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Insurance Sector Right on Target

China's third year of WTO membership comes with significant responsibilities that will affect the country's insurance sector.

Under World Trade Organization commitments significant increased market penetration by foreign insurers is expected. But while China is on schedule to meet its insurance-sector commitments, speculation is rife about whether final restrictions on foreign insurers will be lifted in December as scheduled. The question arises even though it is certain that geographic restrictions that limit insurance company locations within China are supposed to be eliminated at this time.

To date, only in the non-life insurance sector are wholly foreign-owned companies allowed to operate in China. Foreign life insurers can only operate in joint ventures with Chinese partners. The exception is the life insurance company American International Assurance (AIA), the life insurance arm of AIG.

AIG operates its life insurance company, AIA, and non-life arm, AIU, as wholly foreign-owned companies. AIA obtained its privileged position under Chinese policy through its long-term relationship with the insurance sector here.

Sources said the introduction of foreign insurers has helped to restructure the insurance industry in China and to correct growing problems within State-owned insurance companies. This has allowed for the introduction of foreign capital, has increased competition in the market and has affected operations and reform within the insurance sector.

The insurance market in China was valued at more than 380 billion yuan (US$45.8 billion) in 2003 and is expected to rise to a staggering 3 trillion yuan (US$362.25 billion) by 2020.

About 120 foreign insurance companies operate in China. So far, foreign insurers have a less than a 2 percent market share, worth 5.83 billion yuan (US$702 million) annually. China Life Insurance is China's insurance market leader. It sells over 130 billion yuan (US$15.7 million) worth of insurance premiums annually.

While some hope that final restrictions on wholly foreign-owned insurers will be fully lifted by the end of the year, the China Insurance Regulations Commission (CIRC), the industry's regulator, has not yet released its regulation on the matter. Sources asserted that it now seems unlikely to happen and could result in delays in the further development of the industry.

"It is expected that further restrictions to wholly foreign-owned insurers will be lifted in time for full WTO succession in 2006," said Zhang Hong, a senior correspondent for The Economic Observer.

This does not mean that the CIRC is dragging its heels.  Foreign partnership restrictions have already been lifted allowing stakes in insurance brokerage joint ventures to be raised to 51 percent. At the end of 2004, according to China's WTO commitments, foreign life insurers will be allowed to conduct group life businesses.

Group life insurance coverage is usually offered as an employee benefit and can be converted to individual policies following employment changes. The attraction for foreign insurers operating in China is the volume generated by group insurance.

"Since group insurance generally operates in large volumes, foreign insurers which were granted licenses to conduct group insurance since November 2004 will be able to increase their premiums. Given their close relationship, foreign multinational companies target other multinational companies as clients," Zhang said. "For non-life (or general) insurers, there will no change in status in China at the end of this year."

One of the most profitable insurance products on China's insurance market at the moment is life insurance, expanding at a rate of 20 percent over the last couple of years.  This success is partly due to the strength of savings in China. According to estimates, savings in China reached 1.58 trillion yuan (US$181.1 billion) in July this year.

Rex Tung, general manager of the Beijing branch of Aviva-COFCO, a joint venture between Britain's largest insurance company and State-owned China National Cereals, Oils and Foodstuffs Corporation (COFCO), is confident of insurance market expectations.

"You have to remember the household savings ratio in China is very high," Tung said. "A customer earning 30,000 yuan will spend between 10 percent and 15 percent of their income and get a return value of 300,000 yuan." 

Aviva-COFCO began operations in Guangzhou in 2003 and now has 10 percent of the life insurance market in China. The recent move of Aviva-COFCO to concentrate more heavily on life insurance affirms market potential, particularly with local bank cooperation. Aviva-COFCO has newly developed methods for direct selling that are stimulating their life insurance sales in China. Interestingly, individual insurance agents collect over 50 percent of China's life insurance premiums.

But because of the high rate of market expansion, life insurance in China has not been without risks.  This has understandably attracted the attention of the CIRC, the insurance regulator. 

As a result the solvency margin and profitability of the majority of the companies in the life insurance market are under constant scrutiny. The solvency margin is an indicator ratio used by the CIRC to judge how financially sound life and non-life insurance companies are. This is usually determined by analyses of capital and reserves and through risk assessments.

Insurance regulators focus on market activities of insurers and on their solvency margins.

"The CIRC is now tracking international trends and this creates more room for local insurers' pricing and market promotions. Also, the CIRC is now strengthening its supervision of all solvency margins," Zhang said.

"Because product approval was liberalized in 2004 in line with WTO commitments," says Tung from Aviva-COFCO, "we can expect to see further changes in 2005."

The risks for insurance customers remain, however, depending upon whether capital investment and dividends are fully realized. 

In general, in the non-life insurance sector, the market is booming but with some unexpected consequences.

"Competition in the non-life sector, especially in the auto-insurance sector, has driven down market prices. At present, the claims from clients are rising. This has resulted in relatively low profits for insurers," according to Zhang.

Next year, it should be business as usual for non-life insurers.

"Some new products on the market show the creative side of foreign insurers. AIU (American International Underwriters) is an example. They brought kidnap insurance onto the market in China," Zhang said.  

Foreign insurers also find the market potential in mortgage protection, car loans, and insurance investments attractive since personal incomes are steadily rising.

Problems as yet unengaged by the insurance sector include China's retirement issues and huge aging population.

So far there is no tax advantage in China's insurance market.

Requirements that reinsurance companies to reinsure 5 percent of their business with the State-owned China Reinsurance Company have been eased.

So it seems that while foreign insurers may have to wait until 2006 for certain restrictions to be lifted, China's insurance market is on target to achieving its WTO commitments.