With China becoming easier for European businesses to access, now is a great time to grab a slice of its fledgling insurance market, especially as the economy is predicted to remain more stable than our own, explains Mark Vrijmoed
Practically every industry, in every region of the world, has been hit by the current financial meltdown. Despite the gloomy atmosphere, an optimist would argue that in times of crisis arise unique opportunities. While China does face increasing challenges during the global downturn, there is strong evidence to suggest it will cope better than most and many industries will continue to grow. Insurance is one sector that has positive forecasts with insurance penetration currently far lower in China than in developed nations. This offers abundant opportunities for domestic and international insurance companies.
With the UK accounting for 11% of current worldwide premium income - second only to the US - it lies in a very strong position to benefit from the Chinese market. UK insurers, underwriters, reinsurers and brokers are perceived as global leaders and industry experts and their expertise would complement Chinese development.
A matter of timing
But why now? Recent natural disasters, such as the winter snow storms that hit southern and central China as well as the earthquake in the Sichuan province, have made people more aware of the benefits of insurance. Backed by the government's commitment to strengthen this sector in its 11th five-year plan (2006 to 2010), the government has confidently predicted that insurance premiums will reach RMB 1trn by 2010 and achieve a 4% penetration rate with RMB 5trn worth of total assets managed by 2010.
The Chinese Insurance Regulatory Commission has also stated that insurance premiums for the first three quarters of 2008 were RMB 793.96bn - double that of the same period last year. Furthermore, the following month they had increased to RMB 855.45bn, according to reports. A Pricewaterhouse Coopers report published in September last year also revealed that foreign insurers in China forecast sales and gross premium income to grow by 30% to 50% per year and to double within the next three years.
In addition, the report estimated that general insurance premiums against gross domestic product in China is 1% with an insurance penetration rate currently at 1.7% of GDP. Both are expected to grow significantly. In March 2008, there were 110 insurance companies in China - 43 of them foreign invested; by September, this latter figure had increased to 47 with an estimated share of 5% to 6% of the Chinese market, reflecting the growth potential.
However, the growth and development of China's insurance market has been hindered by several factors that set it apart from other markets. And these should be taken seriously by those companies wishing to make a successful entry. Problems that continue include corporate governance issues and commitments to the World Trade Organization. Chinese insurers generally have state ties that mean decision-making typically involves the central government, making it lengthy and reducing flexibility, innovation and implementation of new ideas. To counter this, some Chinese insurance companies and brokers have welcomed joint venture and other co-operation with foreign partners as this can improve efficiency and increase competitiveness.
China's entry into the WTO initially meant both Chinese and foreign insurers would compete on a level playing field. In practice, however, China has yet to make the necessary reforms to make this a reality. But there are signs it is moving in the right direction with the adoption of Qualified Domestic Institutional Investors, which allow insurers to invest in insurance funds overseas. More recently, allowances have been introduced for Chinese insurers to cross-sell their products. While such developments are accessed first by Chinese companies, it is expected that joint ventures and foreign firms operating in the country will be able to take advantage soon afterwards.
The CIRC chairman, Wu Dingfu, mentioned in December 2008 that Chinese insurers lagged international insurers in their infrastructure, IT systems, corporate governance and the provision of good quality customer services. Furthermore, they are also behind in effective sales and marketing techniques and payouts on insurance claims. It is in these areas that UK insurers can use their expertise, know-how and ideas to profit and, in the meantime, strengthen China's insurance market.
In the coming years, trends show that the potential of selling insurance via the internet should start to grow as more people become familiar with online payments and online shopping. The deregulation of the health and pension sectors and other areas that offer specialised insurance in niche markets, such as in the sporting and entertainment sector, are also worth monitoring. Although regulatory changes are slow in coming, keeping a close eye on the situation can allow firms to capitalise on any first-mover advantages.
When rules and regulations do change, insurers must make sure they are flexible enough to reorganise their operations and adapt to them; the recent announcement that allows banks to offer insurance services is a case in point.
As China's big insurers are increasingly turning their attention overseas, there is a good opportunity for UK insurers to start testing the waters targeting smaller and medium-sized Chinese insurers that have limited resources to expand.
But it must be remembered that China's insurance market is still developing and, therefore, conditions are constantly changing. As it matures, the potential for insurers of all sizes and specialities to take a slice will be vast and China continues to represent an opportunity amid the turbulent world economy. Even though barriers are higher than elsewhere - and doing business in China is not always easy - Chinese companies are becoming much easier to co-operate with, and returns on investment are not as distant as they used to be for pioneering companies.
In November 2007, China Consulting led a trip for a UK-based medium-sized insurance broker to meet with 12 Chinese firms that fitted a pre-defined profile and were willing to co-operate. From these meetings, potential partners were shortlisted and further meetings conducted. In May 2008, an agreement was signed by the UK broker and the Chinese company to co-operate and develop a joint venture insurance broker in China. By incorporating a Hong Kong company and working with an existing Chinese broker, the CIRC approval process was reduced considerably.
Staff have been hired to run the JV from Beijing, and talks with underwriters and insurers have thus far been fruitful. The Chinese partner has a network of retail outlets in 13 provinces in China, which will allow the UK company to start on a strong footing. When this local presence is added to the UK company's strength in internet capability, managerial experience and understanding of advanced insurance products, a formidable combination is formed.
- Mark Vrijmoed is an analyst at China Consulting www.china-consulting.co.uk.
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