China’s insurance market is expanding steadily, and foreign companies must build up their operations to remain competitive.
At a property insurance policy meeting in Shanghai, an insurance company representative asked a policy holder whether he would renew his policy. “No,” said the client. “May I know why?” asked the insurer. “Well, I didn’t win,” the client replied, referring to the fact that he had no losses in the covered period and, therefore, did not “win” any claims.
Many Chinese consumers share this attitude toward insurance. They often do not view risk mitigation as an insurance policy’s primary objective. Instead they want to get something back in claims. Otherwise, they would consider the policy a waste of money.
Though China’s property and casualty (P&C) insurance market has expanded quickly in recent years, the industry remains underdeveloped and many consumers have a weak understanding of the purposes and benefits of insurance policies. (P&C insurance, also known as non-life or general insurance, refers to non-life commercial and consumer insurance such as auto, liability, property, and short-term accident and health insurance.) As awareness of insurance increases in China, foreign companies must pay careful attention to changes in the market and new prospects for growth. P&C insurance companies that do not understand the China market may risk being left behind.
China’s insurance industry makes rapid strides
Though the roots of China’s insurance industry extend back more than 100 years, the industry nearly disappeared from 1949 until China reopened to the outside world in the late 1970s. China’s contemporary insurance industry is thus only about 30 years old. China’s P&C insurance market has developed rapidly in this span, driven by the country’s booming economy.
In the first decade of the twenty-first century, China’s P&C insurance premium volume nearly quintupled on a nominal basis from ¥60.8 billion ($9.2 billion) in 2000 to nearly ¥300 billion ($45.5 billion) in 2009, expanding at a compound annual growth rate (CAGR) of 19.4 percent, according to statistics from the China Insurance Regulatory Commission (CIRC) and Chartis Insurance Company China Ltd. Factoring in the renminbi (RMB) exchange rate appreciation against the US dollar during this period increases China’s P&C premium growth to 22.2 percent compared with a world average of 7.2 percent. Even in as difficult a year as 2009, Swiss Re research shows China’s P&C insurance premiums achieved a nominal increase of 19.7 percent over 2008. By comparison, North America’s nominal premium volume shrank by 2.3 percent, and the world average dropped by 2.1 percent (see Figure 1).
The insurance markets in China’s coastal regions rose the fastest over the past three decades. The top 10 provinces and municipalities in China by P&C insurance premium volume are located mostly in coastal regions such as Guangdong, Jiangsu, Shandong, Shanghai, and Zhejiang (see Table 1). Expansion in these regions has been driven primarily by robust economic growth and, in several cases, by the fact that the regions were opened to foreign insurance companies before China’s other areas.
Rapid P&C market expansion in recent years was fueled in part by extraordinary growth in the auto insurance sector. China has become the largest auto market in the world, selling more than 18 million cars in 2010. Car owners in China are required to purchase auto insurance, which accounts for more than 70 percent of the total P&C insurance premiums. Excluding auto insurance reduces China’s P&C insurance market CAGR from 18.3 percent to 13.6 percent from 2002 to 2009 on a nominal basis.
Despite the rapid rise of China’s P&C business in recent years, insurance awareness and penetration remain low. The P&C insurance penetration rate (total premiums as a percentage of gross domestic product [GDP]) was roughly 1 percent in 2009, compared to the average global P&C insurance penetration rate of 3 percent. Though China achieved a milestone in 2010 by overtaking Japan as the second-largest economy in the world, China’s total P&C insurance premium volume is only about half of Japan’s. The May 2009 Wenchuan, Sichuan, earthquake highlighted China’s low insurance penetration rate. According to PRC government officials, losses from the earthquake totaled ¥845.1 billion ($128 billion), but insured losses reportedly amounted to ¥1.8 billion ($274 million), or about 0.2 percent of total losses.
Domestic P&C insurers
China’s P&C insurance market is dominated by three domestic giants: PICC Property & Casualty Co. Ltd. (a subsidiary of People’s Insurance Co. [Group] of China Ltd.); Ping An Property and Casualty Insurance Co. of China, Ltd.; and China Pacific Property Insurance Co., Ltd. Other domestic insurers have proliferated in recent years with support from the PRC government, and many insurers have established national networks. China had 34 domestic P&C insurance companies at the end of 2010, compared to a single insurer (PICC) in the 1980s. As a result of extensive networks and the expanding auto insurance market, domestic P&C insurers enjoy a dominant market position with a national market share of nearly 99 percent. Auto insurance accounts for about 73 percent of domestic P&C insurers’ portfolios on average, and in some cases comprises more than 90 percent.
The rising number of insurance companies in recent years has led to increased competition, particularly in markets with a high concentration of insurers. For example, there are 34 P&C insurers in Shanghai alone, 9 of which are foreign. Despite their dominant market position, many domestic companies have operated at a loss in recent years because of cut-throat competition for auto insurance market share; nearly half of domestic P&C insurers reported an operating loss in 2009. Domestic firms’ operating results improved in 2010 following aggressive measures by CIRC to standardize market behavior.
Foreign P&C insurers in China
Since the American International Group, Inc. received the first foreign insurance license in 1992, foreign P&C insurance companies have gradually established a visible presence in China. Unlike foreign life insurance companies, foreign P&C insurers are not required to form joint ventures with a domestic partner. By the end of 2010, China had granted P&C insurance licenses to 20 foreign P&C companies from 9 countries and regions (see Table 2). Foreign P&C insurers are concentrated in first-tier cities such as Beijing; Shanghai; and Guangzhou and Shenzhen, Guangdong. In 2009, premiums generated by foreign P&C insurers in those four cities accounted for 63.4 percent of foreign P&C insurers’ total premiums in China, according to CIRC.
Because of regulatory constraints, most foreign P&C insurance companies that entered China before 2006 were set up as branches instead of locally incorporated subsidiaries. Most of them, however, converted to locally incorporated subsidiaries (or wholly foreign-owned enterprises [WFOEs]) by 2007, after China began allowing foreign P&C companies to establish WFOEs as part of its World Trade Organization (WTO) commitments. Nearly all foreign P&C insurance companies that entered China after 2007 chose to invest as a WFOE (see Advantages of the Wholly Foreign-Owned Enterprise Structure for P&C Insurance Companies).
Main product lines of foreign P&C insurers
Foreign P&C insurers may offer nearly all types of P&C insurance in their licensed territories. Such product lines include cargo transport, construction, enterprise property, liabilities, and short-term accident and health insurance. Foreign P&C insurers tend to be niche players, focusing on product lines in which they enjoy a competitive advantage.
Chartis research shows that foreign P&C insurers have acquired significant national market share in cargo transport and liability insurance, accounting for 13.4 percent and 8.2 percent market share, respectively, in 2009. These companies’ strong international service networks and underwriting expertise offer a competitive advantage. Foreign insurers also have a relatively high market share in cargo transport insurance because the PRC government does not place geographic restrictions on the cargo transport insurance market. Foreign P&C insurers can thus conduct cargo transport insurance business outside their licensed territories, even with a limited number of branch operations.
Export product liability insurance is another niche product offered by several foreign P&C insurers. As a result of China’s rapid export growth, several foreign P&C insurers have significantly expanded their cargo transport and product liability insurance businesses. These product lines suffered during the recent global economic downturn when China’s exports decreased, but they rebounded in 2010.
Limitations on foreign insurers
Though most P&C insurance product lines are open to foreign companies, mandatory third-party liability (MTPL) auto insurance remains off-limits because it is considered statutory insurance and is not part of China’s WTO commitments. As a result, most foreign P&C insurers are not involved in China’s auto insurance business. A few foreign companies have partnered with local insurers who provide MTPL auto insurance and offered additional commercial coverage for the local insurers’ customers as needed. Because the auto insurance business has struggled in recent years, CIRC reportedly may consider opening MTPL to foreign insurers with the hope of introducing international expertise and best practices to China.
A main challenge that most foreign P&C insurers face in China is the inability to expand geographically because of the limited number of branch licenses that PRC regulators approve. As a result of the influx of domestic companies into the P&C market and the tremendous growth of the auto insurance market, which is essentially off-limits to foreign insurers, collective market share of foreign P&C insurers has hovered around 1 percent in recent years.
In the absence of economies of scale, the 18 foreign P&C insurers operating in China collectively reported an operating loss of ¥91 million ($13.9 million) in 2009; only 7 companies, or about 39 percent, earned an operating profit. According to a recent survey by PricewaterhouseCoopers, however, most foreign P&C insurers remain committed to the China market despite these challenges.
China’s P&C insurance market will likely expand steadily, driven by robust economic growth and increasing insurance penetration. In the first decade of the twenty-first century, China’s GDP grew at a CAGR of 14.5 percent on a nominal basis, while the P&C insurance premiums expanded at a CAGR of 19.4 percent. In other words, P&C insurance premiums grew nearly 5 percentage points faster than GDP. If China’s GDP increases at a CAGR of 8 percent between 2010-16, it would reach $9.4 trillion by 2016, up from $5.9 trillion in 2010. Assuming China’s P&C insurance premiums rise at a CAGR of 13 percent in the same period, the country’s total P&C premiums would reach $122.8 billion by 2016.
China’s growth potential is particularly notable compared with more mature industrialized markets. For instance, Japan’s P&C insurance market grew at a CAGR of 0.4 percent in the first decade of the twenty-first century. Assuming Japan’s P&C market maintains a CAGR of 1 percent during the 2010-16 period, its total P&C insurance premiums would amount to $115.3 billion by 2016. In other words, China would overtake Japan in total P&C insurance premiums in about five years. With such a promising outlook, more new companies, both domestic and foreign, will likely enter China’s P&C insurance market in the coming years. Competition will increase as a result. Foreign P&C insurers in China may expand gradually but steadily. Their success, however, will depend largely on their ability to expand geographically.
Advantages of the Wholly Foreign-Owned Enterprise Structure for P&C Insurance Companies
The wholly foreign-owned enterprise (WFOE) structure is a more efficient investment vehicle for property and casualty insurance companies. WFOEs require a minimum registered capital of ¥200 million ($30.3 million), the same as an independent branch. An additional ¥20 million ($3 million) in registered capital is required for each new WFOE branch, with a ceiling at ¥500 million ($75.8 million).
Without a WFOE, each independent branch of a foreign enterprise would require ¥200 million in registered capital. A company under the WFOE structure with four branches would require only ¥280 million in registered capital (¥200 million for the WFOE plus ¥20 million for each branch), compared to ¥800 million for four independent branches. Moreover, WFOEs can consolidate operations and cut costs by sharing resources—such as underwriting, claims, information technology systems, and other support functions—among branches. Otherwise, multiple independent branches of the same international parent company would have to maintain separate functions without shared resources.
[author] Eric Zheng ([email protected]) is the general manager of Chartis Insurance Company China Ltd.’s Shanghai Branch. [/author]