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China's emerging insurance sector holds foreign participants at arm's length
Ji Chen and Stephen C. Thomas
In response to China's emerging insurance needs, the Chinese government has attempted to modernize the insurance industry during the reform era not only through development of a legal and regulatory framework, but also by expanding the number of insurers participating in the market. Domestic insurance companies, led by the giant state-owned People's Insurance Co. of China (PICC), have multiplied in recent years. Foreign insurers, on the other hand, have gained only limited access to the market.
To their frustration, Beijing has chosen to dole out operating licenses to foreign firms slowly, basing its decisions as much on political as market considerations. Of the many foreign insurers wishing to participate in China's insurance market, the few that have been licensed are companies that have met stringent formal as well as informal requirements, or have historical ties to the country--notably American International Group, Inc. (AIG), and Tokio Marine and Fire Insurance Co., both of which had a significant presence in pre-1949 China.
Despite ongoing reforms, including the creation in 1998 of an independent regulatory body, China's slow approval process is likely to continue. Nonetheless, foreign insurance companies are hopeful that their long-term commitment to Chi na will pay off in the form of access to a rapidly expanding market.
Back from oblivion
After more than 30 years of a command economy that had little need for market-style insurance, the economic reforms of the early 1980s prompted the State Council to proceed with reforms of the insurance sector. Initial moves included creating more domestic insurers; detailing types of permitted insurance products; and developing a basic legal framework for the sector. By the end of 1998, 25 Chinese and foreign insurance companies (13 Chinese companies, 6 foreign branches, 5 joint ventures, and 1 quasi-foreign Chinese company based in Hong Kong) were competing to provide a wide variety of insurance services and products to Chinese and foreign individuals, businesses, and the Chinese government. But PICC, the Ping An Insurance Co., and the China Pacific Insurance Co., the three largest domestic companies, dominate the sector.
The State Council separated PICC from the People's Bank of China (PBOC) in 1984 and brought PICC under its own authority. PICC was divided in 1996 into three independent companies: the PICC Property Insurance Co., the PICC Life Insurance Co., and the PICC Reinsurance Co. The People's Insurance (Group) Corp. (the PICC Group) was also established in 1996 to control the three companies. In October 1998, the PICC Group was disbanded, and the three PICC companies were renamed China Life Insurance , China Property Insurance, and China Reinsurance. Before this move, the PICC Group controlled the three companies' combined registered capital of Yen20 billion ($2.4 billion) and 6,000 branch offices employing 120,000 throughout China. In 1997, Standard and Poor's Corp. ranked the PICC Group the 17th-largest insurance company in the world, based on insurance-premium income.
PICC's first competitor emerged in 1988 when the China Merchants Co. and the Industrial and Commercial Bank of China formed Ping An in Shenzhen, Guangdong Province as a shareholding company. The Insurance Division of the Shanghai branch of the Bank of Communications founded China Pacific in 1991. PICC, Ping An, and China Pacific controlled around 97 percent of the market in 1997. PICC's 1997 premium revenues alone accounted for roughly 70 percent of the total Chinese insurance market. China Pacific captured 11.9 percent of the national market--11.6 percent of the property insurance market and 12 percent of the life insurance market. And Ping An, by the end of 1997, had grabbed 15.8 percent of the Chinese domestic market, with 8 percent of the property insurance market and 22 percent of the life insurance market.
In addition to these three largest players, 10 other Chinese domestic insurance companies operate on a small scale in various regional markets. All are either shareholding companies, meaning that no state funds are invested directly, or l imited-liability insurance companies (see Table 1). No Chinese insurance company is listed on any of the domestic securities exchanges.
Small claims
To conduct insurance business in China, a foreign insurance company must pass an approval process with two formal steps. First, it must gain national approval from the China Insurance Regulatory Commission (CIRC--before October 1998, such approval was sought from PBOC). Second, it must obtain an operating license from the Administration for Industry and Commerce in the city in which the company has been approved to carry out insurance underwriting. According to PBOC regulations still in effect, national approval requirements include the following formal criteria: operation of a Chinese representative office for a minimum of 2 years; total parent company assets exceeding $5 billion a year prior to the application; and 30 continuous years of experience in insurance underwriting.
A number of informal factors have influenced the national approval process as well. First, a company must demonstrate a long-term commitment to China, by, among other things, offering seminars, setting up research institutes, making financial investments in and contributions to Chinese educational institutions, and conducting programs to strengthen China's insurance-industry infrastructure. Second, Beijing appears to distribute licenses based in part on the quality of governmen t-to-government relations between China and the company's country of origin. Finally, historical relationships between the company and the Chinese government have factored into approval decisions.
PBOC awarded AIG, in September 1992, the first license of a foreign insurance company since 1949. AIG, among the world's largest insurance companies, was founded in Shanghai in 1919 as American Asiatic Underwriters. AIG now holds three separate licenses, one to underwrite both life and property insurance in Shanghai, and one each for life and property insurance in Guangzhou. The company is the only foreign firm to have been granted a single license to underwrite both life and property insurance in China.
By the end of 1998, a total of only 9 foreign insurance companies from 8 countries had been approved to do business in China, either as branches or as joint ventures with Chinese companies (see Table 2). The eight companies other than AIG have obtained (or are in the process of obtaining) licenses to carry out insurance underwriting only in Shanghai. With the exception of the United States, just one insurance company from each major industrial country has obtained a license. Two US companies together hold four licenses--Aetna Inc. has one license in addition to AIG's three. Nevertheless, in hopes of eventually breaking into the market, the 113 foreign insurance companies with a presence in China, including those that alread y have licenses, have opened a total of 202 representative offices in major Chinese cities.
Though the licensing process is a slow one, with the number of licenses granted limited to 2 to 3 per year since 1995, some foreign insurance companies have chosen to enter China through other available forms. A quasi-foreign company owned by PICC and the Min An Insurance Co. of Hong Kong has underwritten insurance in Shenzhen and Hainan Province since 1982. Foreign reinsurance companies have been able to provide Chinese commercial projects with reinsurance without a license. In 1997, foreign reinsurers captured about 50 percent of China's reinsurance market.
After establishing a non-business presence in the 1980s, in 1998 the British Sedgwick Group obtained a trial license to conduct an insurance brokerage business. More than 12 other foreign brokerage companies have representative offices in China and are seeking licenses to provide insurance brokerage services.
Some foreign firms have taken equity positions in Chinese companies as a way to participate in the PRC insurance sector. Goldman, Sachs & Co. and Morgan Stanley Dean Witter each own 6 percent of Ping An, and Japan First Life and Lincoln National Corp. of the United States have each been approved to purchase up to 5 percent of Ping An.
Hamstrung in the market
The continued dominance of Chinese companies in Shanghai and the exclusion of for eign companies from most other Chinese cities has so far left little room for the few foreign insurance players. By 1997, foreign insurers had captured only 8 percent of the life insurance market in Shanghai and less than 1 percent of China's total insurance needs. According to the China Insurance Institute's Insurance Research (Vol. 9, 1998), by 1997 Tokio Marine and Winterthur Schweizerische Versicherungs Gesellschaft had captured only 0.46 percent and 0.16 percent, respectively, of the property insurance premiums in Shanghai. Manulife Financial's joint venture, similarly, had only gained 0.12 percent of Shanghai's life insurance market.
In part, limited foreign participation is a result of the web of rules that constrain licensed foreign insurance companies. A license permits a company to set up either a wholly foreign-owned branch or take up to 51 percent ownership in a Sino-foreign joint-venture company. Other rules include limits on business scope. For instance, foreign insurers in China may sell liability insurance only to foreign-invested companies, and may sell life insurance only to foreigners or individual Chinese in China. In addition, all insurance underwriting has been limited to Shanghai and Guangzhou, and the premiums collected by foreign insurance companies may be invested in only a limited number of instruments. Foreign companies may deposit premiums into accounts in Chinese banks; may buy Chinese gover nment bonds or corporate bonds, but only up to 10 percent of the company's total investment portfolio; and may offer foreign-exchange trust loans or make equity investments in Chinese stocks, but only up to an additional 15 percent of their total investment portfolio.
Other limits on the activities of foreign insurers include prohibitions against Chinese citizens acting as general managers of foreign insurance operations in China. And government officials limit, on a case-by-case basis, the proportion of Chinese citizens that may sit on a foreign insurance venture's board of directors. All insurance companies are also required to have 30 percent of their insurance policies reinsured by a Chinese domestic company (for China's domestic companies this requirement is 20 percent).
Table 1 Source: Ji Chen and Stephen C. Thomas
China's Top Insurers Type of Base of insurance Geographic/ Company operations offered operational scope China Life Insurance Beijing Life National (Formerly PICC Life Insurance Co.) China Property Insurance Beijing Property National (formerly PICC Property Insurance Co.) China Reinsurance Beijing Reinsurance National (Formerly PICC Reinsurance Insurance Co.) China Pacific Insurance Co. Shanghai Comprehensive National Ping An Insurance Co. Shenzhen Comprehensive National Tian An Insurance Co. Shanghai Property Shanghai Dazhong Insurance Co. Shanghai Property Shanghai Huan An Insurance Co. Shenzhen Property Shenzhen Xin Hua Life Insurance Co. Beijing Life National Taikang Life Insurance Co. Beijing Life Beijing, Guangzhou, Wuhan Huatai Life Insurance Co. Beijing Property Beijing, Nanjing. Shanghai Yong An Property Xi'an Property Xi'an Insurance Co. Xinjiang Army Urumqi Property Xinjiang Group Insurance Co. Production & Construction Group, People's Liberation Army Joint-venture insurance companies must deposit 20 percent of their net receipts into a guarantee fund, overseen by CIRC, to protect the insured. Foreign subsi diary life insurance companies in China are required to deposit $4 million into a guarantee fund. Foreign subsidiary companies selling both life and property insurance in China must place $8 million in the fund. Foreign joint-venture insurance companies are additionally required to put 25 percent of after-tax profits into a cumulative reserve fund.
Another reason for the modest size of foreign insurance companies' market shares in China is that foreign companies are not licensed to sell group life insurance. In Shanghai alone, for example, the total group insurance market in 1996 was Yen1.86 billion ($224.6 million) out of Yen2.86 billion ($345.4 million), or 65 percent of Shanghai's life insurance market.
Foreign market share has further suffered because of Chinese competitors' rapid learning curves. After receiving its license to sell individual life insurance in Shanghai, for instance, AIG began an aggressive door-to-door sales campaign, employing about 10,000 sales agents at its peak. By the end of 1995, AIG had reportedly created and captured the bulk of Shanghai's new individual life insurance policy market. But PICC and the other Chinese companies soon followed suit with their own door-to-door campaigns. By the end of 1996, although the Shanghai life insurance market had expanded overall, Chinese companies had seized much of the new market share. By 1997, AIG's share of Shanghai's life insurance premiums had fa llen, according to Insurance Research.
Table 2 Sources: Ji Chen and Stephen C. Thomas; US Government, International Market Insight, August, 1998; The US-China Business Council
Foreign Insurance Companies in China Type of Country Year of insurance Venture Geographic Company base approval offered details scope Min An Insurance Co. Hong Kong 1982 Property Branch Shenzhen, Hainan American International Group, Inc. United States 1992 Life & Property Branch Shanghai Tokio Marine & Fire Insurance Co. Japan 1994 Property Branch Shanghai American International Group, Inc. United States 1995 Life Branch Guangzhou American International Group, Inc. United States 1995 Property Branch Guangzhou Manulife Financial Canada 1996 Life Joint venture (JV) Shanghai with Sinochem. Foreign share: 51% Winterthur Schweizerische Switzerland 1996 Property Branch Shanghai< /TD> Versicherungs Gesellschaft Allianz AG Germany 1997 Life JV with Dazhong Shanghai Insurance. Foreign share: 51% Aetna Inc. United States 1997 Life JV with China Pacific Shanghai Insurance. Foreign share: 50% Royal & Sun Alliance United Kingdom 1998 Property Branch Shanghai Insurance Group Plc. Colonial Mutual Life Insurance Australia 1998 Life JV with China Life. Shanghai Foreign share: 49% AXA-UAP France 1998 Life JV with China Metals Shanghai & Mining Corp. Foreign share: 51% Market potential
Like insurance industries in other developing countries, China's insurance sector once emphasized business insurance such as marine, fire, commodity, transportation, and casualty. Recently, howe ver, the growth of a Chinese middle class, particularly in Shanghai and other booming coastal cities, has raised demand for life and personal property insurance. Ongoing market reforms have also created a need for types of insurance new to the People's Republic. These include social insurance schemes such as health, disability, and retirement; property insurance for houses, cars, and personal possessions; and insurance for industrial assets, business operations, construction, and infrastructure.
China permits insurance companies to offer either of two broad categories of insurance in China: property insurance and life (group and individual) insurance. The major categories of property insurance include business property, family property, cargo transportation, motor vehicle, ship, and agricultural insurance. Life insurance instruments include "simple" life insurance (similar to term life); life insurance with savings features; group life insurance; "simple" and group disability insurance; group accident insurance; highway accident insurance (such as for bus passengers); collective-enterprise employee retirement insurance; individual pension insurance; children's education and marriage insurance; major medical insurance; and other combination products.
Chinese insurance companies also offer some insurance products to enterprises doing business outside of the PRC and to foreign-related businesses in China. These products include export-goods transportation insurance, shipping insurance, air-freight insurance, automobile insurance for foreign agencies and joint ventures in China, property insurance for foreign and joint-venture companies in China, project insurance, and machinery-damage insurance for foreign and joint ventures. Various kinds of liability insurance are also available, including product-liability insurance, investment insurance, shipbuilding insurance, offshore oil-exploration insurance, nuclear power-station insurance, and satellite insurance. In China, about 50 percent of exported goods and 90 percent of imported goods are insured.
China's reinsurance sector premiums were about Yen9.6 billion ($1.2 billion) in 1997. Most of these policies were the result of PRC insurance regulatory requirements. Chinese and foreign companies involved with infrastructure and commercial projects (such as satellite launches, airplanes, and nuclear power stations), however, have purchased reinsurance mostly from foreign insurance companies outside of China, because of a lack of Chinese experience and expertise in this sector.
In a reflection of huge demand for all types of insurance, premium income has grown rapidly since the launch of PICC in the early 1980s. In 1991, insurance premiums had reached Yen23.4 billion ($282 million), and by 1997, premium income had climbed to Yen108 billion ($13 billion). By 1997 the structure of the industr y had also changed. Life insurance premiums made up Yen60 billion ($7.2 billion), or 56 percent of the total Yen108 billion collected, surpassing property insurance premiums for the first time. In major Chinese cities, the life insurance share of the total market was even higher: in Beijing, it was 70.7 percent, in Shanghai, 64.8 percent, and in Guangzhou, 60.5 percent. In 1997, the combined insurance indemnities paid out by all companies were Yen27.6 billion ($3.3 billion), of which Yen17.6 billion ($2.1 billion) was for life insurance.
Between 1991 and 1997, the total annual growth in premium income was an impressive 29 percent, more than double China's GDP growth rate of about 12 percent. Although the World Bank estimated that total revenue would increase to as much as Yen240 billion ($28.9 billion) by 2000, an annual increase of about 40 percent, the latest estimate for 1998 reached only Yen124 billion ($15 billion), probably beca use of the effects of the Asia financial crisis and a weak domestic economy.
Despite the impressive growth of China's insurance market to date, however, per capita premiums still have significant potential. In 1996, Chinese per capita spending had reached only $7.64, according to a March 1998 China Economic Information Daily report. While higher than India's $1.70 per capita, China's spending is far below that of Thailand, at $30, according to a May 1998 China Daily article, and of course substantially below more developed countries such as Great Britain ($1,775) and the United States ($2,191).
legal catch-up
The rapid expansion of China's insurance industry in the 1980s pushed the Chinese government to put tremendous effort into establishing laws and regulations to manage the insurance market and make it more competitive. In 1985, the State Council issued the Provisional Stipulations of Insurance Enterprises Administration, the sole regulation guiding the industry until the passage of the 1995 Insurance Law. To regulate the experimental opening of the Shanghai insurance market, in September 1992 PBOC issued the Shanghai Administrative Measures for Foreign-Invested Companies (the Shanghai Measures). Some of the measures also applied to Guangzhou, and could be applied to other Chinese cities in the future. The Standing Committee of the 8th National People's Congress passed the Insurance Law of th e People's Republic of China in June 1995--the first insurance law in PRC history. The law spelled out the basic legal structure of insurance companies, insurance contracts, and rules guiding company operations. The Insurance Law also demanded that property and life insurance operations be separated, leading to the restructuring of PICC.
Other regulations include PBOC's July 1996 Provisional Regulations for Administration of Insurance to supplement the insurance supervision section in the 1995 Insurance Law. In 1997 and 1998, partly in response to the growing number of door-to-door sales agents in a number of industries, new regulations were enacted to control the activities of insurance agents and brokers. PBOC issued the Provisional Regulation for Administration of Insurance Agents in November 1997 and the Provisional Regulation for Administration of Insurance Brokers in February 1998. Also, a new state-owned specialized insurance company is being developed to meet the growing insurance needs of the agricultural sector.
The 1995 Insurance Law designated the Insurance Department of PBOC as China's insurance industry regulator. The Insurance Department became separate from the Non-bank Financial Institution Administration Department of the PBOC in May 1995. The Insurance Department was in charge of overseeing all insurance companies in China, foreign and domestic, and approving all insurance licenses. Foreign insuran ce companies were subject to the regulatory supervision of both the Insurance Department and the Foreign Financial Institution Administration Department of PBOC. (The field examination of insurance companies and the insurance industry in general was conducted PBOC's Auditing Department.)
In November 1998, however, the PRC State Council set up CIRC, a semi-autonomous insurance regulatory body, to take over from PBOC all insurance regulatory responsibilities. PICC Group head Ma Yongwei is CIRC head. Overall, three of the five chairmen and vice chairmen of CIRC came from the PICC Group. CIRC will help meet demands for tougher regulation of the industry and is to help shield it from the effects of the Asian financial crisis. CIRC is also expected to be more efficient and to give its full attention to the insurance industry. PBOC, as the nation's central bank, has numerous other responsibilities. In Shanghai, both Chinese and foreign insurance enterprises are still regulated by the Non-bank Financial Institution Administration Division under PBOC's Shanghai branch. Under this division, there is an insurance section overseeing the Shanghai insurance market.
Self-regulation by the insurance industry is developing rapidly as well. In February 1994, the Shanghai branches of PICC, Ping An, China Pacific, and AIG formed China's first insurance industry association to coordinate and self-regulate the insurance market in Shanghai. Among its features are subcommittees on life insurance, non-life insurance, and public relations. The Tokio Marine Shanghai branch, Tian An Insurance, and Dazhong Insurance have also since joined the association. By the end of 1997, insurance companies had established industry associations in 19 cities and provinces. A national insurance industry association is currently awaiting official approval.
Industry longevity
China's economic reforms will continue to stimulate demand for various kinds of insurance services for the countryside, for businesses, and for individual Chinese citizens. Another stimulus, particularly for life insurance, is China's national savings rate of 30 percent. Between July 1997 and July 1998, savings expanded 18 percent, reaching Yen5 trillion ($604 billion). Most of this huge amount is in bank accounts. Life insurance policies with savings features provide alternative savings instruments and are proving much more popular than traditional death-benefit policies.
Other elements of the PRC economy should expand future demand for insurance products and services. For instance, the country's ongoing housing reforms will create a vast new market for homeowner's insurance. Because the reforms are eliminating state provision of rent subsidies, millions of Chinese will opt for homeownership, and therefore will need mortgage and property insurance. Similarly, growing private automo bile ownership will require a major expansion in auto insurance provision.
The loss of the traditional "iron rice bowl" has already left millions of state employees without government-provided health, education, and retirement benefits, which can be replaced by private insurance coverage. The 60 percent of Chinese living in lagging economic areas will also eventually need the insurance products currently becoming standard in China's more advanced coastal cities. Moreover, 70 percent of Chinese people still live in rural areas. Increasingly successful farmers will want insurance for their crops, machinery, and their lives. On the commercial side, state-owned-enterprise reforms have created a demand for commercial risk insurance.
At the same time, a number of obstacles could prevent untrammeled growth in China's insurance industry. First is the limitation on the forms insurance premium investments in China may take. With six recent interest rate cuts, insurers are earning less income than ever, despite having to pay the high returns guaranteed in many policies. Stocks and corporate bonds are still too risky, and real-estate income is unpredictable. But such corporate investments typically yield higher returns than bank deposits and government bonds, and are the mainstays of insurance company investments in industrialized countries. Second, the Chinese public and insurance industry lack knowledge of basic insurance conc epts. A final obstacle is fierce market competition, which has forced some Chinese insurance companies to pay as much as 80 percent of premiums in commissions, reducing profit margins and potentially exposing these companies to future losses.
Few assurances for foreigners
The future for foreign involvement in China's insurance market remains cloudy. Some foreign experts hold that with the establishment of CIRC, approval for new licenses will accelerate and new cities in China will open to foreign insurers. They further argue that should China accede to the World Trade Organization, WTO requirements will force China to continue opening its financial services sector to foreign companies.
Other foreign observers, however, believe that the pace of approval and licensing of new foreign insurance firms will remain slow. They point out a number of reasons why, even with WTO pressure, China may not accelerate liberalization of its insurance market anytime soon. First, the development of insurance industry rules and effective enforcement mechanisms is far from complete. Second, Chinese insurance companies still argue for the need for protection from foreign firms because of their relative inexperience. And third, the recent Asian financial crisis has lent credence to the PRC's policy of cautious opening of the financial services sector.
If past experience is any indication, foreign companies will li kely continue to be restricted to forming life insurance joint ventures, while property insurance companies will continue to be permitted to form branches. Earlier PBOC statements seemed to indicate that China would speed up the granting of licenses and the opening of new cities. Current policy, however, clearly states that there will be no more licenses granted for wholly foreign-owned life insurance branches, either in Shanghai or in any other city. Joint ventures will continue to receive licenses, but probably at a slower rate, as this investment form is not a priority for the Chinese government.
Instead, priority will be given to foreign equity participation in Chinese-owned life insurance companies. Equity ownership is to be limited to 5 percent per foreign insurance company, up to a total of 25 percent by foreign investors in any one Chinese life insurance company. Foreign investors thus might want to consider equity investments in domestic companies such as Xin Hua Life Insurance Co., a Beijing-based, national insurer. In 1997, Xin Hua received $170 million in life insurance premiums, which accounted for roughly 22 percent of the Beijing life insurance market. Xin Hua ranked second in Beijing after the Beijing branch of Ping An, which accounted for 30 percent of the Beijing life insurance market. Other than such equity investments in these rising domestic firms, however, foreign companies face a slow entry process .
China's insurance market will continue to expand to meet the demands of a rapidly growing economy. Foreign participation in this market will continue to rise, but on a modest scale. Any major deviations from this pattern will come only from either drastic changes in domestic economic conditions and policies or in the international environment, neither of which seems likely to occur in the near future.
Ji Chen (j1chen@castle.cudenver.edu) is on the finance faculty of the College of Business and Administration, University of Colorado at Denver. Stephen C. Thomas is associate professor of Chinese politics at the University of Colorado at Denver. The authors would like to thank the Center for International Business Education and Research of the Institute for International Business of the University of Colorado for its generous research support for this article.
Last Updated: 1-Mar-99