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| A Strategy for Opening China’s Insurance
Industry Section II: Analytical Papers On June 30, 1995, the insurance
law was promulgated at the Fourteenth Session of the Standing Committee
of the Eighth National People's Congress of China. It became effective
on October 1, 1995. The law represents a major step forward in
transforming insurance regulation in China. It sets forth rules for: 1.
Insurance contracts, The law applies to all insurers, including those with foreign ownership and foreign branches. However, Article 148 includes a giant loophole stating that foreign joint ventures and branches will be governed by the law “or other laws and administrative regulations if they provide otherwise.”[1] Indeed,
the basic principle of current policies is still that the domestic
insurance industry should be opened to increased competition in a
“gradual, paced” manner. As outlined below, the government still
controls the industry very tightly. According to the
insurance law and Shanghai rules, foreign companies are only allowed to
obtain licenses and conduct business in China if they meet the following
formal criteria. A company must:
According to foreign companies, a number of other informal, non-transparent criteria have impeded their success in obtaining licenses. (For futher discussion of this problem, see the policy analysis section below). 113 companies from 11 countires have applied for insurance licenses in China and, while most meet the above criteria, very few have actually received licenses. Under the insurance
law, foreign non-life insurance companies are licensed as branches, and
foreign life insurance companies are allowed to set up 50-50 joint
ventures with Chinese firms. In practice, however, foreign companies
have little choice in joint venture partners. As highlighted by a 1998
China Insurance Institute study of 20 foreign insurance companies, China
only has three big insurance companies, and each company can participate
in only one joint venture. Although choosing a joint venture partner
company outside of the Chinese insurance industry can help a foreign
company obtain a license from CIRC, especially if the Chinese company is
recommended by the Chinese government, the foreign insurance investor is
likely to have difficulties cooperating with a Chinese company that has
no insurance experience. In short, the insurance law’s provisions on ownership have effectively limited the entry of foreign companies and hampered the development of the insurance market. CIRC needs to re-think its ownership policies in order to reduce their negative effects. The insurance law
includes two sections concerning the regulation and licensing of
insurance brokers and agents. These sections are: ·
Measures for the administration of
brokers, and In theory, the
insurance law was designed to protect consumers in their transactions
within the insurance industry. However, the law is silent on whether
foreigners may obtain broker licenses, and in the absence of a clear
law, Chinese officials have only allowed one foreign company to obtain
such a license. To make matters worse, a number of foreign companies
have gone ahead and engaged in broker activities calling themselves
“risk management consultants,” which fall wholly outside of
China’s regulatory structure. Accordingly, CIRC needs to re-think how to regulate these “risk management consultants.” Just giving them broker licenses and letting them operate businesses according to the rules may be the best option. Insuarnce brokers play a very important role in the insurance markets of many developed countries. Brokers’ business accounts for more than 50 percent of insurance business in the United States and 90 percent in the United Kingdom. Foreign insurers are
only permitted to operate in Shanghai and Guangzhong, and this
requirement limits the development of China's insurance market.
China’s economic development and reforms will continue to stimulate
demand for various kinds of insurance services all over the country.
Indeed, the case studies of Zhangzhou and the Yellow River Delta show
that the Chinese market for insurance holds great potential, even in
undeveloped areas. Because domestic insurers cannot meet market demand,
China should begin to allow more foreign pariticpation in the market.
The geographical restriction should be removed within a couple of years,
and city-by-city approvals should be replace with provincial-wide
licensing administrations. In the past, China’s economic reforms have begun in Shanghai, Guangzhou and other coastal cities and then spread out to cover all of China. Since the Shanghai insurance market has already been open for more than seven years, it is now time to allow more foreign participation in other parts of the country. Indeed, the impact of foreign insurance companies in Shanghai has been largely positive. China’s insurance
sector once emphasized business insurance such as marine, fire, and
casualty. Currently, China permits insurance companies to offer either
of two broad categories of insurance: property insurance or life (group
and individual) insurance. Foreign
property and casualty insurers may only do business with foreign
companies operating in China, not Chinese businesses or individuals.
Foreign life insurance companies may not engage in group insurance sales
to Chinese citizens. Recently, the growth of the middle
class, particularly in Shanghai and other booming coastal cities, has
raised demands for various kinds of insurance, such as personal property
insurance. China’s social reforms have also raised the demand for new
types of insurance. However, compared to other developed countries,
China lacks a variety of categories of insurance. If China were to loosen its
limitations on the scope of services foreigners are permitted to offer,
foreign companies would quickly expand the overall business scope of the
Chinese insurance market. However, if CIRC were to permit foreign
insurers to engage in group insurance sales, domestic companies might
suffer large, immediate losses. Therefore, the CIRC should consider
allowing foreign life and property insurance companies to create new
types of insurance in order to meet market demand. It should also loosen
the foreign limitation on group insurance—but it needs to do this
gradually in order to give domestic companies room to develop. Article 104 of the
Insurance Law limits both foreign and Chinese insurers to investments in
bank deposits and Chinese government bonds. The
application of funds at insurance company(sic) is limited to bank
deposits, trading of government and financial bonds and other forms of
fund application stipulated by the State Council. Currently,
most Chinese insurance companies invest more than 40 percent of their
funds in bank deposits and 30 percent in government bonds. Insurance
companies in other countries have many more investment opportunities. In
the United Kingdom, for example, insurers invest more than 28.7 percent
of their capital in the stock market, 21.9 percent in government bonds,
19.7 percent in real estate and 9.1 percent in company bonds. Clearly,
if an insurance company is limited to investment in bank deposits, it
will be unduly affected by the bank interest rate, and this is precisely
what has happened in China since 1996—interest rates have been cut
seven times and now stand at just 2.25 percent. On the other hand, if an
insurance company has more investment options, it can diversify its
risks. Domestic Chinese companies have long complained that investment
restrictions have threatened their businesses. In 1995, the American International Group (AIG) received the Chinese government’s approval to invest in Renminbi-denominated A-share markets in China. However, because the market was still unstable, immature, and somewhat speculative, AIG decided not to make such investments. Five years later, the Chinese stock market is more mature, and both domestic and foreign insurance companies are interested in making stock investments. In November 1999, CIRC began allowing Chinese insurance companies to invest in mutual funds and to buy into such funds on the secondary market. The next step is to consider how to widen the investment channels for foreign companies. B.
China’s International Obligations After 13 years of effort, Chinese accession to the WTO finally seems imminent. Accordingly, China’s insurance sector needs to be opened to foreign competition based on WTO rules and the bilateral agreements reached with individual countries. 1.
China-U.S. Agreement on WTO Accession China
formally requested accession to the General Agreement on Tariffs and
Trade (GATT) on July 11, 1986. On November 15, 1999, Washington and
Beijing finally reached bilateral agreement on the conditions for
China’s entry into the WTO.[2]
The agreement includes:
The General Agreement on Trade in Services (GATS) is the first ever set of multilateral, legally-enforceable rules covering international trade in services. It was negotiated in the Uruguay Round and signed in 1995. The agreement covers all internationally traded services, including insurance. China participated in all the negotiations on GATS and made specific commitments to provide access to its insurance market. The extended service negotiations were reopened in April 1997, and an improved set of commitments was agreed to in December 1997, however China did not participate in this negotiation. The key principles of the GATS are
the provision of market access, national treatment, and
most-favored-nation (MFN) status. The MFN clause requires that the
members of the WTO accord to “services and service suppliers of any
other member treatment no less favorable than that it accords to like
services and service suppliers of any other country.”[3]
Because not all of the WTO members were willing to apply the MFN
principle to all service sectors, Article II of the GATS permits members
to annex to the Agreement MFN exceptions in relation to specified
measures. MFN exceptions reflect that there is flexibility in the GATS
rules. Under the GATS, each member
country negotiated its own specific sectoral commitments, and these were
listed in country schedules appended to the Agreement. Article XVI of
the GATS also leaves room for flexibility. It states that limitations on
market access restrictions must be eliminated but allows for countries
to make reservations in their individual schedules. Article XVII contains the national
treatment provision of the Agreement. The approach here is very similar
to the market access approach, with national treatment applicable only
to scheduled sectors, and only then if reservations are not made to the
contrary. Another significant difference between national treatment in
GATT and GATS is that in the former, national treatment is established
as a principle to be applied across the board, whereas in the later,
national treatment is subject to negotiation—it is to be granted,
denied or qualified, depending on the sector and member concerned. The GATS also provides flexibility
in that, on many issues, it only sets forth principles, which are
subject to further in-depth negotiation. In GATS 1995, China made
commitments concerning its insurance sector, and China has agreed to
further insurance sector liberalizations in its bilateral WTO agreement
with the United States. China will need to live up to these commitments,
but it does not need to make any new commitments in the near future.
Indeed, as seen in the case studies below, other countries such as
Malaysia and Singapore that are already in the WTO and are more
developed than China have given weaker insurance commitments than China.
Malaysia has even backtracked on liberalization policies, lowering
rather than raising allowable foreign ownership of joint venture
projects.
As mentioned above, the GATS
offers flexibility in making commitments. Indeed, Malaysia is a member
of the WTO and its economy is more developed than China’s.
Nonetheless, Malaysia’s insurance industry is becoming more rather
than less closed. A Strategy for Opening China’s Insurance Industry
To date, the Chinese government has opened the country’s insurance sector only on a "gradual, paced" basis. It has been reluctant to allow foreign investors into the market except on a tightly controlled basis. The government will need to change its policies if the demand for insurance is to be met in the coming years. Indeed, as the government deepens its social welfare reforms, demand for insurance in China is expected to grow faster than supply—this despite the fact that the number of Chinese insurance companies is expected to double over the next three to five years. The entry of foreign companies can help meet market demand. Foreign companies will also keep pressure on domestic companies to offer a diverse set of quality insurance products. Moreover, China will have to open its insurance sector as part of its entry into the WTO. China’s policies for regulating the insurance sector need to be revised so that they are based on market rather than political factors.
Foreign insurance companies have complained that China’s licensing process is not transparent and that it is based on informal factors rather than on transparent laws and regulations. Under the current system, these companies believe that if they don’t demonstrate a long-term commitment to China by offering seminars, setting up research institutes or contributing to Chinese educational institutions, they will not obtain a license. The statistics seem to bear out their suspicions. To date, 113 foreign companies from 17 countries have applied, but although most of them met the criteria mentioned above, they have not been granted licenses. A 1998 China Insurance Institute study offers furthe evidence of the problem. Of the 20 foreign companies surveyed, most believed that the relations between their home country and China is the most important factor in determining whether or not licenses are granted (see Exhibit 10). Foreign companies also believe that a company’s status in its home country is an important factor, as well as a company’s contribution to the Chinese education system. The companies saw networking and making connections or "gaunxi" as key to foreign investors in all business sectors; they believe that non-market factors are more important than economic ones. In fact, the central government, specifically, the State Council, does wield a great deal of influence in licensing decisions, meaning that licensing often has to do with political or other issues rather than legal or market factors. As noted above, the China Insurance Institute has also studied and noted the problem of ownership for foreign firms. Foreigners simply have very few options in choosing joint venture partners (see Exhibit 11). Policy Reform: Bringing Commercial Insurance into China’s Social Welfare Framework Until recently, China’s health-care and pension insurance systems were based on central planning. Now China is reforming these systems, and the reforms will undoubtedly generate more business for insurers. If the CIRC can convince the central government to incorporate commercial insurance carriers into its reforms, the potential for Chinese insurance companies operating in China will skyrocket. In rural areas, around 64 percent of the Chinese population has no health insurance. Only 120 million farm and village enterprise employees are covered by Cooperative Medical System (CMS) plans, and CMS is not an effective or efficient system even though it has been in operation for several decades. CMS lacks qualified personnel, stable financial resources, an effective fund collecting mechanism, and essential health facilities and equipment. In China's urban areas, most workers are covered by the government or SOE health care systems. There are many problems associated with these systems. While GDP was growing at 9.8 percent (1978-1993), the combined spending for these programs grew at an annual rate of 11 percent between 1978 and 1992, and jumped to 13 percent between 1986-1993. The government's health care budget increased from 14 percent in 1978 to 30 percent in 1993. In recent years, the 11 percent enterprise set-aside for medical expenses has simply been insufficient, and enterprises profits have had to be used to supplement the shortfall. In some cases, the shortfalls have imposed large financial burdens on enterprises by limiting their resources for reinvestment in capital equipment and for other welfare services, such as pensions. In 1994, the State Council launched a pilot program in Jiujiang, Jiangxi Province, and Zhenjiang, Jiangsu Province with the goal of reducing health care subsidies in SOEs.[5] Three tiers of financing were introduced: Medical savings accounts (MSAs), out-of-pocket spending in the form of deductibles, and social risk pooling. MSAs provide incentives for consumers to be more cost-sensitive in their demand for health services; deductibles act to further increase cost sharing by patients; and social risk pooling aims to protect persons against catastrophic expenses. Employees and employers contribute one percent and 10 percent, respectively, of their total wage bill each year, and these contributions are divided between two accounts. Five percent goes to the social risk pool, and six percent goes to the individuals’ MSAs. The program was expanded in 1997 to over 60 other cities, and it is likely to become national policy, applicable to domestic and foreign-invested firms. However, primary data collected from these two mid-sized cities indicates that the program has some undesirable side effects. People are not allowed to choose which hospital they go to, not everyone has the same right to health care, and fraud is rampant because so many people are uninsured. The study also shows that, in 1994 in Zhenjiang and Jiujiang respectively, 13.7 and 15.9 percent of workers were not able to get their health expenditures reimbursed on time. Thus, although MSAs have become a widely proposed model for health care reform, they are not problem free. Moreover, relying on MSAs ignores the contribution that commercial providers can make. Instead of, or at least in addition to, further expanding MSA programs, the State Council should give the private sector greater lattitude to provide coverage. Indeed, the government’s economic reforms are stimulating consumer demand for better quality and an expanded range of health services, and provisions need to be made for the rapidly growing segment of the population that works for private companies. In 1978, 72 percent of new urban job entrants were assigned to the state sector, but by 1985, the proportion had fallen to 61 percent.[6] While foreign-invested private enterprises are required to provide health insurance benefits via the Foreign Enterprises Service Corp. (FESCO), other private enterprises most often offer no medical coverage at all. The following two examples illustrate the problem:
Premier Zhu Rongji announced in June 1999 that China was to set up a nationwide, integrated medical care program in three to five years. The time is ripe for CIRC to advocate liberalization of the domestic and foreign commercial medical insurance setors. The pension system for state employees was first established in the 1950s. It provided lifetime pensions upon retirement to women (age 50) and men (age 60) who had a record of at least 20 years employment. The weakness and limitations of this system are becoming apparent as China shifts towards a market-oriented economy. First, the enterprise-based system is already losing its ability to meet its present obligations. It will be no better able to meet its obligations in the coming years as declining mortality rates and the one-child family policy accelerate the aging of the population. The urban population aged 60 and above will account for over 10 percent of the urban total in 2000 and nearly 13 per cent in 2010. Second, the financial burden on enterprises with more retirees is growing disproportionately to those with relatively young workforces. Enterprises with older workforces are finding it increasingly difficult to compete with younger enterprises, and some have already been forced to reduce, delay, or completely cancel pension benefits to retirees. In Hainan province, for example, nearly 30 percent of SOEs were unable to fully meet pension obligations.[8] Third, employment in non-state sectors, where pension benefits are smaller or nonexistent, have been growing since the 1980s. The shares of urban employment in foreign-funded, private, and individual enterprises will only increase in the next century. There is no question that pension reform is needed and that the key objective of the reform should be to move away from a pay-as-you-go system toward a system with diversified financing. In the short run, the government will need to continue to make significant contributions in its role as pension guarantor. Indeed, the old economic system is failing and today’s elderly population has no ability to buy commercial insurance. In a long run, however, employees should pay for their pensions using commercial insurance; employers should no longer be the sole contributors to the pension fund.
[1] It is worth noting that the Chinese approach to law is quite different than that of the West. Whereas in the West laws are made to rule man, the Chinese see man ruling the law. [2] "Market access and protocol commitments," http// www.insidetrade.com/1999. "April 8, 1999 U.S. List of Chinese Commitments," http//www.insidetrade.com/, 1999. "Administration Fact Sheet on China Agreement," http//www.insidetrade.com/1999. [3] Article II:1, GATS Agreement, 1995. [4]" Discussing Malaysia’s insurance future," East Asian Executive Report; Washington, Jun 15, 1997; "WTO agreement: not perfect but good enough," National Underwriter; Chicago; Dec 22-Dec. 29, 1997. [5] "The health market," The China business review; Washington, November, 1998. [6] China State Statistical Bureau, 1996. [7] " Insurance Boom," a report form the Painan Insurance Co. 1998. [8] "Pension reform in China: preparing for the future" http://www.census.gov/ipc/www/ebsum, Feb.1999. | ||