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A Strategy for Opening the Chinese Insurance Industry
Section II: Analytical Papers
Analytical Papers
The following analytical papers examine the challenge of
liberalizing China’s insurance market from five perspectives: commercial,
legal, policy, political and public relations, and enforcement/implementation.
The analyses reach a common conclusion: China needs to open its insurance market
and should actively prepare for the challenges of accomplishing this opening.
Commercial Analysis
The commercial analysis highlights the real impacts of the
foreign participation on the domestic insurance industry. The analysis finds
that:
- The Chinese insurance industry is an infant industry.
- The market still lacks market competition.
- The market is growing very quickly.
- Insurance market demand is bigger than market supply.
- Foreign companies hold only one percent of the national
insurance market.
- The market has enormous potential. The number of insurance
companies is expected to double in the next three to five years; insurance
sector income is expected to continue to grow at an average annual rate of
about 30 percent; and premiums are expected to at least double.
The commercial analysis also demonstrates that the overall
impact of foreign company participation in the domestic insurance industry is
positive:
- The entry of foreign companies has not influenced domestic
companies’ market share.
- The entry of foreign companies has improved the competitive
level of the Chinese insurance market.
- Domestic companies have learned new sales and management
techniques from the foreign companies.
- Consumers have benefited from foreign competition because
domestic companies have had to improve the quality products and services in
order to compete with the foreign companies.
Legal Analysis
The legal analysis offers a framework for understanding China’s
current insurance law and regulations. Specifically, the legal analysis focuses
on the following issues:
- Licensing
- Ownership
- Insurance brokers
- Geographic restriction
- Products and service scopes
- Investment opportunities
Policy Analysis
The policy analysis finds that China’s decision-making
process lacks transparency, especially in terms of licensing and helping foreign
insurance companies find joint ventures partners. Improving the transparency
level of the insurance industry’s regulatory oversight will be critical to the
liberalization process. Policy making and licensing decisions should be based on
the market rather than on non-market factors, such as political concerns and
relationships.
China's central government is engaged in a vigorous
bureaucratic effort to accelerate the reform of the social security system and
create a system of health care and pensions appropriate for a market economy.
However, current reforms are incomplete because they still do not acknowledge
the large contribution commercial insurance can make. If China wants its economy
to become a market-based economy, it should encourage the development of a
commercial insurance industry.
The analysis also finds that market restrictions on foreign
companies should be loosened immediately. Rules confining insurers to invest
premiums in government bonds and bank deposits should be lifted, and foreign
insurance brokers should be allowed to obtain licenses. At the same time,
however, the domestic industry should continue to receive some protection in
order to give it room to develop in the face of new foreign competitors.
Restrictions on the scope of products that foreign insurers may sell should be
loosened only gradually. Geographical restrictions, city-by-city controls, and
ownership restrictions should also be loosened slowly.
Political and Public Relations Analysis
Opening up the Chinese insurance industry is a complex
challenge that involves many interest groups including government agencies, the
domestic insurance industry, state-owned enterprises, and domestic consumer
groups. At the same time, insurance reform will be key to China’s overall
economic development since state-owned enterprises are no longer able to supply
health and retirement insurance.
Implementation Analysis
Once China decides to open its insurance industry and adopts
new policies, CIRC will need to develop a comprehensive enforcement scheme. To
be successful, this will need to be a cooperative effort that involves a number
of government agencies, as well as industry associations. Without cooperation,
illegal and corrupt activities are likely to plague the liberalization effort.
A Strategy for Opening China’s Insurance Industry
Section II: Analytical Papers
Commercial
Analysis
Although Chinese insurance companies fear that their
development will be stunted by increased foreign competition, China has agreed
to open the industry to greater competition as part of its WTO accession
agreements. Even if these agreements had not been made, however, China would
benefit from increased foreign participation in the sector. In fact, China’s
experience to date supports the view that competition, both domestic and
foreign, will strengthen the industry during this phase of rapid development.
China’s insurance industry is developing
very quickly. It is estimated that, from 1980 to 1998, China’s insurance
market grew 39.6 percent annually. There are several reasons for this growth:
·
For more than 40 years, commercial insurance was
virtually unavailable in China. The country represents the world's largest
untapped insurance market.
·
In recent years, overall economic growth in China
has been strong. China’s economy was growing at more than 10 percent per year
before the Asian financial crisis. The growth rate in 1998 was eight percent,
and this year it will be more than seven percent.
·
Competition between domestic insurers has
accelerated growth. Since 1996, several domestic insurance companies, such as
Tian An and Tai Kang, have been established. The three major insurance companies
in Beijing are now facing a big challenge from Tai Kang Life Insurance Co.
·
Competition between domestic companies has
increased marketing efforts which, in turn, has increased consumer awareness of
and demand for insurance products.
·
The entry of foreign insurers into the market has
pushed domestic companies to improve their services. Insurance buyers are
receiving better service, which encourages consumers to buy insurance.
·
Social welfare reforms have also spurred insurance
sales. As reform of the social security system has deepened, life insurance as a
portion of total insurance in China increased from 0.2 percent in 1982 to 41.75
percent in 1996; by the end of 1997, it had leapt to 55.5 percent. Recently,
China’s government decided to implement further social services reforms that
cover pensions, health insurance, unemployment insurance and birth insurance.
All of these reforms will accelerate the demand for commercial insurance and
spur the industry’s development.
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Case
1: Shanghai Study
Shanghai is the birthplace
of the Chinese domestic insurance industry. During the 30s and 40s, some 232
insurance companies had offices in the city; it was the insurance capital not
only of China, but also of the Far East. Shanghai was also the first city in
China to open its insurance sector to foreign investors since China began
re-opening the industry in the 1990s. The People’s Bank of China granted a
license to AIA in 1992, and this was followed by licenses to Japan’s Tokyo
Marine and Fire Insurance and to Winterthur. Total premium income of the
Shanghai market has increased dramatically. Life insurance premiums grew from
RMB 560 million in 1992 to RMB 5.7 billion in 1997. Property and casualty
insurance was RMB 3.1 billion in 1997. PICC grew in Shanghai over the
1992-1995 period at an average annual rate of 27.3 percent, CPIC at 119.8
percent, and Pingan at 101.7 percent. Foreign investors have been keen to
enter the Shanghai market where the economic growth rate has been above 13
percent per year for five years and per capita income has on average grown
over 23 percent per year. Now Shanghai hopes to speed the development of a
multi-level insurance company system to make the city the reinsurance center
of China.
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B. Market
Participants
During the 1990s,
the Chinese insurance market was characterized as a “tripartite
confrontation” between three big state owned insurance companies—the
People’s Insurance Company of China, the China Pacific Insurance Company Ltd.,
and the Pingan Insurance Company of China. In 1997, the premium income of these
three companies accounted for 96.56 percent of total premiums. PICC's premiums
alone accounted for roughly 70 percent of the market. China Pacific accounted
for 11.9 percent (11.6 percent of the property insurance market and 12 percent
of the life insurance market), and Pingan accounted for 15.8 percent (eight
percent of the property insurance market and 22 percent of the life insurance
market).
The rapid growth of
these three companies is not expected to change any time soon:
·
People’s Insurance (Life) Co. Ltd. posted a premium income of
30.33 billion yuan in the first half of 1999, and China Life seized 77 percent
of China’s life insurance market in 1998.
·
China Pacific Insurance Co. increased its premium income 13.07
percent in the first half of 1999 to reach 7.018 billion yuan.
·
Pingan Insurance Co. maintained growth momentum in the first half
this year, with its insurance premiums rising 48 percent to 10.95 billion yuan.
Despite these
phenomenal growth rates, the three insurance companies fell far short of meeting
the needs of China’s vast insurance market, and this has opened the door for
other domestic insurance companies to develop. Indeed, small domestic companies
are growing very quickly and are expected to create competition for the three
large carriers in the years to come.
Any major changes
in market share in the coming years are expected to be driven by competition
among domestic companies. While AIA captured about 45 percent of the Shanghai
life insurance market when it first entered the Chinese market in the early
1990s, a recent study shows that domestic companies have successfully improved
their competitive abilities. Domestic companies have forced AIA back to a modest
level of market share (see Case 2 below).
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Case
2. Foreign company market share remains small in Shanghai
One
of the great misconceptions concerning the impact of foreign entry into the
Shanghai insurance market is that foreign companies have taken over a big part
of the market. The reality is that, while the Shanghai market grew about 50
percent during 1996-97, foreign companies’ market share dropped from 20
percent to about seven percent (see Exhibit 6). AIA grew rapidly when it first
established itself in Shanghai, but domestic competitors responded
aggressively and have forced AIA back to a modest estimated 14 percent share
of the Shanghai life insurance market (only 1.5 percent of the national
market). Of the 20,000 life agents active in Shanghai, only about 10 percent
are AIA agents. Some 4,000 former AIA agents have joined domestic companies.
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Chinese insurance
companies have further strengthened their financial position by aggressively
investing in other markets. Currently, PICC has more than 80 overseas branches
in Hong Kong, Britain, the United States, Macao, and other countries and
regions, and this overseas growth has paralleled the growth of competition
within the PRC. In Hong Kong, for example, the market share of mainland Chinese
companies rose from five percent in 1991 to more than 25 percent in 1997. The
fact that mainland companies are succeeding in Hong Kong, one of the world’s
most competitive markets, is a testament to these companies ability to thrive in
highly competitive environments.
If China opens up
its insurance market, the real impacts of foreign participation, such as how
many Chinese insurance companies will be hurt and to what extent, are unclear
now. However, one result is clear: The entry of foreign insurance companies into
China will bring heavy pressure on Chinese companies and force them to improve
their management and operational efficiency.
C. The Benefits of Foreign
Competition for Domestic Companies
China’s insurance
industry is still in its developmental, infant stages. Only 13 domestic
companies and 11 foreign insurance companies currently operate in China (well
over 5,000 companies sell insurance in the United States). Foreign competition
can help ensure that China’s industry develops in the most efficient way
possible.
Indeed, foreign
insurance companies bring efficient management systems and advanced sales
techniques to China’s insurance industry, and domestic insurers and industry
regulators have in many cases learned and copied these techniques in order to
increase their own companies’ efficiency and profitability. For example:
·
Following the lead of foreign companies, Shanghai regulators now
require insurance agents to pass an exam.
Among the first batch of test-takers, 43 percent were employees of domestic
insurance companies, compared with 90.4 percent of the third batch. A better
trained and more professional sales force will better service Shanghai insurance
buyers.
·
It was AIA that introduced China to the door-to-door sales method,
a practice commonly used in international insurance sales for well over 100
years. In Shanghai, AIA was the first to use door-to-door canvassing.
D. The Benefits
of Foreign Competition for Chinese Consumers
Because China ’s
economy has been almost entirely a peasant farming economy for thousands of
years, the concept of long-term investment is unknown to the vast majority of
Chinese. Insurance doesn’t
readily make sense to most Chinese who believe that the young generation should
support their aging parents. To the extent that the Chinese consider outside
assistance at all, this assistance has been provided for more than 30 years as
part of China’s planned economy. People are still accustomed to enjoying free
medical and retirement pensions under the old social welfare system.
Thus, most Chinese
consider insurance to be unnecessary if they’ve even considered it at all. But
the entry of foreign insurance companies into the Chinese market has begun to
change this perception. Indeed, many people in Shanghai recognized the need for
insurance only when AIA began door-to-door canvassing. Increased competition in
China’s insurance sector will help further the Chinese people’s knowledge of
insurance as more and more companies compete for consumers’ attention. Foreign
firms have also benefited consumers by introducing new products, more coverage,
and more information about their insurance policies—all at increasingly
competitive rates.
E. Both Domestic
Insurers and Consumers Benefit from “Goodwill” Programs
China also benefits
from the “goodwill” programs that foreign insurance companies provide.
Because foreign companies must have an established office in China for two years
prior to being eligible to apply for a license and begin selling insurance,
these companies have plenty of time to establish such programs.
The programs cost
millions of dollars each year and would not be possible without foreign
assistance. They include professional training, educational support, seminar
organization, and financial sponsorship of research, and they will help improve
both domestic and foreign companies’ services and ultimately benefit
consumers. Some programs offer direct training to consumers.
A few examples of goodwill programs are:
·
The Chubb School of Insurance. This school was established
by the Chubb Group of Insurance Companies in cooperation with the Shanghai
University of Finance and Economics in 1995. Located at the university, the
school offers specialized training and courses of one- or two-week duration to
Chinese insurance industry regulators and officials, insurance agents and
brokers, and the local staffs of Chubb, as well as domestic insurance companies.
Subjects include risk management, marketing, management of specialized areas of
underwriting, claims, catastrophe management, and solvency. Chubb provided the
insurance industry experts who conducted the initial courses for the Shanghai
University staff that now teach the courses.
·
Young Leaders Development Program. The American
International Assurance Company Limited Foundation launched this program in
1996. Each year, 24 first-year students are selected from the six universities
in Hong Kong and a series of systematic leadership skills training workshops are
organized for them.
·
MetLife Scholarship Fund. Metropolitan Life Insurance Co.
started a $100,000 scholarship fund at China’s Central Finance and Economic
University in October 1999. The goal of the fund is to encourage outstanding
teachers and top-performing students at the university. MetLife and the
university also intend to explore further opportunities for training insurance
teachers and professionals.
F.
Market Potential
As discussed in the background section, the
Chinese insurance market has great potential. Per capita premium spending is far
below the worldwide average, and premiums as a percent of GNP are still less
than the average for developing countries.
According to Professor Wei Runquan, an executive member
of the China Insurance Society, China’s GDP reached 5,770 billion yuan in
1995, with total saving deposits approaching 3,000 billion yuan. If calculated
in terms of internationally accepted norms for the contribution the insurance
makes to the national economy, the potential scale for China’s 1995 insurance
market would have hovered between 320-360 billion yuan, or eight times higher
than actual premiums that year. Wei also notes that the average per-capita
outlays for life insurance coverage in Japan and the United States stand at
US$3,800 and US$1,000 respectively. China’s per capita outlays are just
US$1.3. Professor Wei contends that national economic growth, maturation of the
market economic system, the enhanced awareness of 1.2 billion people of the need
for insurance, and government policies that encourage development of the
insurance sector provide powerful guarantees for the continued expansion of the
insurance sector.
As
previously noted, total Chinese premiums from 1981 to 1994 (13 years) grew at a
compound rate of 39 percent from $200 million to $6 billion. CIRC experts
predict that, if premiums continue to grow at a relatively high compound rate of
30 percent a year, life and property casualty insurance premiums could total
$63.6 billion by 2003.
If growth is a more conservative 10 percent annually, the total by 2003 would
still be $14.1 billion. If growth were to take off at 50 percent, the projection
becomes $230.6 billion.
Examination
of specific rural areas’ market potential provides further evidence of
China’s overall insurance market potential. Zhangzhou and the Yellow River
Delta are representative of current economic development levels in China since
both have largely rural, agrarian economies. The forecasts in both areas show
that insurance premiums will at least double within the next three to five
years.
· The
Yellow River Delta is located in Shandong Province and is one of the three
biggest delta areas in China. Although economic development in this area has
been slow to date, it is expected to develop very quickly in the next century
because of its rich natural resources. The insurance industry in this region has
developed very rapidly since 1992. Its insurance density has doubled in the last
five years. (Exhibit 8 shows the insurance premiums in this area, and exhibit 9
shows the market potential.)
G. Conclusion
Although China’s
insurance industry is still in its infancy, the overall impact of foreign
company participation in the industry has been positive. Although foreign
companies’ market share remains small, they have improved the competitiveness
of the Chinese insurance market. Domestic companies have learned from the
foreign companies’ management and sales techniques, and they have benefited
from the “goodwill” programs offered by foreign firms. Chinese insurance
consumers have also benefited. They now have better opportunities to learn about
and purchase insurance policies.
But because demand
still far outstrips supply, China would benefit still more if it were to further
open its markets to foreign competition. Since domestic companies currently
control the market, they are well positioned to improve in the face of foreign
competition even if China were to open its insurance market now. Chinese
policy-makers should re-think the current policy of “gradual, paced”
liberalization of the domestic insurance industry.
[13] "China in our
hands," available from http://web.lexis-nexis.com, Internet, accessed
June 1999.
[14] "Impact of
foreign insurance company entry into the Chinese market," Amcham
Insurance Industry Forum, May 1998.
[15] "Why
countries are hesitant to open markets," Huang zhen, Economic
Review, China, May 1998.
[16] "Impact of
foreign insurance company entry into the Chinese market," AmCham
Insurance Industry Forum, May 1998.
[17] Ibid 5.
[18] News available
from http://www.chubb.com/china, Internet, accessed 20 Dec. 1998.
[19] News available
from http://www.aia.com.cn, Internet, accessed May 1999.
[20] News available
from http://www.lexis-nexis.com/universe/docu, Internet, accessed November
1999.
[21] "
Insurance reform and development in China," PICC, 1997.
[22] Forecast by CIRC’s
Policy Study Division.
[23] "China's
insurance market: current situation and its trend," Qiu sanfa,
Yan xudong and Zhou erchang, Insurance Research, 1999.
[24] "China's
insurance market: current situation and its trend," Qiu sanfa,
Yan xudong and Zhou erchang, Insurance Research, 1999.
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