Fulfilling eastern promise

Chinese tea set

Firms hoping to break into the lucrative Chinese market will have to prove that they can add value and sustainability - as well as satisfy the country's thirst for knowledge, says Veronica Cowan.

'Be not afraid of growing slowly, be afraid only of standing still' states an ancient Chinese proverb, but insurers and brokers trying to break into the Chinese market may feel they have got stuck at a red light.

While UK firms have made some inroads, foreign insurers still only account for 6% of market. So how is the Chinese insurance market measuring up for foreign players this year?

Sally Yim, assistant vice president and analyst with Moody's Investors' Service, comments: "The Chinese insurance market is highly competitive, as domestic players continue to have a dominant share with their strong brand recognition and long history. Most foreign insurers are still in the 'start-up' phase of their operations and, because of the vast geography of China, it takes time and money to build a substantial operation. Nonetheless, foreign insurers are keen to expand in China as it offers good growth opportunity outside their home markets, which may already be mature."

Fair point, but the fast-flowing headlines of the past few years, trumpeting the winning of formal licenses and establishment of wholly-owned subsidiaries, certainly seem to have dried up of late. Does this mean everyone interested in setting up a Chinese base has already done so, or is it more indicative of second thoughts about the prospects and potential, with economic constraints perhaps forcing foreign players to focus their efforts towards 'home'?


Long-term strategic relationships

Lockton International claims to still see China as one of the key 'lands of opportunity' for brokers and insurers, but Gregory McCoy, its managing director for Greater China, agrees things have gone quiet. He believes this is because everyone has had to re-assess their original strategies in light of experience. The practice of business built on long-term relationships" or 'guanxi'" is much stronger in China than almost any other country in the world, he says, and international brokers and insurers looking for early-mover advantage sought to tap into the market via agency relationships with individuals and personal or political relationships with large clients. But this model has proven both unsustainable and unprofitable.

On top of that, it is somewhat at odds with the Chinese government and China Insurance Regulatory Commission's desire and intention to increase the level of professionalism and sophistication in insurance-buying strategies.

China granted its first-ever foreign insurance broking license to Marsh, back in January 2007. It has since been ranked number one of all international brokers" based on invoiced revenue in 2008, according to the CIRC, with growth of 43% over the previous year. "We were on top for two years running," notes a spokeswoman.

Mr McCoy points out that Lockton was awarded the second wholly-owned foreign enterprise license in October 2008: "Our observation of other brokers' strategies and activities" prior to gaining our licence" made it clear that, in line with our private ownership, we must be 100% independent rather than part of a joint venture. It also made clear that we needed to invest the financial and intellectual capacity necessary to deliver the professional service resources CIRC is seeking, to assist the modernisation of the insurance industry in China." He claims Lockton's investment remains long term and that development of the China market is one of its key short- and long-term global opportunities.

Underpinning these developments has been the World Trade Organization's framework, under which the Chinese government lowered entry barriers in line with its commitment to open up its insurance industry to foreign investors. This allowed foreign insurers to establish wholly-owned brokerages of large scale commercial risk five years after accession, wholly-owned subsidiaries in non-life insurance within two years and 50% foreign-owned joint-venture life assurance firms on accession.

Foreign investors must open a representative office, operate it for two years and satisfy other criteria, such as having at least 30 years in insurance business and assets of no less than $5bn (£3.1bn) in the year prior to application.

Naturally, this tends to rule out smaller and newly established foreign players, notes Andrew McGinty, a partner at law firm Lovells, who reports that foreign insurers and brokers are finding it difficult to restructure, by mergers and acquisitions, an existing operation. "Most of the serious players are already in China, and are now looking for opportunities and buy-outs. But the approvals process is slow, and legislative and regulatory change is incremental. We have come to the end of the WTO road, so it's a question of hacking slowly on, on a case-by-case basis."

Trying to hack through the regulatory jungle is only one challenge. Martin Rumsey, a consultant with PA Consulting, cites distribution as a particularly difficult area in itself, because it is licensed city-by-city or province-by-province, meaning insurers cannot obtain China-wide licences.

This necessitates developing relations with regulators in each province, and partnering with a Chinese company, which may not be an insurance specialist. "This is not unique to China, and not necessarily a bad thing provided the partner allows the insurer to run the company," says Mr Rumsey.

However, foreign insurers forming joint ventures with local partners "may encounter conflicts as these, often non-insurance, partners may have different expectations of how the company is run," adds Ms Yim.


BRIC targets

Research by Accenture, published earlier this year, revealed that most insurers plan to grow outside their home market in the following 12 months" with 48% pinpointing the BRIC countries (Brazil, Russia, India and China) for investment over the next three years. And China was cited the most frequently (Postonline, 10 June 2009).

Sharon Khor, head of Accenture's insurance practice in China and based in Beijing, reports that there has been a slowdown in applications in the past 12 months, albeit "in the last three-to-six months interest is back" because of insurers' saturated home markets, making the move to Asia a natural progression.

Those going east include HSBC Insurance (Asia) which received final approval from the CIRC in June to launch a jointly held insurance company with Beijing-based National Trust to form HSBC Life Insurance Co. It will open for business in the third quarter of 2009, on a 50% holding basis. While commercial property insurer FM Global, which specialises in partnerships with clients to support risk management, has had a representative office in China since the end of 2008 and confirms it will be applying for a licence in 2010.

Ken Davey, managing director for Europe, the Middle East and Africa, and Asia-Pacific, says: "China is interested in letting companies in that will add value and sustainability. Our business model is based on the basic premise that you can prevent losses, which appeals to the Chinese."

And this notwithstanding the fact risk management is more common in established and sophisticated, as opposed to emerging, markets. In his view, Chinese firms are quick to do things that help and are pragmatic. As FM is a global business, it is inevitably affected by the recession and there has been a slowdown in China, agrees Mr Davey, "but it is not significant for us as we have taken a medium-to-long-term view".

In August, China Daily reported that the country's insurance capital investments hit Y2.45tr in the first seven months of this year, citing figures from the regulator, CIRC, which also reported a slowdown in the growth rate of premium income during the same period. But Ms Khor observes that, although overall premium growth slowed in the first half of 2009, commercial projects are not heavily affected because of a stimulus package put in place by the Chinese government on infrastructure.

One of the problems in trying to grow premium income is that, although China is large and populous, there are huge regional disparities between the relative wealth of the major cities and the rural areas. Mr Rumsey points out that the middle-class market remains a very small sector, while the rural market is unlikely to be huge, although it has the obvious prospect of growth.

Bryan Joseph, a partner in the actuarial and insurance management division at Pricewaterhouse Coopers, adds that there are "many different aspects to the conundrum presented by China". He cautions that it is not just another country, and brokers and underwriters that approach this market thinking they can establish themselves easily are likely to fail.

"The Chinese wish to run companies themselves and to develop world-class institutions. This means they have a thirst for knowledge and business partners" and not to be run by a multinational corporation. Companies establishing themselves in China should pay heed to this wish, as building a successful business will take time and requires a commitment to become a local business and not an adjunct of a multinational one," says Mr Joseph.

This thirst for knowledge has also been observed by Tamsin Mills, director of accreditation services at the Chartered Insurance Institute, who sees great potential in China: "We have had a relationship with the insurance college in China for 19 years, and two universities in China run our examinations," she comments. "In China, education is valued but the challenge is how to educate the managers of companies."

Indeed, because training is a potential area of expansion, the CII has looked at the possibilities of establishing a presence in China, but no decision has yet been taken. It commissioned a report" as yet unpublished" which notes that China's economy has continued to expand, accelerating to 7.9% in the second quarter of 2009, "supported by easy monetary policy, including a massive surge in credit, and a big fiscal boost, which may be worth as much as 15% of gross domestic product over two years".

Another important, but largely untapped, market for UK firms is reinsurance. The pre-existing preferential treatment for domestic reinsurers has been removed from the law, and revised provisions only require insurance companies to abide by CIRC regulations when ceding insurance business, and to select reinsurers prudently.

Mr McCoy comments that legislative changes may dramatically increase reinsurance opportunities for foreign insurers and reinsurers, although Mr McGinty does not think elimination of the mandatory preference means foreign reinsurance companies will receive equal treatment to their Chinese counterparts. This is primarily because the Insurance Company Solvency Reporting Principles No.15" effective 1 January 2010" creates new incentives for insurance companies to favour domestic reinsurers over foreign competitors.


Closer cooperation

According to Ms Yim, there have not been any specific rules on further opening up the reinsurance market: "We believe the state-owned China Reinsurance Group will continue to dominate the market, but we also expect closer cooperation among foreign insurers, the regulator and domestic insurers on transfer of knowledge and setting of market discipline."

Chuo Mitsui Trust International, a Japanese institutional investment firm, recently prepared a report about prospects in China. This tested the theory that, due to active financial expenditure, China will see an early recovery from the steep fall in demand worldwide.

Daisuke Ishihara, a portfolio analyst, pointed to the "imaginative Y4tr plan" that has been China's response to the global economic crisis and said companies have indicated that demand, which had dried up between November 2008 and January 2009, began to pick up in February. The shift was particularly clear in construction machinery, due to a resurgent demand in Sichuan, and also in production equipment for consumer electronics for the domestic market. Some companies in these sectors saw a recovery that slightly exceeded forecasts.

According to the Bank of China's Purchasing Managers' Index, monthly figures for car sales also continue to show an improvement, but this will not help foreign motor insurers because, as Ms Khor notes, while it is easier for general insurers to set up wholly-owned companies, they are not allowed to insure cars. The regulatory hurdles are greater in the life assurance sector, she reports, which is not surprising given the mis-selling cases in China" both by domestic and foreign insurers. But, as Ms Khor adds, the largest insurer, China Life, has 500 000 agents" and policing that would be a challenge in any country.

As to the way forward, she says: "The market is huge with a lot of areas for insurers, but they need a different strategy as they are all playing in the same place. There is little differentiation as they all target similar areas. They don't need to compete head-on and they are not opening up new products."

So while the Chinese market was never going to be easy, as Confucius said: "Better a diamond with a flaw than a pebble without."

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