Fortune favours the brave


China's insurance industry is playing catch-up in the wake of the country's massive economic boom, offering a plethora of opportunities to foreign insurers and reinsurers. But Dom Savaiano and Ryan Hemingway caution that the chance to crack this market may be time-limited

It is no secret that economic growth has exploded in China in recent years. Not only does it make many of the world's industrial and consumer products or their component parts, but China's exports include pharmaceutical, agricultural and consumer food products. And its insurance market is busy catching up with this booming economy.

Insurance premiums in China are rising 25% per year with some predicting sustained double-digit premium growth in premiums for at least the next five years. Understandably, foreign insurers and reinsurers - along with brokers, adjusters and third-party administrators - are eager to participate in this burgeoning market; as the Chinese insurance market matures, claims and coverage issues will undoubtedly increase.

The growth of insurance in China reflects increasing personal prosperity and the biggest demand continues to be for life and motor insurance. Domestic Chinese insurers still dominate provision of personal lines cover, which is sometimes reinsured with foreign reinsurers.

While demand for commercial policies lags behind personal lines it is gaining. By market share, the greatest demand is for commercial property with the appetite for it reflecting the increase of private, rather than government-run, business concerns. This demand is linked to foreign investment in manufacturing Chinese exports.

The explosive growth of imports and global offices has also increased the need for insurance coverage for foreign exposures to Chinese manufacturers and businesses. Many of the foreign downstream manufacturers and large retail sellers of Chinese products, such as Wal-Mart, require their vendors to not only possess adequate product liability insurance, but to name the downstream manufacturers and sellers as well. Furthermore, as Chinese businesses open offices or sell securities abroad, they open themselves up to directors' and officers' as well as employment liability claims.

At present, foreign insurers write only a small proportion of the business in China, so there is capacity for significant growth in this area.


The opening up of the Chinese insurance market to foreign insurance companies has been well documented. For example, following receipt of a formal licence document from the Chinese regulators, Lloyd's officially opened its Shanghai office in March and began operations for its new reinsurance company. Shanghai is the most important city for commercial business and insurance in China, and the move by Lloyd's saw it join a number of other foreign insurers operating in the country.

The active involvement and inclusion of foreign insurers has been permitted by the China Insurance Regulatory Commission, enabling these insurers to have access to Chinese markets. This step must be seen as a method of inviting foreign capacity and expertise into a developing industry and economic infrastructure - and Chinese insurers are also able to take advantage of foreign reinsurance and investment opportunities.

Foreign insurers now have several options in terms of entering the Chinese market, including a joint venture with a Chinese company; opening branch offices; and developing wholly owned subsidiaries. Chinese regulators have eased some of the onerous capital requirements in order to permit more foreign investment but each option does carry different capitalisation requirements and jurisdictional limitations.

China has also now signalled its intention to ease regulations for reinsurers. Until very recently, China has had one dominant reinsurance group, China Re, along with several foreign companies. Earlier this year, China infused $4bn (£1.96bn) into China Re to help bring in foreign investors and eventually make a public offering. China is also looking to encourage large foreign reinsurers with expertise in health, agricultural and medicare insurance businesses. As of last year, China's reinsurance market had only 2% of the total assets for the entire reinsurance industry.

Foreign risks

So where do the best opportunities lie for overseas insurers and brokers in this fast-developing and expanding economic giant of a country? Few Chinese insurers offer - and few Chinese manufacturers want to buy - product liability coverage for the large number of products manufactured locally for export to North America and Europe. Furthermore, there is an absence of Chinese insurers writing D&O liability cover where foreign claims issues may arise. Domestic insurers are wary of claims exposure and coverage disputes in North America and Europe - in fact, the US, UK and Canada are often specifically excluded in coverage offered by these insurers. In addition, many Chinese insurers do not have domestic claims networks in place, which are able to effectively cope with large or complicated issues arising in foreign jurisdictions. Therefore, for many domestic claims, Chinese insurers appoint third-party adjusters.

Given the scale of manufacturing, foreign investment and corporate growth, there is a gap in the market - creating a need that foreign insurers are meeting. The People's Insurance Company of China, the largest non-life Chinese insurer, is a notable exception. With assistance from foreign advisers, PICC is actively building a claims network and seeking to write new lines of business to compete with large foreign insurers. Another local insurer has sought to solve the problem by incorporating a claims control clause, which identifies a suitable foreign claims network.

So although there are clear opportunities for foreign insurers to participate in the Chinese insurance market, these opportunities may be time-limited. The global heavyweights will face competition for these business lines as Chinese insurers become more sophisticated and better equipped to accept risks generated by China's economic expansion.

Legal issues

The demand for insurance in China, and for Chinese related lines of business, will continue to grow as the economy expands but the unique legal landscape impacts on how claims and coverage disputes are resolved. In China, as in all developing jurisdictions, effective dispute resolution will be a central element of success. Appropriate policy wording can anticipate the issues and provide insurers with certainty in conducting business.

Certainly, the resolution of insurance claims issues through China's court system presents unique problems. A lack of legal precedents is one and a lack of an experienced court system with a well-settled rule of law is another. Fortunately, China has a relatively lengthy history of arbitration to provide alternate forums to resolve international disputes.

China's court system, otherwise known as the People's Court, has undergone considerable change over the past 10 years with reforms subject to foreign legal and commercial influence. Judicial appointments were previously filled by former army officers and local party members, which opened the system to charges of corruption. More recently, the People's Court has retired most non-lawyer judges, replacing them with appointed judges who have legal training. Yet, problems persist within the court system, as the new judges are inexperienced in adjudicating cases. Likewise, the People's Court still receives reports of corruption from litigants. China has attempted to modify its courts, based upon its history of deficiencies, by making an effort to modernise the entire system.

Matching its accompanying economic expansion, China is continuing to overhaul its legal system with support from overseas. It has developed almost 400 law schools over the past two decades. Hundreds of thousands of judges and lawyers have been quickly trained. However, despite these numbers, the People's Court is still, at best, a nascent system for resolving disputes. Alternative dispute resolution and arbitration are the preferred methods to resolve altercations involving foreigners.

China has developed an arbitration system to support the People's Court. This assists parties to resolve commercial disputes in a more efficient and cost-effective fashion. Consequently, China has become one of the fastest growing and, due to the scale of economic growth, most popular forums for international arbitration.

Forum selection

Arbitrations are currently quicker and offer more certainty than the People's Court by relying on trained and experienced arbitrators to handle complex commercial claims. As in other jurisdictions, arbitration renders final and binding decisions, which, if stipulated, can remain confidential. Chinese arbitration decisions are internationally recognised and enforceable.

Moreover, Chinese arbitration awards are enforceable in China, provided that proper agreement, notice and rules are utilised. These arbitration rules will be familiar; an examination of the procedures and process reveals influence by the American Arbitration Association as China has followed numerous policies and procedures set forth in the AAA rules.

Insurers should determine upon arbitration at the contract stage; Chinese courts will honour agreements to arbitrate and provide assistance and supervision for processes. The courts cannot accept a dispute arising out of a transaction if there is a valid agreement to arbitrate. However, it is worth noting that ad hoc arbitrations might not be enforceable in the People's Court.

Forum selection

Interestingly, China ranks first in the world in terms of the number of cases handled by commercial arbitration bodies (see chart below). There are 185 arbitration commissions in China and care should be taken in selecting the most appropriate. One of the most commonly used arbitration forums for international disputes is the China International Economic and Trade Arbitration Commission. From 1995 to 2000, Cietac received 4200 new international commercial arbitrations - more than any other commercial arbitration body in the world.

Cietac began in 1956 as a forum to settle disputes arising from contracts and transactions in foreign trade. However, once the development of international commercial arbitration began to grow, the scope of cases given to it included other economic activities, such as investment, financing and agency.

Cietac is flexible and allows parties to agree on the applicable rules, proper law, language to be used, the place of arbitration, and the nationality of the arbitrator. It also provides the parties with a secretariat to handle administrative issues for the tribunals. With the consent of the parties, Cietac encourages a combination of conciliation with arbitration similar to US 'med-arb' agreements. It is also an expedient option - awards can sometimes be rendered in three months. Under the ordinary procedure, a resolution can be reached in an average of eight months. Finally, the fees associated with arbitrating through Cietac are relatively low compared to other arbitration institutions.

Chinese conciliation

As in more familiar jurisdictions, there are alternatives to litigation and arbitration in China. ADR is not a foreign concept and is used regularly to settle disputes. It is worth noting that conciliation and mediation have the same meaning in China and the Chinese courts and procedural law have placed a great emphasis on encouraging parties to settle disputes by mediation. Furthermore, Arbitration Law, Article 51 confirms that a written conciliation statement and a written arbitration award has the same legal validity and effect. Accordingly, both judges and arbitrators can be expected to urge conciliation.

China has conciliation service providers, ad hoc mediations, conciliation arbitration and conciliation litigation. Conciliation service providers offer these in China and in partnership with international conciliation centres. Like the US med-arb, Chinese conciliation-arbitration and conciliation-litigation offer conciliation by the arbitrator or judge prior to commencing the binding process.

Opportunity knocks

Undoubtedly, China's growth presents opportunities for insurers - commercial property, product liability, D&O and reinsurance are the main commercial issues for foreign insurers. Local capacity for writing these lines is limited by a fledgling claims network but this situation is likely to change with increased investment by Chinese insurance companies.

As with all developing jurisdictions, understanding the local legal landscape is a vital component to effective underwriting. The legal backdrop for conducting commercial business in China is changing and large scale investments are being made. While commercial activities continue, insurers should question whether they wish disputes to be resolved in the People's Court or by arbitration. Conciliation and arbitration clauses may offer more certainty for insurers - and such clauses should be carefully considered and probably incorporated into policies concerning commercial risks in China.

Dom Savaiano is a partner of attorneys Clausen Miller, and is the US and European co-ordinator for the firm's Asia practice. Ryan Hemingway is the managing partner of the firm's Shanghai office. They were assisted by Jason Reeves, a solicitor in the London office.

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