? Unequal treatment The foreign insurers do not believe that they are treated on an equal basis as the domestic insurers. Areas of concern include branch licensing and new product initiatives. Sustainability Concern was expressed over the industry s pursuit of growth with little attention paid to sustainability. Controls on product development The foreign insurers believe they do not possess the flexibility to structure creative products. Talent development The high level of staff poaching between insurers means that it is difficult to retain qualified staff. Personnel costs are equal to those found in Singapore and Hong Kong and reflect aggressive hiring practices for both internal staff and members of the sales force. Several companies mentioned that team leaders were often recruited first and then used to attract former colleagues to their new employer. Telemarketing The credibility of telemarketing is at risk as more players enter this channel. Some domestic and foreign insurers, for example, were accused by participants of aggressive, unqualified solicitation. Shareholder expectations Some joint venture life insurers believe that their domestic shareholder s expectations on profitability are unrealistic. A counter argument to this is that the foreign insurers may have initially presented overly optimistic projections in relation to the time frame to reach profitability. Several foreign participants stressed the importance of maintaining an ongoing dialogue with their domestic shareholders on the challenges of the insurance marketplace. Pricing Many of the participants believe that costs are not fully priced into products. A high percentage of the foreign property and casualty companies raised this concern in relation to their domestic counterparts. Agent quality Overall the quality of agents is a concern. At the lower end of the market where agents are less professional, this is viewed as a major problem. New insurance law While many of the proposed components of the new law were viewed positively, the foreign insurers are concerned about incontestability. They noted that they will be given 30 days to discover any fraud. After 31 days they are unable to act. PricewaterhouseCoopers 21

25 Q What are the most important changes taking place in China s financial market? Profitability focus Several companies mentioned a shift in emphasis away from sales towards profitability. Pending bank entry On both the life and property and casualty sides of the business, foreign banks are anxiously waiting for regulatory approval to gain entry into the market. It is unclear how this change will affect the distribution of the foreign insurers products. are continuing to upgrade the calibre of their workforce. Distribution management Foreign insurers are reviewing their agency channels and also the impact of more direct channels such as telemarketing. New product development Several foreign property and casualty insurers noted positive changes in the health insurance market. Increased regulation The CIRC have increased their regulatory oversight as a result of the global financial crisis and a number of foreign insurers feel overburdened by the magnitude of current regulation. One European insurer noted that in the past if there were problems the CIRC took no mandatory action. This has changed with the CIRC becoming much more proactive. New insurance law Although full details of the new insurance law remain undefined, it is clear that the new law represents a major overhaul of the insurance environment. There will be new requirements on policy provisions, product structuring, risk management, solvency, policyholder protection and sales practices. Talent management The economic slowdown has affected the rate of staff turnover. However, there is still high demand for specific skills and foreign insurers Increasing pressure to be more transparent A foreign property and casualty insurers suggested that the CIRC was pressing companies to become more transparent, particularly in relation to how commission was being paid. Increased levels of competition Foreign life insurers feel that competition has intensified from both large and mid-sized domestic insurance companies. Increased emphasis on protection CIRC is placing greater importance on the promotion of insurance for protection rather than for investment purposes. Micro-insurance Although the government is encouraging micro-insurance, foreign insurers feel that significant regulatory changes are required before this segment can begin to develop. PricewaterhouseCoopers 22

26 Q What are the major drivers of change in the Chinese insurance business? In the past two years the most important driver of change was identified as regulatory changes. This changed in 2009 with the existing domestic insurers moving from third position in 2008 to the top spot in This is a dramatic change and verifies the recognition acknowledged in other parts of this report that the domestic insurers are formidable competitors for the foreign insurers. Regulation remains a key determinant of the pace and direction of change. The foreign insurers believe they are restrained by 200 regulation. They argue that it restricts their ability to enter different markets and introduce innovative products. The economic cycle was included in the question for the first time in 2009 was positioned in third place. Another new factor in 2009, bank entry into insurance was placed fourth. Existing foreign insurers which was placed in the top five in both 2007 and 2008, dropped to fourteenth position in The global financial crisis as a driver of change was in seventh position. 150 Score Existing domestic insurers Regulatory changes Economic cycle Bank entry into insurance Capital Markets Capital requirements Global financial crisis New domestic entrants Economies of scale Globalisation New foreign entrants Mergers/Consolidation Technology Existing foreign insurers Funding constraints Convergence Other Based on responses from 29 companies in and 2007 responses are pro-rated PricewaterhouseCoopers 23

27 Q What are the most pressing issues you face? Can you rate them 1 to 5? The foreign insurers indicated that the most pressing issue is now improving premium growth followed by increasing regulatory demands. Similar to 2008, recruiting and training competent staff and the distribution network were the two most critical issues. They occupied third and fourth position in the survey. Profit performance which placed third in 2008 dropped to fifth position in In the adjacent chart the axis is based on a scale of the respondents rating of 1 to 5, where 5 is most pressing. The central spine of the chart is 0 which reflects a score of 3 on the 1 to 5 scale. As a result 2.0 represents 5 and -2.0 represents 1 on the scale. Improving premium growth Increasing regulatory demands Recruiting/Training competent staff Recruiting/Training in the distribution channels Profit performance (margin) Cost reduction Building a customer base Government intervention^ Retaining existing customers Quality of insurance books (lapse risk) Appropriate staff incentive schemes Risk management Managing customers expectations China economic downturn Targeting the previously uninsured market Brand awareness Global economic downturn Regulated solvency requirements Market volatility Transparency of fees & commissions Fraud levels Guaranteed returns in products Natural disasters^ Data security Impact on rates of global catastrophes Internet security risks Business continuation Currency related issues IFRS Litigator risk Consolidation of financial industry High dependence on new technology Globalisation Availability of reinsurance^ Epidemics (H1N1)^ AIDS Increasingly pressing issue Based on responses from 29 companies in 2009 both Life and P&C ^New issues in 2008 PricewaterhouseCoopers 24

28 Pressing issues: Differences between life companies and property and casualty companies The most pressing issue for the 20 life companies interviewed was recruiting and training in the distribution channels. In contrast, property and casualty companies shared the top spot with improving premium growth and increasing regulatory demands. Cost reductions as a pressing issue moved up from eleventh position in 2008 to 6 th position in China s economic downturn slipped from 7 th position in 2008 to 16 th position for life companies although it generated a much higher score for the property and casualty companies. Similarly the global economic downturn recorded a much higher score for the property and casualty companies. Epidemics including H1N1 recorded a very low score for both types of insurers. Recruiting/Training in the distribution channels Improving premium growth Increasing regulatory demands Profit performance (margin) Recruiting/Training competent staff Cost reduction Government intervention Quality of insurance books (lapse risk) Building a customer base Retaining existing customers Appropriate staff incentive schemes Risk management Regulated solvency requirements Managing customers expectations Market volatility China economic downturn Brand awareness Guaranteed returns in products Targeting the previously uninsured market Global economic downturn Fraud levels Transparency of fees & commissions Life companies P&C companies IFRS Natural disasters Impact on rates of global catastrophes Data security Business continuation Currency related issues Internet security risks Dependence on new technology Litigator risk Consolidation of financial industry Epidemics (H1N1) Globalisation Availability of reinsurance AIDS Increasingly pressing issue Based on responses from 20 Life and 9 P&C companies PricewaterhouseCoopers 25

29 Q From the perspective of your head office, has the agenda for your insurance company s China operation changed following the global financial crisis? Paradoxically, the global financial crisis appears to have reaffirmed the mandate for the foreign insurers in China. Eighteen companies noted that it had a positive influence on their China mandate. The consensus among this group was that China remained underdeveloped and underserved and in the future offered strong growth. Quoting an Asian insurer, China has confidence, the economic cycle may be shorter here but there are lots of opportunities in Western China. A large European insurer noted, we are very focused on China and now it is even more important. Several companies also suggested there had been a negative impact as a result of the crisis. One European property and casualty insurer said the CIRC had slowed things down and for example, was now only granting one or two branches each year. Another European life insurer noted that they were being subjected to tougher risk and cost controls by their parent. Neutral Negative 18 companies said positively Based on responses from 29 companies Positively PricewaterhouseCoopers 26

30 Q What changes do you see in distribution channels (i.e. moving towards or away from their use)? Commenting on movements in the distribution channels, bancassurance continues to play a critical role. As banks become more directly involved, some of the foreign insurers envisage movement to more direct sales including telemarketing. Indeed, telemarketing received unanimous support as a channel that insurers would use. Agents received the most pronounced away from movement. Although over 60% of respondents predicted movement towards the internet as a channel, additional comments suggested this channel had only limited application at present and continued to experience slow pick-up. Affinity schemes were seen as a marketing opportunity for some participants. A European property and casualty insurer had successfully used affinity relationships to expand its client base. The distribution network of the post office which has received permission to distribute insurance products was also seen as an important channel at the lower end of the market. Bancassurance Direct sales (promotional) Telemarketing Insurance agents (tied) Independent financial advisors Brokers Internet Affinity schemes Post office Towards Away from No Change No response Based on responses from 29 companies PricewaterhouseCoopers 27

31 Distribution of new premiums by channel Participants were asked to estimate the generation of new premiums for their company across the 10 channels. The two channels that are most pronounced for life insurers are bancassurance and agents. Property and casualty insurers have a strong presence with direct sales, agents and brokers. Bancassurance Direct sales Telemarketing Insurance agents (tied) Independent Financial Advisors Brokers Internet Affinity schemes Post office Other Life 1 35% 15% 20% 30% Life 2 15% 5% 80% Life 3 50% 4% 1% 35% 10% Life 4 50% 10% 15% 15% 10% Life 5 35% 5% 60% 0% Life 6 50% 1% 1% 25% 15% 8% Life 7 10% 90% Life 8 34% 66% Life 9 50% 40% 10% Life 10 50% 50% Life 11 50% 35% 10% 3% 3% Life 12 1% 98% 1% Life 13 50% 25% 25% Life 14 60% 30% 10% Life 15 30% 70% Life 16 85% 15% Life 17 40% 40% 15% 5% 5% Life 18 50% 20% 30% P&C 1 10% 5% 40% 40% 5% P&C 2 40% 10% 50% P&C 3 5% 15% 20% 60% P&C 4 80% 5% 15% P&C 5 20% 55% 5% 20% P&C 6 75% 5% 20% P&C 7 65% 15% 20% P&C 8 10% 20% 70% Based on responses from 26 companies PricewaterhouseCoopers 28