A leading property and casualty insurer gears up for post-WTO China

The Chubb Group of Insurance Companies became the second US nonlife insurer, in late September 2000, to obtain a license to sell property and casualty insurance in China. Chubb, a 120-year old firm based in New Jersey, is among the world's leading providers of property and casualty and executive liability insurance for a broad range of sectors, including finance and high technology. The company--with 12,000 employees and 135 offices in 32 countries--is one of the few nonlife insurers anywhere with real global reach.

Chubb sees its expansion of its China operations as contributing to the development of a modern Chinese insurance sector. As China's economy continues to develop and its service sector moves up the value chain, Chubb is confident that its global network will play an important role in attracting foreign investment to China.

One of the indicators of the immaturity of China's insurance industry is the lack of a well-developed distribution system of professional brokers and agents. This is one of the biggest obstacles insurers face in building up their China business, according to the American Chamber of Commerce in Beijing. Brokers help individuals and businesses assess their risks and recommend insurers best suited to their needs.

Moreover, China has severely restricted foreign participation in insurance, although conditions will improve with the country's World Trade Organization (WTO) accession. When Chubb entered China, PRC insurance licenses allowed the few foreign insurance firms operating there to sell policies only to foreign investors in one city and to invest only in interest-bearing accounts with Chinese banks or in Treasury bonds or other State Council-sanctioned instruments. China's WTO commitments in the area of insurance are substantial but will be phased in gradually over five years (see Insurance In China: Pre- and Post-WTO).

The ambiguity of the insurance regulations also makes operating in China difficult. There is substantial room for administrative discretion that further clouds the picture.

Despite these obstacles, WTO membership will open up the insurance sector to new foreign participants and will expand the range of cities in which they can choose to operate. In addition, China recently announced that insurance companies would be allowed to invest premium income in the stock market. Such alternative investment vehicles are essential to the development of a healthy insurance industry. They also help to broaden and deepen the capital market. The ability to use alternative investment vehicles, Chubb officials note, is important to the overall health of the economy as well.

After more than six years of effort to secure an insurance license in China, Chubb was invited to submit an application letter and form to the China Insurance Regulatory Commission (CIRC). The invitation to apply was issued on the occasion of Premier Zhu Rongji's 1999 visit to the United States. The company finally received its license on September 28, 2000. The extended application process was the result of the ups and downs in the US-China relationship during this period.

As one of the first foreign insurers in China, Chubb paid RMB100 million ($12.1 million) in registered capital to establish operations; the PRC now requires foreign insurance operations in China to have a minimum registered capital of RMB200 million ($24.2 million). The company had to deposit 40 percent of its total registered capital into a guarantee fund; now, companies must deposit 20 percent of their RMB200 million in registered capital into this fund. Any changes to the information submitted at the time of application require approval from CIRC, which has overseen China's insurance industry since 1998.

Chubb operates as a wholly foreign-owned entity with three offices in China: a Shanghai branch office, which serves as Chubb's Greater China Regional Headquarters and has 23 employees; a Beijing representative office, which has eight employees; and a representative office in Shenzhen. Chubb's insurance license allows the company to sell property and casualty insurance only to foreign-invested enterprises in the greater Shanghai area and to provide limited amounts of reinsurance.

Chubb's clients in China are multinational companies ranging from low-cost manufacturers to high-end service corporations. Chubb has targeted businesses in China that include high technology, metal work, electronics, biomedicine and biotechnology, and power and energy resources firms, as well as financial institutions. Chubb's major competitors are American International Group, Inc. and local Shanghai branches of major PRC insurers. Chinese firms dominating the Shanghai property insurance market include People's Insurance Co. of China, Huatai Insurance Co., China Pacific Insurance Co., and Ping An Insurance Co. (PAIC). Chubb recently partnered with PAIC to launch the first directors and officers (D&O) liability product for the China market. In this joint effort, Chubb will assist PAIC with the technical knowledge and skills associated with providing D&O liability coverage and will provide PAIC with reinsurance for this line of business.

Chubb has pursued a long-term strategy to position itself for the coming market openings. China's December 2001 entry into the WTO means that Chubb may gain access to four more cities: Dalian in Liaoning, and Foshan, Guangzhou, and Shenzhen, in Guangdong. (Other cities will open over the next few years.) But the investment levels that Chinese officials say is required to open additional city offices substantially exceed international norms and raise the question of whether such investment can result in financially viable operations. Clarification of this issue is being sought in discussions between China and other WTO members. Resolution of this issue would enable Chubb to introduce tailored policies, as well as the services for which it is known around the world, to a broader segment of the Chinese economy. Further, as WTO commitments phase in, the scope of Chubb's license will allow the company to serve both foreign and domestic enterprises.

Chubb's involvement in China came about as China's leaders recognized the importance of the insurance industry for the country's growing and increasingly sophisticated economy. Even so, the market remained closed to foreign firms until the early 1990s. Chubb's involvement in China goes back to 1979, when the Chinese government invited a delegation of Chubb executives to Beijing to discuss insurance issues. Subsequently, in 1994, Chubb opened its first representative office in Beijing. This office spearheaded a series of training and other programs and technical assistance efforts to demonstrate the company's commitment to developing the Chinese insurance industry.

As WTO commitments phase in, the scope of Chubb's license will allow the company to serve both foreign and domestic enterprises.

For example, a joint effort by Chubb and the Shanghai University of Finance and Economics paved the way for the Chubb School of Insurance. The purpose of this project was to share Chubb's risk management expertise with China's insurance regulators, domestic insurers, and businesses. Today, the Chubb School has evolved into a Chartered Property Casualty Underwriter/Insurance Institute of America (CPCU/IIA) accreditation center. Other Chubb efforts have included a regular insurance column in the People's Daily on insurance matters and a weekly English-language radio message on insurance.

Chubb also partnered with various state institutions during the late 1990s to carry out risk assessments. In 1997, Chubb helped the State Seismological Bureau to develop its first digital earthquake intensity map. The company has also provided pro bono advice on corporate governance and loss-control strategies to Chinese companies, as well the China Securities Regulatory Commission and the Shanghai Stock Exchange. Chubb's managers helped research and develop loss-control strategies for industrial parks in Beijing, Dalian, Guangzhou, Shenzhen, and Tianjin, and Zhuhai, Guangdong; Suzhou, Jiangsu; and Xiamen, Fujian. Chubb also conducted a comparative analysis of PRC building and fire codes with the US National Fire Protection Association. In addition, the State Institute of Water and Hydraulic Research developed the Shenzhen and Pudong flood risk maps in 1999 and 2001, respectively, with Chubb's assistance. Chubb notes that senior Chinese officials have regularly sought its expertise on a wide array of issues, from insurance solvency to WTO. These types of contributions to China's own capacity-building efforts helped earn the company a positive reputation among Chinese officials and complemented the company's bid for a license.

The demand for international quality insurance products and loss-control techniques has already risen considerably in China and is projected to grow at an even faster pace now that the country is a WTO member. Chubb's new product team will launch several cutting-edge insurance products in 2002. These new products will not only benefit Chubb's foreign-invested enterprise clients, who are desperately looking for world-class insurance products, but will also help develop the local insurance industry.

The concept of loss control is not yet prevalent in China's business culture, however. There is a great need for the application of risk-prevention techniques and programs offered by experienced loss-control engineers. Industry experts, for instance, generally cite the statistics that following a major disaster in any country: 30 percent of the companies affected never reopen for business and an additional 30 percent go out of business within three years. Tangible effects of a loss can be seen directly and protected by an insurance policy, but the loss of a company's ability to generate sales and profit is less obvious and has far-reaching consequences for the survival of a company. Sound risk management practices help stop losses before they happen. In China today, however, primarily because of cost concerns, buildings are rarely constructed with the appropriate materials, resulting in potentially hazardous situations. Educating local governments and businesses about loss-control strategies and risk-assessment techniques will take time.

In the next three to five years, as WTO commitments phase in, Chinese individuals and businesses are likely to learn the importance of sophisticated service products relating to insurance, banking, and taxation. This is particularly true since state-owned and private enterprises can no longer expect the government to cover their losses. Foreign companies, like Chubb, currently operating in China will have an obvious advantage over new entrants because of the time they have spent learning about the needs of the market. After nearly two decades in China, Chubb is building name recognition, customizing its products, and gaining valuable experience in the China market that will help prepare it for post-WTO China.

Naziha Hassan is the publications assistant at The CBR.