The Chinese Insurance Market
June 2002
Jorn Kristensen and Cherry Zhuang examine
China's political, legal, monetary, economic, and regulatory structures, and
predict the future for life and non-life insurance there.
by Cherry Zhuang, edited
by Jorn F. Kristensen
XL Winterthur
The People's Republic of China (in Chinese, Zhonghua Renmin Gongheguo) is
situated in Eastern Asia. It is the world's third largest country in area, after
Russia and Canada, and the largest by population. China is bordered on the north
by the Mongolian Republic and Russia; on the northeast by Russia and North Korea;
on the east by the Yellow Sea and the East China Sea; on the south by the South
China Sea, Vietnam, Laos, Myanmar (Burma), India, Bhutan, and Nepal; on the
west by Pakistan, Afghanistan, and Tajikistan; and on the northwest by Kyrgyzstan
and Kazakhstan.
China includes more than 3,400 offshore islands, of which Hainan, in the
South China Sea, is by far the largest. The total area of China is about 9,571,300
sq. km (3,695,500 sq. mi.), not including Taiwan. The capital of China is Beijing.
The country's largest city is Shanghai with approximately 15 million people.
More than a fifth of the world's total population lives within China's borders
(approximately 1.2 billion people).
Political and Legal System
Under the 1982 Constitution, the President is elected to a 5-year term by
the National People's Congress (NPC). The office of the President is largely
ceremonial, though the current General Secretary of the Chinese Communist Party
(CCP) is also the President, currently Jiang Zemin. Executive powers rest with
the State Council, which is headed by the Premier, and is responsible for administering
various areas of state business. The command of the national military belongs
to the Central Military Commission. Generally, the positions of greatest authority
in the Chinese government are those of Premier and General Secretary of the
CCP.
The NPC is the highest organ of state power in China. Its members are chosen
for 5-year terms by a series of indirect elections; each province elects one
representative (or deputy) to the NPC for each 400,000 people. All candidates
are either members of the CCP or approved by it. The NPC is empowered to pass
laws, amend the Constitution, and approve the national budget and economic plans.
It also has the power to appoint and remove members of the State Council (Cabinet),
which is the highest component in the structure of the Chinese government.
The State Council is the central governmental body of the NPC. The Chinese
Premier, currently Zhu Rongji, and vice-Premiers lead it. Various ministries,
commissions, and agencies are responsible to the State Council.
The Chinese have had a tradition of judicial process that differs considerably
from that of Western nations. Civil order has historically been the responsibility
of the family, the neighborhood, or the local government. The Chinese judicial
process has generally been more concerned with understanding the context of
an individual crime in an effort to redress its causes than with creating a
highly formal judicial system. Since the promulgation of the 1978 Constitution,
however, China has made a considerable effort to align its judicial and legal
systems with Western models. The 1982 Constitution guarantees the right of legal
defense, for example.
The Chinese legal system has three components: a court system; a public security
administration, or police component; and an office of the procurator or the
public prosecutor. The highest organ is the Supreme People's Court, which ensures
observance of the Constitution and of regulations of the State Council. Offices
of all three judicial branches are found at the provincial, county, and municipal
levels in higher, intermediate, and low courts, and the public security offices
function at the local neighborhood level.
Monetary System and Economic Outlook
The monetary unit of China is the yuan of 100 fen (8.3 yuan equal US$1).
The banking system is completely under government control and managed by the
People's Bank of China (PBOC, the central bank).
China began its reform program in 1978 under the leadership of Deng Xiaoping,
gradually introducing market-oriented reforms to a communist centrally planned
economy. Reforms helped China increase its gross domestic product (GDP) per
capita from US$226 in 1978 to more than US$900 in 2001.
China's reforms allowed it to achieve rapid economic growth and to attract
Foreign Direct Investment (FDI). China has attracted labor-intensive manufacturing
and done better than its Asia neighborhood in this respect. Some key factors
of China's successful reforms include China's willingness to invest in human
capital, resulting in a highly productive but low-cost workforce. Further, China
has gradually changed from a typical raw material producer to a manufacturer
and marketer of final goods. China has offered preferential government policies
to attract capital with flexible labor laws, low taxation, etc. Finally, China's
ambitious reform on state-owned enterprises has reduced the number from more
than 300,000 to well below 100,000 today.
China has achieved to maintain a remarkable annual average GDP growth of
close to 10 percent over the last 10 years. The World Trade Organization (WTO)
entry of China will assure more direct foreign investment to flow into the country,
and with strong trade flow, most economists are confident and predict that China
will maintain strong economic performance, i.e., an annual GDP growth of 7 to
8 percent in the near future.
| 9.7 |
8.8 |
7.8 |
7.1 |
8.0 |
7.3 |
| 819 |
903 |
961 |
991 |
1080 |
1159 |
| 673 |
731 |
762 |
791 |
855 |
915 |
|
Source: China State Statistics
|
| 38.1 |
41.7 |
41.1 |
37 |
37.5 |
44.3 |
| 2.7 |
3.5 |
2.4 |
2.1 |
1.8 |
3.4 |
| 2.4 |
3 |
2.1 |
1.3 |
2.2 |
1.9 |
| 1.8 |
1.1 |
1.8 |
2.3 |
3 |
1.7 |
| 1.3 |
1.1 |
2.1 |
1.9 |
2.1 |
1.8 |
| -2.3 |
-1.6 |
0.7 |
5.1 |
3.5 |
0.6 |
| 1.5 |
3.2 |
6.6 |
5.8 |
3.4 |
2.7 |
|
Source: Institute of International Finance
|
Brief History of the Insurance Market
After the founding of the People's Republic of China by the Chinese Communist
Party in 1949, the insurance industry was nationalized with the establishment
of the People's Insurance Company of China (PICC). Deng Xiaoping 's introduction
of economic reforms in the early 1980s revived a stagnant insurance industry
that had suffered a 20-year suspension during the period of political turmoil.
In 1984 the State Council separated the state-run PICC from the PBOC. Between
1984 and 1998, smaller state-owned insurance companies were established to create
a more competitive insurance market, the largest of which was Ping An Insurance
Company (established in 1988) and China Pacific Insurance Company (established
in 1991). In October 1998, following the introduction of restrictions on insurance
companies from conducting both property and life insurance, the PICC was disbanded,
and its three subsidiaries—China Life Insurance Company, China Property Insurance,
and China Reinsurance Company—have become independent insurers. In the 1990s,
China further developed the insurance market by permitting the establishment
of non state-owned domestic insurance companies.
In 1992 China began to allow limited access to foreign insurers and approved
the entry of American International Group (AIG) as the first foreign insurer
to conduct insurance business in China. Tokyo Marine and Fire Insurance and
Winterthur Swiss Insurance followed suit in 1994 and 1996, respectively, as
the second and third foreign insurers in China. The limited opening of the insurance
market to selected foreign insurance companies was seen by the Chinese government
as "the Shanghai experiment." To protect domestic insurers, geographic limitations
were placed on foreign insurers as well as restrictions on their scope of business.
Throughout the 1990s, the insurance market grew rapidly, notably from a small
basis. As of 1989, the total gross written premium was RMB 9.8 billion (US$1.2
billion). By year 2000, the figure had increased to RMB 159.6 billion (US$20
billion), which was more than 15 times the gross written premium underwritten
in 1989. An interesting observation is the distribution of premium in the market,
which has changed from being dominated by non-life in the early years to now
being dominated by life. In the early 1990s the proportion between non-life
and life was almost 2:1. Ten years later, the market proportions of non-life
and life has changed to the opposite—1:2—similar to that in developed countries.
Figure 3
Regulatory Environment
The China Insurance Regulatory Commission (CIRC) is the supervisory body
of the insurance industry. The CIRC is an independent commission subordinate
to the State Council and was established in 1998 to take over the regulatory
duties of the Insurance division of the PBOC. The staff for the CIRC came largely
from the PICC. The headquarters of the CIRC are in Beijing, and CIRC is represented
throughout China with branch offices.
Several insurance regulations have been issued in recent years, with a major
regulatory framework for the insurance industry being codified in the "Insurance
Law of the People's Republic of China," which came into effect on October 1,
1995. The Insurance Law includes provisions relating to capital requirements,
approval requirements for opening of new office, approval requirements for product
and pricing, restrictions on the investment of company funds, and restrictions
on dealing in or the holding of foreign currency. Since CIRC took over supervision
of the insurance market in 1998 from the PBOC, the supervision and control of
the insurance market has intensified and strengthened.
Non-Life
Structure. The Chinese non-life insurance market
is highly concentrated compared to other markets in Asia. As of May 2002, there
were 10 domestic insurers and 9 foreign insurers. Four of the 10 domestic insurers
are authorized as national insurers, permitted to conduct business on a nationwide
basis. The remaining domestic insurers are regional players. Foreign insurers
are confined primarily to Shanghai, with the exception of AIG, which has branches
in other Chinese cities, such as Guangzhou, Shenzhen, and Foshan. The market
share of the top three companies in 2000 (PICC, Ping An, and China Pacific)
was 97 percent. The remaining share was distributed among the other domestic
and foreign insurers. In 2000 the foreign market share was 0.54 percent on a
national basis.
Figure 4
Major Lines of Business. In 2000 motor vehicle
and third-party insurance accounted for approximately 60 percent of the total
non-life gross written premium of US$7.2 billion (non-life total). Commercial
property insurance and marine cargo insurance accounted for 20 and 7 percent
of the non-life total, respectively. The remaining lines of insurance (household
property, employer's liability, agriculture, etc.) accounted for 13 percent
of the non-life total. Compared to the developed markets, only fairly basic
products are available in the Chinese market. With the liberalization of the
market and further legislation, the level of product innovation is expected
to increase after China's entry to the world Trade Organization (WTO).
Distribution. Direct sale staff and in-house
agents handle the majority of business. Brokers are gaining importance, and
some domestic brokers have been set up since 1999. Currently, no foreign brokers
have a license to operate in China. However, following China's entry to WTO,
foreign broker firms will be allowed to establish wholly owned operations in
China within 5 years. Foreign non-life companies typically obtain some business
in China through referrals or contracts made outside China. This is typical
of global operating insurance companies that are able to serve multinational
clients on a worldwide basis.
Competition. Competition is fierce and the
global hardening of the property casualty market has not yet reached the Chinese
market. In particular in Shanghai, where all of the foreign companies are located,
the domestic (10) and foreign non-life (9) companies are sharing a fairly limited
amount of business (non-life excluding motor = approximately US$250 million).
Companies are competing for market share and neglecting to a certain extent
underwriting quality.
Life
Structure. The Chinese life insurance market
is similar to non-life sector in terms of concentration. As of May 2002, there
were 6 domestic insurers and 12 foreign insurers in China. Except for AIG, which
is exempted from restriction on full ownership by foreign insurers, all other
foreign companies have entered joint ventures with a Chinese partner in the
form of 49/51, 50/50, or even 51/49. Most of the domestic insurers are authorized
as national insurers who can conduct business on a nationwide basis.
The foreign insurers are all subject to geographical limitations. All foreign
branches are mainly confined to Shanghai, with the exception of AIG, which also
has branches in other Chinese cities for example Guangzhou, Shenzhen, and Foshan.
Two foreign insurers are licensed to operate in Guangzhou. The combined share
of the top three companies in 2000 was 96 percent (China Life, Ping An, and
China Pacific). The remaining share is distributed among the other domestic
companies and the foreign branches. In 2000 the foreign share was 1.85 percent
on a national basis.
Figure 5
Major Lines of Business. In 1999, out of a
total premium of US$10.4m, the premium revenues were approximately split one-third
to group insurance and two-thirds representing individual insurance. Foreign
insurers are not permitted to sell group life insurance. Insurance related savings-type
products dominate the China market. In 2000 savings component accounted for
more than 80 percent of total life market, while the risk component accounted
for less than 20 percent. In 1999 and 2000, all of the major life companies
introduced investment linked and dividend products, and such products gained
increased recognition in the market.
Asia's traditionally high savings rates have fueled the growth of the life
insurance business and as evidenced by the high savings content of life insurance
premiums. China is certainly no exemption to this fact as it has one of the
highest savings rates in the region of more than 40 percent (gross domestic
savings rates as share of GDP). The high savings rate, together with the absence
of an adequate social security system, is likely to encourage strong growth
for the life insurance industry.
Distribution. With AIG's entry to the Chinese
life insurance market in 1992, came the introduction to the market of the agency
system. Insurance agents now handle almost all business. In recent years, alternative
distribution channels have developed. Banks and Post Offices now play a role
as a distributor of life insurance. All of the large Chinese life companies,
as well as some of the foreign companies, have attempted to distribute insurance
products through banks, with the bank acting as agent.
Competition. Competition is keen, and in Shanghai
there are now six domestic insurers and seven foreign insurers competing in
a relatively small market (Shanghai annual premium US$1.7bn). There is certainly
a drive to secure market share and profit margins are getting lower. In addition,
the investment environment is not particularly favorable for a life insurer
as there remain many restrictions on investment policy. However, in light of
WTO and further relaxation of restrictions, the market has enormous potential
for growth in the long term.
Potential for Foreign Insurers
As we can see from the above-mentioned comments, the Chinese market is highly
concentrated both in the life and non-life sectors. Since 1992, the market has
been opened to foreign insurers. The market has, however, been highly regulated
and restricted to date, which is reflected in the limited market share of foreign
insurers. The foreign insurers have basically been geographically restricted
to operate in Shanghai only. Non-life insurers have been restricted to serve
foreign invested enterprises only.
It is, however, no doubt that the Chinese market offers good growth potential
as the economy is growing. As the average spending on insurance in year 2000
in the United States was more than US$3,000, in China it was less than US$20.
China's potential (in both life and non-life) is apparent, since it remains
among the lowest countries in terms of insurance premiums per capita.
WTO and Outlook
It took China 15 years of negotiation to become a member of the WTO, which
is expected to ensure the continued transition to a market economy. As part
of the conditions for entry, China agreed to open up industries such as telecommunications,
banking and insurance, automobiles and energy. WTO membership is expected to
boost the Chinese economy further in the long run. In the medium- to short-term,
however, there will be some pain for sectors that have been highly protected
against foreign competition, such as the insurance industry. Based on the WTO
commitment of introduction of "national treatment" within 5 years, the existing
protection on domestic insurers should be gradually reduced and finally eliminated.
Reforming the insurance industry was a key point in the final round of WTO
negotiation both with the United States and the European Union (EU). China has
promised to gradually open up the sector and to remove restrictions on foreign
insurers. In a nutshell, China appears committed. Immediately after the WTO
entry, China committed to abolishing the restrictions on the number of licenses
issued to foreign insurers. Foreign insurers must satisfy the following conditions
before applying for a license in China:
- A business history of more than 30 years as a WTO member
- Operating a representative office in China for 2 consecutive years
- Holding no less than US$5 billion in total asset as of the end of year
prior to the application
Geographical limitations will gradually be lifted with the commitment that
all geographical restrictions will be lifted 3 years after the entry.
The business scope will gradually be lifted (before entry, business scope
for foreign non-life companies was limited to foreign invested enterprises located
in Shanghai), and 2 years after the entry, foreign non-life insurers will be
able to offer all kinds of non-life insurance services to Chinese and foreign
customers. Similarly, the foreign life insurance will be opened up. Before entry
to WTO, foreign insurers were limited to offer individual life in Shanghai only.
Two years after WTO entry, foreign insurers will be allowed to provide health
insurance, group insurance, pension, and annual pay insurance services to Chinese
and foreign citizens.
Finally, the ownership structure of foreign firms will be liberalized. Immediately
after entry, foreign non-life insurers will be allowed to set up branches or
joint ventures in China. Foreign companies will be allowed to hold as much as
a 51 percent stake in the joint ventures. Two years after the entry, foreign
non-life insurers will be allowed to set up wholly owned subsidiaries in China,
i.e., there will be no restriction on the form of enterprise establishment.
For life insurers, the situation is similar. Immediately after entry, foreign
life insurers will be allowed set up joint ventures in China, and hold no more
than a 50 percent stake in the joint venture. The foreign company will be able
to choose their joint venture partner independently (before entry to WTO, this
was highly regulated).
After entry, foreign broker firms can immediately set up joint venture firms
and hold no more than a 50 percent stake. After 3 years, the foreign firm may
hold 51 percent, and after 5 years, foreign broker firms will be permitted to
set up wholly owned subsidiaries.
Conclusion
China's achievements in progress and development over the last 20 years would
have taken other territories generations. It is therefore understandable the
protective approach taken on sensitive industries, such as banking and insurance.
On the other hand, China wants to be part of the international community and
is already benefiting from that in terms of export and trade with other nations
and certainly the inflow of foreign direct investment. The WTO entry is the
ultimate confirmation of China joining the international community, and the
entry will certainly change the market.
The market is enormous, and so is the potential. However, foreign insurers
intending to enter the Chinese market should plan realistically. Mr. Stephen
Harner, a senior adviser with Roland Berger Strategy Consultants, expresses
his reflections as follows:
- The immense market size and commensurate opportunities of the China
market belong to the realm of current business mythology. Chinese officials
invariably try to impress outsiders with huge potential of their market
place. The business press, too often citing the work of consultants or echoing
Chinese government announcements, can frequently be heard proclaiming the
market's great potential and the huge significance of every new deregulation
measure or license issued to a new foreign participant.
- Given the mythology and media hype, it is particular important for foreign
insurance companies approaching China to firmly ground their thinking and
planning in reality. The starting point should be a simple question: How
big is the Chinese market, really?
The market is still relatively small. The top three companies, holding a
96 to 97 percent market share, will certainly position themselves to retain
their dominance. There will be no easy market penetration for a foreign player.
Figure 6
The Chinese market and its future potential are, however, too important to
ignore for a global operating company. However, the capital requirements and
investment for foreign insurers are significant. This should be seen in light
of the size and potential of the market and future return. Substantial corporate
commitment on all levels in the organization is required when entering the Chinese
insurance market.
The challenge for foreign international insurers is therefore not whether
they should enter China, but rather when and how (wholly owned branch, joint
venture, cooperation and shareholding in domestic insurer)!
Cherry Zhuang
comes from Shanghai. She joined Winterthur Swiss Insurance when the company
received license to operate in China as the first European insurance company.
Ms. Zhuang was part of senior management in Shanghai and was responsible for
planning and controlling. She relocated to Hong Kong and is currently holding
the position of Regional Financial Controller of XL Winterthur International
in Asia. Ms. Zhuang obtained a bachelor of arts degree from Shanghai University
and is a member of Chinese Institute of Certified Public Accountants.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
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is needed, consult with your attorney, accountant, or other qualified adviser.