Overseas focus - China: a market of opportunity?

Ask any of the many insurance interests in China and they pretty much say the same thing — things are going well, there are huge opportunities and they plan to be there to make the most of them.

Talk to an industry observer, however, and the picture is not quite so clear cut. Yes, there is opportunity — the Chinese insurance market grew by 33% last year and still has very low penetration rates — but there are also questions about whether the local market may just be getting the better of the foreign firms.

Unlike the US and Europe, Asia did not really suffer in the economic downturn. Most business people in China will say 'Global crisis, what crisis?'. The reality is that, generally speaking, most Chinese businesses continued to grow and develop, which, in turn, means their insurance partners continued to enjoy plenty of demand.

However, as one industry observer explains, many foreign firms were facing crises back home and so, while the intent to expand in China continued, their boards were concentrating on dealing with problems elsewhere and their eye was off the Chinese ball. While they did that, Chinese insurers were seizing the opportunity to expand, making inroads to the local market and gaining valued market share, which may be tricky for the foreign firms to win back.

Highlighting the changes
In fact, a report from Pricewaterhouse Coopers at the end of 2010 highlighted the changes, saying: "2010 is proving to be a year of unprecedented change for foreign companies in China. Several foreign insurers have announced plans to reduce their shareholdings in their joint ventures. A number of new entrants have also emerged from Asia."

Foreign firms account for around 5% of the life market and a smaller share of the general insurance market. Before the financial crisis hit the west, predictions for growth in China had suggested that market share would be taken closer to 10%.

But in the wake of the financial turmoil, foreign firms are now focusing on maintaining their existing share. The more positive message from PwC is that the market itself will continue to grow rapidly — so simply maintaining existing market share would produce a massive increase in business. In fact, many are predicting a doubling in the number of policyholders by 2013.

Meanwhile, in a more recent survey of clients and brokers by Chartis, risk managers were asked about the opportunities and threats they perceive for their operations in emerging markets, including China.

Unsurprisingly, one of the major attractions of China was the access it afforded to new consumer markets (75% of respondents). Russell Meagher, head of the major accounts practice at Chartis UK, says: "The economic growth being experienced in these territories coupled with a growing consumer class, increased foreign direct investment and infrastructure development present extensive opportunities for all types of businesses looking to extend their reach into new markets."

And it is far from doom and gloom. There are new faces in China — and the old hands are grabbing new opportunities. Broker Lockton Companies, for example, has recently opened an office in Beijing to build on its existing presence in Shanghai.

Chief executive Julian James is delighted at the move. "As only the second international broker to have a wholly owned foreign enterprise licence [the other being Marsh], we are able to develop as we would like to without a joint venture partner."

His involvement with China goes back many years and Mr James understands the importance of having a physical presence in China. "We have many international clients who need on-the-ground support. It is part of our philosophy to be close to where our clients are doing business."

Most importantly, though, he believes that there is a real need for foreign expertise to help develop the market — and to enhance client understanding of risk management.

This is an issue raised by everyone. With its history of communism, the Chinese population largely expects the state to look after it. If a building collapses, is burnt down or destroyed by an earthquake, the state will rebuild it — why would anyone need insurance?

Generally the Chinese have a fatalistic attitude towards life and death too — most will simply get on with life after a death in the family — they may struggle but they do not look to life insurance to help out. Life is also considered expendable — public executions are still carried out, for example.

Understanding the culture is frequently cited by those talking of moving into new markets, but China is a destination where this really matters. It is not simply about understanding the language but also the way in which people think.

Mr Meagher says: "Although many of our clients are already doing business [in China], they are keen to understand the differences in local custom and practice that need to be recognised and accommodated in their risk management and risk financing programmes."

The top four operational concerns for Chartis' clients, when considering a move into the country, related to the changing legislative environment (83%), regulation (78%), local insurance market practices (58%) and risk management culture (56%).

Despite these reservations, moving into China remains attractive — after all it is the biggest trading nation, the second largest manufacturing base in the world, has the second largest economy and is already the seventh largest insurance market globally, with assets valued at around $751bn (£461bn) and was worth $42bn in 2009 according to Lloyd's.

Dominance of motor
Changes in lifestyle and political approach are fuelling the equally rapid change in insurance outlook. David Coupe, a partner at Clyde & Co, uses motor as an example. "Everyone in China wants a car. It is a symbol of success but motor liability is also a compulsory class of insurance."

So, motor insurance dominates — it accounts for about 70% of all insurance sold. And while household and other personal insurances are fairly low down the list of classes of business sold, there is growing sophistication in other areas.

Again, Mr Coupe points to the state influence. Agriculture insurance, he says, has been driven along by the state and demand is growing. "China has a history of earthquakes, there is a typhoon risk on the coast and there are weather-related risks to crops. We are starting to see more insurers looking to underwrite crop business as a result. Overall, the appetite for new products and ideas is immense."

But, he adds: "Every time you look at figures and see huge growth, you must remember you are starting from a zero base — all growth looks good from that point. Having said that, the potential is still huge."

Mr Coupe says the Chinese are learning fast. Insurers are gaining experience from other markets as they expand internationally and then taking those lessons back to China: "As more people buy insurance, word gets round. The culture of buying insurance is beginning to develop and people are starting to look for cover."

Broker penetration into the market remains low at present, but Mr Coupe says there is undoubted interest and several brokers have approached him this year with a view to setting up in China.

Mr Coupe is also an admirer of the development of Chinese regulation overseen by the China Insurance Regulatory Commission. Generally speaking, the Chinese market is heavily regulated.

"It certainly does not have a lack of bodies on the ground to do the work," he says. Although gaining a licence can be a protracted business for a foreign firm, the regulator takes a hands-on approach to keep a close eye on firms. The CIRC is proactive in introducing laws and ideas, such as the new consultation on legislation including the UK's Part VII transfer legislation.

However, for Western companies there can still be difficulties to undertaking business in China. Since much business is still undertaken through fronting arrangements with local Chinese insurers, this can give rise to complex issues for reinsurers.

Sometimes local insurers have little stomach for litigation. Original claims can be settled quickly, particularly if it involves a state-owned entity and a state-owned insurer. Therefore, foreign reinsurers need to be particularly careful regarding the wording of 'follow the fortunes' and claims handling clauses to make sure they do not payout on a claim just because the original insurer is not keen to litigate. Complete transparency is needed in relation to the handling of the original claim.

There are also issues with the experience of the Chinese. Generally speaking, some very young faces occupy fairly senior positions. For example, judges in lower courts may be no more than 25 or 26 years old, while even Supreme Court judges are often only in their early 40s.

A report from AM Best has highlighted some of the problems that a lack of experience can create for insurers. Yvette Essen, author of China: A Dangerous Wind or An Opportunity? and head of market analysis, says there is a shortage of expertise and talent in the country.

"Insurers can also lack certain technical expertise as well as infrastructure — for example, data and IT platforms needed to run a profitable business. Brokers and insurers state that the Chinese insurance market can lack data and underwriting track records, with information varying by province," she adds.

And Cint Kortmann, of human resources firm Talent Pro, agrees. "Heads of western firms need to be on the ground in China to see what is happening for themselves," he says. "Changes are really fast. Areas like nanotechnology, for example. The Chinese are leading the world but nobody knows about it. The West is being left behind." He sees real opportunity for insurers to offer support in these new areas where the young are leading the drive for change.

Mr James also sees the opportunity. "Increasingly people in China are beginning to understand areas of emerging risk such as cyber liability, product recall and business interruption.

"There are some staggering figures — for example there are 420 million internet users in China and one-third of them shop online. For companies involved in internet security and credit card security, the risks are enormous and they want to talk about cyber liability."

Going back to the subject of motor, he says the opportunities and the figures are just as significant. "The prediction is that there will be half-a-billion Chinese cars on the road within the next 20 years."

Spreading the message
Because motor is the one compulsory class, Mr James says more people have to buy insurance and the message is spreading. "Consumers are becoming more astute. If something happens, they are beginning to expect compensation, so that culture is growing.

"They may have shrugged their shoulders 30 years ago but now they expect recompense. Individuals are also learning from experience overseas. Chinese companies are trading on foreign stock exchanges, whether in Hong Kong, the US or the UK and, as part of that, they have faced an amount of securities-related litigation, particularly in the US."

As a result, he says, they are buying more directors' & officers' liability cover to protect against class actions. If they are not buying such cover as a result of direct experience, they are having their hands forced by the regulator, which makes such protection part of the listing requirements.

Mr James adds: "A lot of Chinese companies are beginning to see that disaster does strike and the state will not necessarily be there to back them up.

"There is a strong motivation to look to the insurance markets for help and to be able to offset some of the risk into the insurance markets."

With insurance comes risk management, and Mr James is among those who believe that this is another massive opportunity for western firms. "Many company owners still have so much to learn about risk management," he says, adding that such messages are beginning to filter downwards through organisations.

But he stresses it is also important not to consider the Chinese naive. "There are many big businesses that are extremely sophisticated and have been buying insurance for many years," he says.

China is a huge country with a population to match and an appetite for change and growth. The trick for western firms will be in matching those desires with the right insurance products and capacity.