Posted on Nov 02, 2011 by Sergio Ulloa
A special report released this week by international insurance information and credit ratings agency AM Best has provided fresh analysis about recent developments occurring in China's powerhouse insurance industry. While the Chinese protection market will continue to provide tremendous business opportunities going forward, individual insurers active in the world's second largest economy will need to build greater capital and continue to evolve their business practices to succeed, a view now shared by other industry analysts
The Chinese insurance market has experienced phenomenal growth over the past decade and still has much to look forward to due to favorable economic conditions and an under-penetrated market. While other, more mature insurance markets across the world are stagnating, total gross written premiums in China reached RMB 1,452.8 billion (US$221.4 billion) in 2010, a year-on-year increase of over 30.4 percent. This strong demand for insurance has continued into 2011. According to the latest China Insurance Regulatory Commission
(CIRC) figures, the total premium income reported by Chinese insurance companies' surpassed RMB 1 trillion in the first half of the year, with non-life insurance accounting for RMB 308 billion (US$48.66 billion) in premiums and life policies for RMB 699 billion (US$110.44 billion). China's continued economic development, pegged at 9.6 percent real GDP growth this year, is providing scope for insurance demand across all business lines.
In the report "Harnessing Momentum in China's Evolving Insurance Market
" AM Best finds that although many Chinese insurance companies are riding the country's economic development to continued top line growth, underwriting leverages are rising in tow, and additional funds will be required by insurers to keep up with the current pace of market expansion while maintaining healthy operating margins. Companies are thus attempting to fund further growth by quickly raising capital through a variety of means, including planned initial public offerings and the issuing of subordinated debt. Two recent examples of this have been PICC upcoming dual listed IPO
, first announced in June, and China Life's issue RMB 30 billion (US$4.74 billion) of subordinated debt in August. Insurers are then finding their balance sheets under further pressure from increased regulatory efforts to maintain adequate solvency levels. Companies with insufficient solvency levels (usually below 150 percent) in China face restrictions on the creation of new businesses and subsidiaries as well as payment of dividends. As a result, some of the nation's largest insurers are now focusing increasingly on operational profitability as opposed to increasing their market share further and taking on more liabilities.
For smaller domestic insurance companies, AM Best says that the main challenge remains gaining a foothold in China and achieving the necessary scale to operate successfully in a market dominated by humongous state-backed players, particularly in the compulsory motor third-party liability sector, which has been amongst the most competitive business lines. According to CIRC data, the motor insurance market posted an overall operating loss of RMB 7.2 billion (US$1.14 billion) in 2010, and work is now underway to improve underwriting performance in this sector. Insurers of all sizes are also facing increasing uncertainty in the macro economy, and this could place pressure on future growth. Volatility in the financial markets and the low interest rate environment are also major challenges for Chinese insurers to generate favorable investment returns with the increasing size of their investment portfolios.
The AM Best report notes that insurance companies in China have had to pay attention to recent regulatory developments
. The CIRC has been looking to strengthen its oversight over insurer financial matters to mitigate the threat of systemic risk spreading from the insurance industry to the banking sector and vice versa during these volatile macroeconomic times. In the life insurance sector, bancassurance channels have been restricted and this has been responsible for a slight dip in sales, and the subsequent pursuit of new product and distribution mechanisms across the market. In the non-life sector, ending government incentives to purchase cars dampened motor insurance sales but overall the sector has continued growing. Across the board debt rules have been tightened and investment channels have widened. While this will grant more options for insurers and enable them to diversify their portfolios, it may also create greater volatility in insurers' investments going forward.
The role of international insurance companies in China has also developed over the past few years, with several of the world's most prominent multinational insurance groups acquiring stakes in domestic Chinese players in order to gain a quick entry into a competitive and potentially lucrative market. By law, overseas companies are permitted to establish representative offices in China, and after two active years they can apply for conversion to branch offices, although there is no guarantee this will be approved. International insurers have normally found success in the country through direct investment and operating as joint venture partners alongside major local insurance and finance conglomerates, which have provided more immediate access to local expertise and distribution networks. Recent foreign investments in Chinese insurers have included Insurance Australia Group (IAG) paying a reported RMB 687.5 million (US$108.62 million) for a 20 percent stake in Bohai Property Insurance in August 2011
. In June 2011, Starr International Co became the largest shareholder in Dazhong Insurance Co for an undisclosed sum
. This followed Goldman Sachs successful purchase of a 12.02 percent stake in Taikang Life Insurance Co Ltd
, China's fifth-largest insurer by premiums, earlier in the year. Meanwhile, Lloyd's of London, in addition to obtaining its domestic reinsurance license
, began underwriting direct business in China in September 2011
AM Best found however that not all overseas ventures have proven successful and that some foreign companies have in fact exited China or have reduced their stakes in Chinese insurers. While China's insurance and reinsurance markets have remained attractive investment opportunities on paper, it has been difficult for many international insurers to compete against the major domestic companies, which all have entrenched extensive branch networks, sales representatives and considerable brand recognition. The international insurers who have invested in domestic companies have also faced challenges, including adapting to markedly different cultural and management practices. Some foreign companies that have recently left China in some capacity, include New York Life, which sold its stake in Haier New York Life Insurance to Haier Group and Meiji Yasuda Life Insurance in 2010
, and Zurich Financial Services who reduced its stake in New China Life Insurance
by 5 percent this spring. Meanwhile, the large successful Chinese insurers who have found sustainable premium growth attainable in their home market
have not shown much interest in expanding their operation overseas, as of yet.
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.
China Life Insurance
China Life Insurance Company Limited (China Life) is a People's Republic of China-based life insurance company. The products and services include individual life insurance, group life insurance, accident and health insurance. The Company operates in four business segments: individual life insurance business, group life insurance business, short-term insurance business, and corporate and other business.
People's Insurance Company of China (PICC) is a state-owned holding company in the PRC, founded in 1949, that sponsors its subsidiaries: PICC Asset Management Company Limited and PICC Property and Casualty Company Limited (PICC P&C) among others. PICC P&C was established in 2002 and is now China's largest non-life insurer.