Reversal of fortune

Marcus Alcock investigates the remarkable growth of foreign insurers in China during the past couple of years as the former communist stalwart has increasingly geared its economy to a market-based system, three years after acceding to the World Trade Organisation

In May 2002, there were 10 domestic insurers and nine foreign insurers in China, according to the China Insurance Regulatory Commission. Now there are 37 foreign insurers, reinsurers, and brokers conducting business in the country, with more waiting to gain a licence to open an office on the mainland. And it is hardly surprising that international insurers should demonstrate such an interest. A poll of forecasts for The Economist last month put growth in 2004 at 9.2%, and a still impressive 7.9% for next year.

Since Deng Xiaping launched his 'open door' policy in 1978, the country has experienced a dramatic period of wealth creation with income per capita increasing sevenfold. Importantly for insurers, along the eastern seaboard, construction projects have continued apace as a new market economy has flourished and a middle class of 100 million people has been created, where none existed previously.

Foreign insurers have been able to capitalise on such growth as the Chinese authorities have opened up the insurance market. Life insurers are now able to form 50-50 joint ventures with Chinese life insurers. Moreover, foreign reinsurers doing business in China are witnessing a liberalisation of the regime, with the amount of business that must cede to state-run reinsurer China Re dropping from 10% this year to zero by 2006.

Rules relaxation

International general insurers are also experiencing a significant relaxation of the rules. They can now apply for licences to do business in China directly and - crucially - by the end of the year, will see the restriction lifted that meant a certain office could only transact business in that location. In May this year, the Chinese authorities also passed a law that could yet prove to a be a real boon for motor insurers - making third-party motor liability compulsory. This truly is a dynamic regime for foreign investors, with the possibility of further growth in the offing.

"There is still a lot of potential for the insurance market," says Clarence Wong, head of Swiss Re's economic and consulting team in Asia. "The total level of spending is still very low. In 2003, total spending per capita was $36 (£20), which compares with $80 in Thailand and $227 in Malaysia.

But it is still higher than India, the Philippines and Indonesia." He says that the change in motor insurance regulations is important as, prior to the legislation being introduced, the level of motor cover purchased in China was also relatively low - 24% in 2002 according to the regulator.

However, Mr Wong points out that the interest for foreign insurers in this class is likely to be limited for the time being, with the regulators lukewarm to the idea of them writing much of this business.

Growth prospects

It is not only personal lines insurance that offers good prospects for growth, according to Mr Wong: "Domestic enterprises in China do not buy the full amount of insurance protection; they buy only to the amount of the loan provided by the banks. If they change their buying patterns, however, the estimates for growth are up to 10 times the current level of buying."

He adds that the advent of international competition has been beneficial to domestic insurers, as the emerging players have been able to bring on board new technology and new products, as well as different forms of distribution such as agents and brokers - whereas in the past insurance products sold via China's banks were relatively unsophisticated.

Emma Davidson, project manager of GAB Robins China, agrees that, in terms of products, the new players have had a lot to offer, with the authorities "very receptive" to new initiatives.

"Most of the local companies rely on traditional products and these are also the main products sold by the foreign companies, such as property all-risks," she comments. "The local insurers' attitude is to 'pile them high and sell them cheap'."

It has not all been rosy for the new entrants, however. Ms Davidson says most foreign companies have relied on marine premiums for cash flow and hence this may form their largest product line, while they have also been restricted by their ability to only insure risks that are foreign or foreign joint ventures.

Charles Tseng, general manager of Marsh insurance and risk management in Beijing, adds that one of the real areas that could open up for international insurers in the coming years is liability business, a development that will be linked to the maturing of China's legal system: "The liability sector was highlighted by the government as the one they want to see developed.

We have public liability, employers' liability and directors' and officers', but the development of these products has been very poor because of a lack of knowledge from people that they need this protection. Also, China has spent a lot of effort trying to develop an independent and sophisticated legal market, whereas, in the past, people haven't really sued each other."

Mr Tseng adds that, despite some of the restrictions that have been imposed on foreign insurers such as the geographical restrictions that previously existed on where they could write business, real opportunities are opening up: "China has a timetable for the market opening up, and the country has more or less its own risk rating and profile. The insurance companies that have opened offices in the past two or three years are starting to develop their operations now. American International Underwriters has a number of offices and Allianz is thinking about how to expand its service networks, which I think is very positive."

Brokers can play an important role in any future growth for foreign companies, which still comprise only a fraction of the country's overall insurance market share, claims Mr Tseng. He points out that Marsh's broker licence has no geographical limitations and the company has been conducting business across China since 1993.

Global techniques

"Foreign brokers in China play a very important role," he explains. "We introduce global, developed risk management techniques and also the right methodology about insurance purchasing. We are bringing a professional service culture where China is traditionally an economy built on relationships."

Naturally, the other major brokers are also involved in the region. Aon has a joint venture, while last month Willis received final approval for its joint venture, Willis Pudong Insurance Brokers, to engage in insurance broking business throughout the People's Republic of China. The approval followed Willis's purchase of a 50% stake in Pudong Insurance Brokers, a domestic enterprise, in March this year.

Not all foreign players in China are convinced, however, that the future is unequivocally bright. Quing Ping, chief representative of Heath Lambert's Beijing office, which has been open for six years, deals with reinsurance broking. He says that the demand for reinsurance has actually dropped off over the past year, with co-insurance becoming more and more popular.

Besides, he adds, the market in China is a soft market for reinsurance.

"It has been a soft market for years and is not likely to change," he declares, adding that this fact will hamper the growth of foreign players in terms of increasing market share. "Some foreign insurers only write the business they think will be profitable. They choose their business and do not write the same lines as the domestic players, who will write anything."

He adds that UK brokers have also been at a competitive disadvantage to US brokers, which have a lot of multinational clients in China, such as Coca-Cola and McDonald's, that their UK rivals may not necessarily have. Besides, he adds, general insurance intermediated sales are still very low despite all the optimistic predictions for growth and there is a long way to go: "I'm not really optimistic - it's a tough job."

Opening up

Perhaps one area in which insurers and brokers could do better in future will come from the fact they can write business in parts of China where they were not previously able to, suggests Mr Ping. He points to the opening up of the west of the country as an economic development area as potentially important.

This issue is picked up by Ms Davidson: "By 2005, more foreign players will enter the market and, provided all the requirements are met, the local authorities are becoming more efficient and less bureaucratic. This is evidenced by the fact that foreign companies are encouraged to take on large risks outside Shanghai, where previously they were geographically restricted - the only requirement is that they co-insure with the local insurers."

Still, for the time being the insurance market in China is one to which insurers are reticent to wholly commit themselves. A spokesman for Royal and Sun Alliance says the company's activities in China are very small compared to its other global centres, while Sue Winston, head of group media relations at Aviva, says the company has no plans to write general insurance in China.

Ms Winston does point out, however, that the company is keen to grow its life operations in the country, having formed a 50-50 joint venture with Cofco, the fifth-largest state enterprise. As evidence of this, Aviva, which opened an office in January 2003 through its joint venture in Guangzhou, has also applied for licences to open in Beijing and Chengdu and is on track to open offices next month.

As Ms Winston says: "We believe China offers huge long-term potential for us." But can the same really be said for foreign general insurers and reinsurers in a market that remains extremely competitive and very soft?

CHINESE INSURANCE FACTS AND FIGURES

- According to the China Insurance Regulatory Commission, 37 foreign insurers and 24 Chinese players make up the 61 insurance businesses in China.

- Foreign insurance companies held Y 19.78bn (£1.33bn) assets in 2003, compared with Y 4.4bn in 1999.

- Fifteen Chinese cities are open to foreign insurers.

- As of April, total assets of the Chinese insurance industry surpassed Y 1trn for the first time, reaching Y 1.01trn.

- At the end of May, total assets of the industry amounted to Y 1.04trn.

PREMIUM INCOME (Y bn)Year General insurance Life insurance2001 68.82 142.42002 77.95 227.462003 86.94 301.1

Foreign insurers and reinsurers in China

- Aegon - CNOOC Life Insurance

- AIG - branches in Shanghai, Guangzhou, Shenzen; sub-branch in Foshan

- Allianz - branch in Guangzhou; representative office in Shanghai

- American International Assurance - branches in Shanghai, Suzhou, Beijing, Guangzhou, Shenzen; Foshan sub-branch, Dongguan sub-branch, Jiangmen sub-branch

- Axa China Region

- CGU Insurance - Guangzhou

- Chevalier Insurance Company - Beijing representative office

- Cigna corporation - Beijing representative office

- Employers Re

- Groupama - Chengdu; Beijing representative office

- Hannover Ruckversicherung - Shanghai representative office

- Manulife Sinochem Life Insurance

- Mincheng Life Insurance

- Munich Re - Shanghai representative office

- New China Life Insurance

- Pacific-Antai Life Insurance

- QBE Insurance Group - Guangzhou representative office

- Royal and Sun Alliance - Shanghai branch; representative offices in Dalian and Beijing

- Scor - Beijing representative office

- Singapore Re

- Sun Life Everbright Life Insurance

- Swiss Re

- Tokio Marine and Fire Insurance - Shanghai branch; Beijing representative branch

- Zurich Insurance - Shanghai.

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