China gained accession to the World Trade Organisation in December 2001. Jin Jie-wei assesses the changes in China's insurance sector following WTO membership.

Great progress and development has been achieved in China's insurance industry since China became a member of WTO in late 2001. Last year, the premiums of China's insurers hit a record high of RMB305.31bn ($36.87bn), up 44.7% from the previous year. Of the total, life insurance premiums contributed RMB227.48bn ($27.41bn), a 60% increase on a year before. Non-life insurance premiums climbed 14% to RMB77.83bn ($9.39bn). Total assets of the industry grew by 41.45% to RMB649.4bn.

Despite this remarkable growth in premium income, China's insurers reaped low revenues from investment last year. The rate of return on investment for the whole industry stood at 3.14% (RMB15.59bn). The previous year, the rate was 4.3%.

The rapid development of direct business no doubt affects reinsurance business. The reinsurance premium income of China Reinsurance Co (China Re), the only state-owned specialist reinsurer, reached RMB19.18bn ($2.31bn), up 17.52% from the previous year. Of the total, compulsory business contributed RMB17.91bn, a 14.8% increase on the previous year's figure of RMB15.6bn. Commercial reinsurance premiums increased by 76.1% to RMB1.27bn in 2002, but still accounted for 6.6% of the total premium incomes of China Re. Its total assets reached RMB20.76bn, up 11.85% from 2001.

By the end of last year, China had 52 insurance companies, including five state-owned companies, 15 small and medium-sized shareholding companies, 20 joint ventures and 14 branches of foreign insurance companies. Last year, the China Insurance Regulatory Commission (CIRC) gave several US and European insurers permission to enter its insurance market, as part of promises made to the WTO. These foreign life joint ventures and general insurers are permitted to operate in Beijing, Tianjin, Chengdu and Dalian. In addition, the world's second largest insurance broker, Aon, was allowed to form the first foreign joint venture broker company in China late last year. Another major step is that the world's two largest reinsurers, Munich Re and Swiss Re, have received permission to enter China. Both were given a full licence to establish a wholly-owned branch to offer national reinsurance coverage to their customers. That means they could, unlike direct insurers which need to apply for licences for each city in which they operate, use a single licence to operate both life and non-life insurance business nationwide. US-based GeneralCologne Re and Employers Re are also lining up following the break-up of the China Re's monopoly and both of them are applying for a full licence branch in either Beijing or Shanghai. One of the conditions for setting up a reinsurance office is that a company holding a licence to conduct either life or non-life reinsurance business must have at least RMB200m ($24.18m) in registered capital. A company with a combined licence must have at least RMB300m ($36.27m) in registered capital; the high capital base required may remain a stumbling block for some latecomers. Hannover Re has said it needs to examine what would be the best business opportunity before it considers making such a venture. French reinsurer SCOR Group said it was in no hurry to enter China's market, though it did set up a representative office in Beijing three years ago.

Many foreign insurers and banks are eyeing China's populous insurance market but are still challenged by a restrictive licensing regime, which also lacks a clear timetable. Rather than starting a joint venture and waiting for a licence, some foreign insurers and banks sought to tap the market by buying into domestic insurance companies. They are looking to tie up with local operators to gain access to the market while accumulating experience and lessons for their own future successful business. Last October, Hong Kong Shanghai Bank Corp entered into a deal to acquire a 10% stake in China Ping An Insurance Co with $600m. Bermuda-based ACE in May 2002 took a 22.13% stake for $150m in China Huatai Property Insurance Co, China's fourth largest general insurer, while Belgian-Dutch financial services group Fortis took 24.9% in China Tai Ping Life Insurance Co. According to current Chinese law, foreign stakes in a domestic insurance company are limited to 25%, a cap that is unlikely to change in the near future.

Exit as well as entrance
In contrast to the trend of foreign insurers rushing to open branch offices and foreign joint ventures in China, a group of 22 overseas insurance companies which had opened a total of 30 offices across the country shut down their operations over the course of last year, despite some of the operations being fully licensed. Among the departures were US-based Lincoln Financial Group, Germany-headquartered Gerling Group of Insurance Cos and Japan's Dai-ichi Mutual Life Insurance Co. The widely accepted reason behind their decision to relinquish their Chinese operations is post-9/11 problems impacting on head office profitability.

Meanwhile many domestic insurers are busy preparing the structural reforms and public flotation, particularly several large state-owned insurance companies. Nowadays, the most highlighted tasks for the insurance industry will be the transformation of the People's Insurance Co of China (PICC), China Life Insurance Co (China Life) and China Re into publicly listed firms.

PICC, which controls almost 70% of China's general insurance business, witnessed steady growth last year. The premium income rose to RMB54.8bn, up 8.44% on the previous year, while underwriting profits jumped by 20.6% from a year earlier to RMB3.9bn. The reform scheme, due to take place in the middle of this year, revealed that PICC would split into a holding company and a joint-stock property insurance company, with the latter launching an initial public offering as soon as possible.

China Life, which still accounted for 56.59% of the nation's total life insurance premiums last year, posted a record high premium income of RMB129bn, up 58% from 2001. It is said that China Life plans to split into two. The parent company will comprise the assets and liabilities incurred by China Life before 1999, while the subsidiary will be formed from the assets and liabilities acquired by China Life after 1999. It is believed the new company would be in a better position for tie-up with foreign investors and a planned public flotation.

Starting from 2003, the 20% compulsory reinsurance is being cut by 5% annually and will be completely eliminated by 2006. That means China Re, which gets 93.4% of its business from compulsory reinsurance, is expected to lose more than RMB4bn premium income per year. In order to solve this problem, China Re is now considering a restructuring plan. It is said the company will be re-shaped into a holding group company this year, comprising of three subsidiaries, China Property Reinsurance Co (CPRC), China Life Reinsurance Co (CLRC) and China Xin An Property Insurance Co. CPRC will operate with registered funds of RMB800m and CLRC with RMB500m in registered funds. China Xin An Property Insurance Co, the new non-life direct insurance company, will be established based on China Re's three branches in Shanghai, Shenzhen and Chengdu with planned registered funds of RMB1bn. These three companies will now be open to foreign and domestic investors. If CPRC does set up this year, it will take over all the non-life reinsurance business that China Re had covered from the beginning of January, as will CLRC.

Regulatory changes
In compliance with the WTO requirements and enforcement, China's Insurance Law needed to be adjusted properly. Last October, China's top legislature approved the newly revised insurance law, which came into effect in January this year. The amendments allowing insurance companies to fix clauses and premium rates which were previously set by CIRC and abolishing the requirement that insurers reinsure their business through China Re, will ensure China's insurance sector falls in line with international practice and enhance reforms and development within the industry. The other revisions include removing stiff investment restrictions, allowing property insurers to offer health care and casualty insurance products, and allowing institutional life insurance agents to become agents for more than one insurance firm. These revisions aim to create a fair, equal and open business climate for domestic and foreign insurers, while meeting China's commitment to the WTO.

Now that China's reinsurance market is open, the business development will depend on perfecting the legal environment and regulatory systems. Some newly approved reinsurers said they were waiting for the debut of the regulatory guidelines before setting up branch offices in China, to ensure they understood the regulatory/legal environment before embarking on such a venture. CIRC is now drafting the regulations on reinsurance business management, to be issued very soon. In fact, CIRC began to study and draft the provisions for reinsurance regulation in 2001 and issued the draft paper to all the insurers for opinions and discussion last year. It is said the proposed provisions' main contents are:

  • an overseas reinsurer which accepts China's reinsurance business is required to be of a credit rating above BBB, otherwise the reinsurer should issue a letter of credit to the ceding company;
  • in treaty business, proper and sufficient premium and outstanding claim reserves should be kept by the reinsured;
  • reinsurers are required to keep all types of reserves in the same way as direct insurers;
  • reinsurance brokers shall not also represent the direct insurer; and
  • fronting business has been banned for the insurance companies.
  • Despite the progress and development achieved, China's insurance industry still has some problems and difficulties.

    First of all, CIRC lifted its restrictions on the motor insurance market, allowing any insurer to set its own rates this year. It is expected that this measure will squeeze profit margins and increase competition in the industry which generates around 60% of the domestic property insurance premiums. A price war crippled the industry with widespread losses as the liberalisation programme was tested in South China last year.

    China's insurance market is showing growth, but for foreign investors it is slower than expected because they are still getting a small slice of the pie. Statistics indicate that the top three life insurers - China Life, China Pacific (Life) and Ping An (Life) - control a total of 91% of China's life premiums, and the top three non-life insurers - PICC, China Pacific (Property) and Ping An (Property) - have 94% of the total market share.

    Low returns on investments have already affected solvency and steady management of insurance companies. Statistics show that life insurers have lost more than RMB50bn ($6.05bn) over the past decade due to changes in interest rates.

    In contrast to the international market, China's insurance market is still soft due to intensified competition. Though overseas reinsurance facultative rates were on the high side, the Chinese insurers adopted co-insurance measures to cover key construction projects and high-value accounts by using their own treaty capacity and net retention. If this situation goes on, the low rates and poor conditions of property insurance business will still dominate the market and sooner or later the insurers will suffer from under-pricing business.

    China's insurers set far lower reserves than their foreign counterparts. The proportion set for some reserves does not fully serve the purpose of commercial insurance and reinsurance. Making things worse is that their retentions, particularly for some state-owned insurers and reinsurers, are too high and solvency margins too low. To solve this problem, more reinsurance is the proper and effective solution.

    Speaking at the most recent annual insurance conference, a senior officer of CIRC commented that CIRC is preparing and drafting a number of rules and provisions most of which will be issued before the end of this year. CIRC will take measures such as strengthening regulations against illegal and unhealthy practices and encouraging more innovation, to deal with these problems. He also said that CIRC is considering giving the green light to more new players in a move to encourage fuller competition in the market. It is foreseeable that the future foreign insurers and reinsurers will play an important role in China's insurance market.