Bringing out the best China.

China's insurance industry is maturing fast and enticing foreign companies. Jeremy Golden reports.

Not so long ago it would have been impossible to imagine China as
the dominant, stable economic power in South-east Asia. Yet, barely
six months after the fallout from the Asian financial turmoil that
left most of the 'economic tigers' licking their wounds, China is no
longer being measured just in terms of potential.

China is not simply holding firm, it is helping to take charge of a
critical situation. This was clearly shown by its significant
intervention in International Monetary Fund-sponsored efforts to bail
out the Thai and Indonesian economies.

Moreover, China's sustained economic growth into the next decade, it
is believed, will buy crucial time; allowing her neighbouring
economies to reform, restructure and revive.

The dynamism of China is symbolised by its vibrant new leader,
President Jiang Zemin. He is committed to accelerating change;
principally speeding up the transition from a centrally planned to a
market economy, while maintaining a "culturally advanced socialist

Yet the essential pragmatism that has characterised economic reform
over the last decade is highlighted by the willingness of the central
planners to defer, or at least scale down, reform if the social cost
is thought to be too high. Although privatisation is at the top of the
agenda, with around half of China's state-owned enterprises in the red
and many of the rest barely breaking even, the government is fearful
of adding to the high unemployment pool and has delayed selling off
many state corporations.

Nevertheless, the regime does want to encourage private enterprise to
flourish. The government's aim of decentralisation has, of course,
enormous social as well as economic implications because at the heart
of this radical programme lies the implication that citizens should no
longer rely indefinitely on the state to provide a job, hospital
treatment or housing facilities.

Most recently, at a press conference in Beijing in March, Premier Zhu
Rongji pledged to turn China into a nation of homeowners by abolishing
state subsidised housing. He also outlined a series of probable
reforms to the national healthcare system.

Establishing a secure and regulated insurance industry along western
lines to protect individuals and businesses is considered integral to
China's vision. This was broadly put in place by the Insurance Act,
which took effect from 1 October 1995, and provided a cohesive legal
and supervisory framework for conducting insurance in China, such as
the compulsory registration of all insurance agents. The Act also
stipulated a strict division between life and non-life business.

This solid framework is being expanded on by, for example, opening up
the industry to greater competition from foreign companies. At the
same time, the government is intending to upgrade the so-called 1992
Shanghai Regulations and tighten supervision. The recent instances of
a number of supposedly stable insurers going under in many Asian
countries, particularly in Malaysia, and even in Japan, would not have
gone unnoticed by this regime.

Between 1996 and 1997 there was a substantial increase in premium
revenue in China, sustaining buoyancy in the insurance market. In
April 1998, Ma Yongwei, chairman of the China Insurance Institute and
the group chairman for the People's Insurance Company of China (PICC),
announced a national premium income of Yuan 108.7bn ($13bn) for 1997,
or around $11 per capita.

Domestic companies, led by PICC, accounted for Yuan 108.1bn of this
total, representing a 27.2% increase in revenue over the previous year
for Chinese insurers. Life insurance accounted for Yuan 60bn, up 46%
over the previous year and therefore by far the more dynamic sector.
The non-life sector generated Yuan 48.1bn, a rise of 5.8% on 1996.

One of the most striking features of the insurance market is the
extent to which it is almost exclusively an urban phenomenon, and
still a comparatively elitist product at that. According to figures
from the Municipal Insurance Association (MIA), there was a colossal
90% jump in total premium income in Beijing between 1996 and 1997, to
reach Yuan 9bn. This represented 5% of the city's gross domestic
product, and, on a per capita basis, premiums of Yuan 818 were almost
10 times the national average.

Shanghai, the country's largest port and commercial centre, mirrors
the trend in the capital. Statistics from the Shanghai Association of
Life Insurance Companies show registered premiums of Yuan 4.6bn last
year, or Yuan 450 per capita.

Life policies accounted for just 25% of all insurance sold in Beijing
in 1995. Today, an estimated three out of four policies bought are for
life cover. In Shanghai, life products made up 65% of the market last
year, compared with 31% in 1992.

Pu Ying, head of the MIA, singles out two major developments that
contributed to the rapid infiltration of life policies into city
households: the agent system pioneered in China by American
International Assurance (AIA), established in 1992 as a subsidiary of
the American International Group, and the increase in door-to-door
insurance sales. However, the boom has also moved The Beijing Evening
News to warn readers about high-pressure tactics by salesmen working
on commission.

Although sales of non-life products have been comparatively slow over
the past two years, motor insurance is perceived as an immensely
promising market. This might seem wildly optimistic given a per capita
car ownership in China that is even lower than that of India.

Nevertheless, Duan Qiuping, general manager of the vehicle insurance
department of PICC Property, predicts that premiums for motor
insurance, including motorcycles and tractors, are bound to hit the
Yuan 60bn mark ($7.23bn) by the end of the century.

Mr Duan says: "One piece of evidence is the sharp growth in car output
and the soaring number of privately purchased sedans in the last two

Due to the high risk and high compensation rates, vehicle insurance
has become the most necessary insurance product in the minds of
Chinese citizens.

What is more, only around half of all vehicles for civilian use have
been insured, which means great potential for insurers to further
develop their business."

The story of insurance in China has, until today, mainly been about
one company - the state-owned PICC. Although the market is
experiencing vigorous competition from the private sector, PICC still
managed to acquire around 70% of premiums in 1997; a 36% increase on
its premiums a year earlier.

PICC's closest 'competitors' also showed healthy increases, with the
Shanghai-based Ping An earning 16.5% of insurance sales nationally,
followed by China Pacific Insurance's estimated 12%, up 70% and 50%
respectively on their totals in 1996.

Breaking up PICC into separate subsidiaries to manage life, property,
casualty and fire insurance, as stipulated by the Insurance Act, was
expected to have a negative impact on the company's sales in the short
and medium term as it attempted to restructure. In fact, PICC has
rallied remarkably well.

The group vice president, Wu Xiaoping, attributes this positive
performance to the depth of reforms in the group, including changes to
how it recruits staff and a better training and wage structure.

Mr Wu anticipates that PICC will retain its focus on insuring
large-scale projects and underwriting most of the state-owned trading
companies. It has also adjusted its long-term strategy to accommodate
the insurance requirements of companies that are to be privatised
under the ongoing economic reform, particularly in the prosperous
coastal regions. Yet, as PICC's Ma Yongwei acknowledges: "The
competition in these regions has become white hot."

Without referring to it directly, the PICC chairman (among other heads
of Chinese companies), is acutely aware of the potential threat posed
by foreign companies.

Despite the kickstart administered to the life market in China by AIA,
it is difficult to envisage that this threat will be serious for some
time to come. Although there are literally hundreds of foreign
representative offices in China, from just over a hundred foreign
companies hoping to win a licence, only a handful of them have
licences to sell insurance.

Initially that licence is restricted to Shanghai, but it can be
extended to include Guangzhou.

In 1997, premium sales by foreign companies, including AIA, Tokio
Marine & Fire and Winterthur, totalled $72.6m - 0.6% of the market.
This year, the French and German insurance giants Axa-UAP and Allianz
will begin to sell insurance for the first time in China under
joint-licence agreements.

Aetna, the US life insurer, is also set to open up for business in
partnership with a local company, China Pacific, offering life
products in Shanghai.

Despite the heavy state restrictions on what they can sell and where,
and although the returns so far have proved to be relatively paltry,
foreign insurers are nonetheless competing ferociously for new
licences, which tend to be doled out slowly on a country-by-country

The haggling for places involves a complex process of political
lobbying and intrigue. Cultivating important contacts over many years
and demonstrating 'sincerity' to the host nation by, for example,
setting up risk management seminars and international exchange
programmes for Chinese insurance trainees is an expensive but
essential part of this process.

One of the few winners over the last year was the UK's Royal &
SunAlliance which, in April 1998, following seven years of intense
lobbying by the company and the UK government, was granted a licence
to sell policies - the first for a UK insurer in 50 years. The fact
that the company was the first major UK player to establish a
representative office in China may have worked in its favour, together
with the fact that it was pitching for non-life business.

Naturally, John Statham, director of corporate and strategic
development in the Asia Pacific division of Royal & SunAlliance, is
delighted by the turn of events. He says: "The full details of the
scope of our licence have yet to be agreed with the regulator, the
People's Bank of China (PBOC).

However, the licence will be for property business and it may well be
restricted to commercial lines. We will be providing essentially
'classic' property and casualty cover.

"One important group of buyers will be existing multinational
programme clients with operations in China; Royal & SunAlliance being
one of the leading providers of this type of cover." As Mr Statham
points out, the company, which is based in Shanghai, is particularly
well positioned to serve its existing clients, as the UK is by far the
largest European investor in the city.

Royal & SunAlliance, together with US insurer Lincoln National, has
also invested $1.4m in a project to assist the PBOC in supervising
foreign insurance companies in China as the market is opened up.

However, the international insurance community remains essentially
frustrated by its painfully slow access. The US is especially vocal in
its criticism.

Only last month, Dean O'Hare, chairman of insurance giant Chubb,
declared that China will lose foreign investment unless it opens its
insurance market wider and stops using licences as a "political
football". Mr O'Hare said the US had made clear it expected China to
approve two new branch licences for US insurers during a presidential
summit in Beijing this month.

Partly to ease growing pressure for faster liberalisation from
overseas, the PBOC has been considering allowing foreign underwriters
to take equity stakes in domestic insurers. Zhang Xunhai, deputy
director of PBOC, outlined a proposal currently being considered that
would allow local companies to sell up to 25% of their share capital
to underwriters based overseas, but would be accompanied by a rule
prohibiting foreign companies from establishing wholly owned branches
in China.

According to Hermann Hefti, head of the Asia Pacific department at
Swiss Re: "The reinsurance market in China is not very dynamic, being
restricted to foreign currency business only. The Yuan is not
convertible and it is likely to stay that way, particularly with the
currency crisis in other Asian countries. If someone claims to be
becoming rich in the Chinese market, please can I see their figures

A senior executive involved in Chinese operations for Munich Re
concurs that, relative to the enormous potential of the market, actual
business transacted, which totals around $150m reinsured on the
international market, excluding satellite and aviation, is
"comparatively speaking, a drop in the ocean".

Both Swiss Re and Munich Re are heavily involved in reinsuring the
large multinational construction and infrastructure projects that are
financed or part-financed by foreign capital, thus allowing
reinsurance to be ceded outside the country.

As Mr Hefti explains: "There is a huge investment in infrastructure
and consequently there is great demand for engineering reinsurance
but, pricewise, everyone wants to be part of it, so we cannot be as
strict as we would like on the underwriting side."

Munich Re reinsured the Jinamao building in Pudong, the tallest
high-rise building in China. The company representative estimates that
around 90% of Chinese construction business is uninsured, and of the
10% that is, approximately 30% will be reinsured.

In April, Scor Re announced it was to be the leading reinsurer for the
second tranche of the $1bn nuclear power plant at Qinshan, insured by
the Chinese insurance company Ping An. Scheduled to come on stream in
April 2003, it follows Scor Re's involvement in the Daya Bay, Ling Ao,
Zhuhai and Laibin B power plants. The company is firmly established as
the number one nuclear reinsurer in China. Scor Re and its competitors
are assidously courting the private insurance sector as an important
source of revenue for now and, more pertinently, for the future.

Charles Gosling, director of Aon Re China, claims his company has
proved particularly successful at working with Ping An, which it has
targeted since 1993 and for which it provides treaty reinsurance -
property, cargo and windstorm, including consequential loss. Aon Re
also provides aviation cover for China Pacific and has some dealings
with PICC.

Although the Chinese reinsurance market, like the insurance market,
remains mostly elusive to the international players, the major
reinsurers have noted the steady increase in demand for insurance and
are cautiously optimistic about their long-term prospects.

George Leung, general manager of Scor Re Asia, elaborates: "You could
say that private property is restricted to a large elite, but more
people are being encouraged by the state to buy their own homes and
the employers are often prepared to subsidise workers to do so. It may
well be that, as this trend increases, banks will insist on life
insurance as a cover and this huge volume in life cover will have to
be reinsured. Similarly, with the large number of state companies
being privatised there will be a substantial rise in property cover
that may have to be reinsured as well."

At Munich Re and among the other major reinsurers there is broad
agreement that this is likely to be the case, but it is far too early
to know what proportion of reinsurance, if any, will find its way on
to the international market. One scenario would be for the local life
companies to reinsure among themselves, perhaps together with the
China-based composite European insurers like Royal & SunAlliance and

Whatever the outcome, Swiss Re's Mr Hefti says: "China has been, and
will continue to be, very cautious about opening up its markets, and
therefore those (foreign reinsurers) that haven't got the stamina to
stay the distance should not do so. There is a lot at stake here and
the major players are up to the challenge."

Table 1: Chinese market share
Company 1996 (half year)
($m) % ($m)
PICC 2600 63.3 2200.0
Ping An 900 22.0 950.0
China Pacific 480 12.0 360.0
AIA 60 1.5 n/a
Xin Hua 30 0.7 50.0
Tai Kang 20 0.5 45.0
Zhung Hong n/a n/a 0.6
Total 4090 100 3605.6


Across the water from China, Hong Kong has managed a very smooth
change to mainland rule, with the local insurance industry not only
unaffected but seemingly buoyant as a result of the transition - so
much so that rating agency Standard & Poor's commended the Chinese
authorities for their astute handling of the insurance industry in the
former British colony.

According to Hong Kong insurance commissioner Alan Wong Chi-kong, the
life insurance industry is expected to grow by 15-20% in 1998. To
demonstrate his point, he refers to a 5.7% increase in premiums in the
first nine months of 1997.

In the past few years, motor and workers' compensation have been the
bane of the non-life sector. In 1996, motor insurance premiums dropped
19%, while workers' compensation business declined 24.6%, prompting a
more general decline in non-life business of 7%.

Yet, in the first nine months of 1997, motor insurance experienced a
dramatic turnaround - the first time the line has experienced growth
after three consecutive years of declining premiums. Workers'
compensation business also grew (14.5%) for the first time since

Mr Wong claims that growth in general insurance will continue in 1998,
despite the slowdown forecast in the overall economy. "The sale of
public housing estates will increase the need for fire insurance which
will benefit the general insurance companies," he says.
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