Chinese Insurance Market Grows in 2011, Faces Challenges in 2012

Posted on Jan 11, 2012 by Sergio Ulloa (G+)

China may be home to one of the world's fastest growing insurance markets but unless the country's insurance sector can address some fundamental issues going forward, insurers will not be able to capitalize on the market's profound business potential moving into 2012 and beyond. This is all according to Xiang Junbo, the head of the China Insurance Regulatory Commission (CIRC), who had strong words for the Chinese insurance industry this week, warning that they would indeed face major challenges this year despite the continued double-digit growth in premiums reported for 2011. Insurance companies will need to adapt to changes in the Chinese economy, adjust their business models and increase both their equity investments and bank deposits, all while making sure to maintain a healthy solvency ratio. According to the latest industry data presented by the CIRC at the National Insurance Work Conference last week, Chinese insurance companies wrote CNY1.43 trillion (US$226.4 billion) worth of premiums last year, a 10.4 percent increase on 2010's results. Broken down by sector, the country's property and casualty insurance sector recorded an 18.5 percent annual increase in premium income to CNY461.8 billion (US$73.1 billion), while the life insurance industry posted a 6.8 percent rise in premium income to CNY969.9 billion (US$153.5 billion). This occurred while the total assets held by insurers in China rose to a record CNY5.9 trillion (US$930 billion), compared with CNY5 trillion (US$790 billion) in 2010, with the number of insurers failing to meet solvency ratio requirements declining from seven to five. Claims payments made by insurers meanwhile amounted to CNY391 billion (US$61.9 billion) in 2011. Despite these strong growth figures, data that most markets would in fact be delighted with right now, the CIRC chairman Xiang Junbo used his time at the National Insurance Work Conference in Beijing on Saturday to warn those active in the domestic insurance industry that there were still deeply-rooted problems in the market that need to be dealt with promptly. Chinese insurance companies did indeed deal with difficult conditions last year, with the increased prevalence of natural disaster losses, inflationary pressure and ongoing global financial market volatility occurring throughout 2011 amongst other issues, and saw their annualized return on investment fall by 3.6 percent. According to the CIRC website, Xiang warned that if these challenges cannot be overcome, the growth potential of the insurance market may in fact exceed the domestic industry's capacity to act. "Affected by severe external economic and financial conditions as well as the sector's own problems, the industry is experiencing a rapid increase in difficulties," Xiang said, adding that insurance companies could soon face greater pressure due to their relatively low capitalization, unrefined risk management practices and limited asset and liabilities management options. In his speech Xiang, who was appointed CIRC commissioner last October, went on to outline several specific problems Chinese insurers must contend with in 2012. First off, the CIRC head admitted that the largest growth figures seen over the past year in the property and casualty insurance sector were mainly generated by the automobile industry and compulsory first party motor lines, not through any noted product or market developments. According to Xiang, the overall competitiveness within the Chinese insurance industry is still relatively weak, with some insurers in fact violating industry regulations in order to gain market share. An industry-wide development strategy that has focused primarily on gross premium growth has been the main culprit for this malaise. This current pattern of expansion, which comes largely at the expense of improved management structures and product/service innovation has failed to consistently satisfy public demand, Xiang held, and that pushing for more innovations in insurance product design and service would be the best way to address this issue going forward. There have also been problems with sales management mechanisms as most of the sales persons in the industry remain under qualified for their positions. Overall, Xiang feels that many Chinese insurance companies are simply not keeping up with "the profound changes in the external environment." In an attempt to remedy these issues and ensure that Chinese insurers do not fall further behind, the CIRC will actively encourage companies to bolster their capital reserves in 2012 and invest wisely in their businesses. Higher reserves will ultimately help companies survive unforeseen catastrophe losses and will enable them to better protect and serve their existing policyholders. The insurance authorities are also considering allowing greater foreign involvement, particularly in the country's claims-heavy motor insurance market, amongst other reforms. The CIRC also has plans to help companies shift their focus toward subordinated, hybrid and convertible bonds, which will help boost their capital positions, as well as the performance of investments throughout the industry, keeping insurance credit ratings fairly high in tow. Xiang and his agency, are on record supporting plans for the People's Insurance Company (Group) of China Ltd. to become a public company and will also push forward reform of shareholding arrangements at China Life Insurance Group Co. Overall, while the Chinese insurance market will of course continue to provide tremendous business opportunities going forward, individual insurers active in the world's second largest economy will need to build greater capital reserves and continue to evolve their business practices to succeed, a view shared by other prominent industry analysts. Recent reports published by AM Best and AON Benfield touch on many of the same concerns expressed by the CIRC but conclude ultimately that China's continued economic development, pegged at 9.6 percent real GDP growth this year, will continue to provide scope for insurance demand across all business lines, provided of course regulation and business practices can improve as well.