A Strategy for Opening the Chinese Insurance Industry
Section II: Analytical Papers

Political and Public Relations Analysis

A. Political Importance

1. International Level  

As the world’s largest developing and socialist country, China is the most likely challenger to western countries, especially the United States. By opening its markets and joining the WTO, China can send a strong political message that it is willing to play the trade game by international rules. Moreover, China’s entry into the WTO will help persuade the world that China’s rise is an opportunity rather than a danger and will help strengthen foreign businesses’ confidence in making investments in China. WTO membership will also promote China’s link to the world economy, which in turn will help create a more stable environment for China's economic development, thereby helping China realize the strategic goal of sustained, rapid and healthy development of its national economy. 

Opening the insurance sector, one of, if not the most, sensitive sector of the Chinese economy, will help China build international political credibility.

2.  Domestic Level

Because the insurance industry is linked to overall welfare reforms, opening this sector to foreign participation is extremely sensitive domestically. Any discussion of insurance liberalization quickly leads to issues of political and social stability, as well as the question of the communist party’s leadership. If the government fails to offer well-functioning insurance programs that cover the majority of the population, its political authority will be questioned, if not challenged. Only a well-functioning insurance system will ensure the success of China’s market reforms; the provision of pensions and health insurance outside of the SOEs will be key to encouraging people to be willing  change jobs and find jobs in the private sectors.

B. Political and Public Relations 

Other than domestic and foreign insurance companies, the groups that have the largest stake in the liberalization of China’s insurance industry are government agencies, domestic industries, and consumer groups.

1. Government Agency Interests 

Several government agencies are concerned with the issue of liberalizing the Chinese insurance industry. They are: the National People’s Congress, the State Council, the Ministry of Foreign Trade & Economic Cooperation (MOFTEC), the Ministry of Health, the Ministry of Labor and Social Security, and local governments.

a) The National People’s Congress and the State Council

The National People’s Congress and the State Council have decision-making authorities. Their concerns focus on whether commercial insurance will ensure a stable Chinese society, which is crucial to the political stability of the country. 

Historically, China’s central government has been divided into two groups. One group represents Northern China, especially Beijing, and cares about political power. The other group represents Southern China, especially Shanghai, and cares about commercial interests. It is not surprising then that Shanghai’s foreign insurance business is more advanced than Beijing’s. Moreover, it is clear that the CIRC will confront these differences as it tries to raise insurance liberalization issues with the National People’s Congress and the State Council. The central government is likely to continue to prefer opening only the southern part of China to foreign competition, not the North. CIRC will need to prepare media and legislative strategies if it is to advance recommendations for the liberalization of geographical restrictions.
    

b) The Ministry of Foreign Trade & Economic Cooperation (MOFTEC)

• MOFTEC’s interests include:

• China’s WTO accession,

• Economic and trade relations with foreign countries,

• China’s role in the world trading system,

• China’s economic interests, and

• China’s role in APEC countries.

MOFTEC is CIRC’s most important ally for a number of reasons:

• MOFTEC represents CIRC in international negotiations both at the bilateral and multilateral levels, and MOFTEC has already tried to put insurance sector liberalizations on a number of negotiating agendas. Strong relations with MOFTEC will be particularly important since China is expected to join the WTO prior to the conclusion of the next round of service negotiations (which include insurance).

• After China joins the WTO, CIRC will face implementation issues and will likely have to defend against disputes with foreign insurers. MOFTEC will still be China’s chief international negotiator.

• MOFTEC can help CIRC monitor relations with other Chinese government agencies. It also has power to address issues directly with the State Council.

c) Ministry of Health, Ministry of Labor and Social Security

Good relations between these two agencies and CIRC will be crucial in any attempt to bring commercial insurance into China's overall social welfare reforms. These two agencies will lose some of their power as part of the reforms and, accordingly, may act as an impediment to change.

d) Local governments

As early as 1979, China started to devolve government authority from central to local levels. Now, local governments have more power to determine the structure of the local economy. They issue licenses, coordinate local business development, resolve business disputes and even participate in the national policymaking process. Moreover, local governments have more power now to resist central government policy changes they don’t agree with. While pressure from the central government can force them to accept policy changes, local governments will still control the rate at which changes, such as insurance policy changes, are made. Accordingly, CIRC will need to build and monitor its relationships with local governments. It will also need good relations with the State Council in order to ensure that the central government will step in when local governments act to impede insurance industry reforms.

2. Domestic Industry Interests

Nearly all Chinese industries are involved in the issue of liberalizing the insurance industry.

a) State owned enterprises

Virtually all of the Chinese SOEs care about insurance issues. They employ a large proportion of the urban work force, and they play a large role in providing social security and health services. They are all eager to decrease the burden of supplying pension, health care, and unemployment benefits. SOEs can help CIRC in making the case to the central government that China’s insurance industry needs to be liberalized. Cooperation with SOEs will also be crucial in implementing any new insurance policies.

b) Banking groups

The issue of how to increase insurance companies' investment opportunities is directly related to China's banking problem; banking problems will hamper any effort to allow insurance companies greater investment options.  If Chinese banks remain weak, they will not be able to provide the basic infrastructure needed to support an insurance industry. Accordingly, CIRC should mobilize political support to push through a set of reforms in the banking sector. The CIRC should also work together with banking groups to develop possible solutions, specifically options that will help the insurance industry.

c) Securities industry

On October 26, 1999, China's financial authorities announced a long-awaited measure that gave domestic insurance companies more options for investing their premium income. Because CIRC plans to call for similar measures for foreign companies in the near future, it will need to establish stable relations with the securities industry.

d) Domestic insurance industry

The domestic industry’s major interests include:

• Maintaining their market share,

• Avoiding competition with foreign firms, and

• Increasing their growth opportunities.

The domestic insurance industry will oppose any attempt to open the Chinese insurance sector to foreign competition. CIRC will need to find a way to maintain good relations with the domestic industry while at the same time advocating for more foreign participation in the market.

3. Consumer Group Interests

Before developing a strategy for opening up the insurance market, the CIRC should clearly understand the positions of domestic insurance consumer groups. First, the CIRC should acknowledge that most Chinese still lack insurance awareness, and it should develop basic education materials concerning how insurance works. Because consumers from different social classes, age groups and work situations have different needs, the CIRC will need to develop multiple education approaches in order to build a broad base of consumer support.

a)      Consumers from different social classes

Consumers from urban areas will have more knowledge of insurance than their rural counterparts.

b)  Consumers from different age groups

It has been nearly twenty years since China began its rapid economic development, and the young generation is now accustomed to making decisions based on economic factors. The older generation, however, is having a harder time adapting to this new way of life.

c) Consumers from different work situations

Employees at private or foreign companies have more motivation to buy insurance than employees who have what they perceive to be stable, long-term employment at an SOE.

A Strategy for Opening the Chinese Insurance Industry
Section II: Analytical Papers

Analysis of Implementation Issues

Implementing and enforcing its international obligations on insurance (as well as other sectoral liberalization policies) will be a serious challenge for China in the coming years.  In order to ensure success, CIRC will need to develop a comprehensive enforcement scheme that draws on the coordinated efforts of administrative, legislative, and private enforcement bodies. Currently, however, such cooperation is lacking in China.

A.     Institutional Barriers

1. Administrative Enforcement Mechanism 

When CIRC was established in 1998, it became China’s first insurance regulatory body, and supervision and regulation of the industry were transferred from the People’s Bank of China to CIRC. The establishment of CIRC indicates that China recognizes the special challenges involved in regulating the insurance industry. However, effective enforcement of central government policies will still be difficult because local insurance regulatory agencies have not yet been established. Additionally, there is a serious shortage of insurance regulators.

2. Private Enforcement 

By the end of 1997, 19 provincial insurance associations had been set up in China. As self-regulating organizations, these associations can play an important role in normalizing business activities in the insurance market. However, a national insurance organization has not yet been established. Such a national organization could help provincial associations develop their professional knowledge and help CIRC build links with industry leaders.

3. Policy and Law Measures 

The promulgation of laws and regulations relating to the liberalization of China’s insurance sector will face opposition from both the domestic industry and factions within the central government. In order to head off these opposition forces, CIRC will have to take the offensive within political circles. A white paper on insurance liberalization should be circulated as a first step.

B.     Market Disorder 

Corruption and illegal activities are common in China’s insurance market. Underwriters have offered inordinately high commissions to agents and excessively high returns to policy buyers in order to gain a larger market share. The CIRC closed down the offices of HongKong-based Jardine Insurance Brokers Ltd,, which was operating in the Chinese market without a license in 1999.  After China joins the WTO, one of CIRC’s crucial tasks will be to seriously investigate and deal appropriately with all kinds of illegal and anti-competitive practices.

A Strategy for Opening China’s Insurance Industry
Section III: Strategy Papers 

STRATEGY PAPERS

Key Recommendations

A.     Policy Changes  

China’s current "gradual, paced" liberalization policy needs to be revised. CIRC should submit a proposal for a new policy to the State Council and push the central government to issue a new policy for liberalizing the insurance sector as soon as possible. The new policy should be based on market rather than political factors. 

Additionally, CIRC should 1) continue to expand its reform of the health insurance system by speeding up China’s transition to a commercially provided health insurance system and encouraging individuals to buy life insurance, and 2) develop a nationwide campaign to convince individuals to purchase commercial pension insurance. 

Chinese regulators should promote the use of market and financial methods rather than administrative orders to regulate the insurance industry.
   

B.     Legal Changes 

In order to prepare China for its imminent entry into the WTO, CIRC should draft regulations for foreign insurance firms operating in China and submit these to the State Council for approval in 2000. The key recommendations may include: 

Recommendations for changes to the Insurance Law

C.     Implementation 

In order to ensure that any new regulatory policies and laws are fully implemented, a comprehensive enforcement scheme will need to be established. 

·    CIRC should establish administrative enforcement mechanisms as soon as possible at both national and local levels, with local regulatory agencies reporting directly to CIRC. The enforcement mechanisms should protect fair competition, reduce monopolies, and promote the competitiveness of the domestic insurance industry. To be successful, there will need to be cooperation between administrative, legislative and private sector officials. 

·    CIRC should increase the transparency of its regulatory functions in order to encourage new entrants into the insurance market. Policy statements should be readily available to all interested parties. 

·    CIRC should encourage the development of private sector enforcement mechanisms by calling for the establishment of a national insurance association.

·    CIRC should take action to improve the quality of insurance professionals. CIRC should issue qualification requirements for insurance professionals and use foreign insurers’ good-will programs to promote the development of insurance education.

D.    International level  

At the international level, CIRC should focus on the following: 

·    CIRC should encourage cooperation between foreign and domestic companies. Foreign insurance companies have a long history of growth and advanced management ideologies. CIRC should encourage domestic firms to strengthen their cooperative ties to these companies. 

·    When engaging in bilateral or multilateral negotiations, CIRC should encourage MOFTEC to use the flexibility built into the GATS principles in developing its negotiating position. China has already made adequate insurance concessions in the context of its bilateral negotiation with the United States; it should consider further liberalization very carefully. 

·    CIRC should prepare itself for the new round of WTO negotiations on services. If China joins the WTO this year, it will need to be prepared for this round.

E.     Public Relations  

CIRC will need good relations with all relevant interest groups if it is to succeed in persuading the central government to adopt new liberalizing policies, let alone effectively enforce them. These interest groups include government agencies, domestic consumers and the domestic insurance industry.

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