Loss adjusters looking to break into the Chinese market still have to surmount significant obstacles, warns Simon Chick.
Everyone appreciates that China is huge, both geographically and by market size, and this fact must be constantly remembered when looking at its insurance market " foreign companies represent only a very small segment.
Yet a claim is still a claim, wherever it occurs, and requires the same skills, procedures and disciplines to resolve it properly and fairly. It is a process that must be managed, whether by in-house insurance company claims officers or independent adjusters. This holds as true for China as anywhere else. Therefore, the similarities between claims handling in China and the rest of the world outweigh the differences. So what makes China's insurance industry different?
Loss adjusting infancy
Perhaps most importantly, independent loss adjusting in China remains in its infancy despite insurance, both life and non-life, being an established industry. Following the creation of the People's Republic of China, the sole insurer was the People's Insurance Company of China. Although no longer enjoying that monopoly, the PICC remains a massive operation, with newer entrants Ping An and China Pacific Insurance Group also operating vast branch networks. While there are now many other insurers, including foreign entrants mainly from the US, Japan and Europe, the 'big three' are still the dominant non-life underwriters.
Originally, all insurers handled all claims in-house and, for a large proportion of claims, this remains the case. Foreign adjusters, including MYI, started to seek access to the Chinese market in the late 1990s" when the government initiated the extraordinary economic growth that has brought China to its position as the workshop of the world.
Apart from the challenge of finding or generating demand for a service that did not exist at the time, the regulatory framework was quite unclear" until the establishment of the China Insurance Regulatory Commission. This is the omnipresent and omnipotent regulator of all branches of the insurance industry, including loss adjusters. All loss adjusting companies must have a licence granted by the CIRC. To obtain a licence a company must comply with various requirements, including proof that the capital has been paid. There are different minimum capital requirements depending on whether a company intends to be single or multi-branch" but, in either case, the amount of capital is substantial.
It is illegal for any company to provide claims adjusting services in China if it is not in possession of the appropriate licence.
There are also significant periodic reporting requirements for licensed adjusters and compliance is carefully monitored. The CIRC has the power to suspend or cancel operating licences in case of breaches" and has used these powers, not only against loss adjusters but also underwriters and brokers, which are much larger enterprises.
The licences described are for adjusting companies whose shareholders are all Chinese citizens. The CIRC has so far issued more than 200 such licences, and it is fair to say the regulator has sought to nurture the fledgling industry. Even so, by no means all of those 200 companies are believed to be still trading. All adjusting companies face significant obstacles, especially extremely low fee levels.
For foreign companies the barriers to entry are undoubtedly higher, as the CIRC has operated a policy of slow but steady opening up of the insurance sector to foreign capital. For underwriters this has involved not only high minimum capital requirements, but also restrictions on permissible customers, lines of business and geographic areas of operation. For loss adjusters, the issue has not been geographic, but has focused on permissible levels of equity in licensed adjusting firms.
Apart from two companies which were 'grandfathered' from previous licences, the CIRC has not issued any licence to an adjusting company with either sole or majority foreign shareholding to date. Regulations have existed for many years governing the establishment by foreign firms of representative offices, and a number of adjusters pursued this option.
However such entities are strictly forbidden to trade in China and can only act as liaison offices. It is understood that, at some time in the future, foreign companies with such representative offices might" on application" be allowed to set up wholly owned adjusting companies in China, but there is no apparent timetable for this policy.
So the only approved route in for a foreign adjuster is for an existing licensed adjuster to apply to the CIRC for permission to increase its capital by issuing additional shares to a foreign adjusting company. Not only is the process quite protracted and complicated, but the maximum foreign shareholding remains below 25%.
Many careers have been built and destroyed on misconceptions based along the lines that 'if we can only secure 1% of the market' or 'if we can just sell one piece of our product to every member of the population then an enormous and successful business will be built in China'.
The brutal truth is that while there is a huge population" and breakneck growth that has only been slightly dented by the global economic downturn" this does not mean optimistic foreign businesses will come bearing the right product, presented in the right way and offered at the right price.
History actually suggests the opposite, and this holds good for insurance in general and loss adjusting in particular. As with Chinese culture as a whole, the roots of the system go very deep, and it is a foolish outsider who claims to know better.
So while close attention is being paid to foreign methods and there is a willingness to absorb any elements found to be useful, it is vital that foreign adjusters have an appropriate degree of humility in the face of an independent-minded market with its own well-established practices.
Simon Chick is managing director of MYI's Asia Pacific regional head office in China. MYI was the first foriegn loss adjusting company to receive approval to set up a represntative office in China.
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