On 25 April 2002, Munich Re became the first foreign reinsurer to receive approval to establish a branch operation in the People's Republic of China. Munich Re's Karl Wittmann surveys the role for reinsurers in the large, emerging market.
Although Munich Re's involvement with the Chinese insurance market dates back to 1956, it been only recently that global interest has been aroused by the cultural heritage, commercial opportunities and, indeed, the sheer size and diversity of China. Its economic role and development have now been firmly underpinned by its accession to the World Trade Organisation, a marvellous step indeed. China's leaders have agreed to a whole range of far-reaching economic reforms, to be implemented according to a very ambitious timetable.
Nobody underestimates the enormity of the task lying ahead, given the social and structural economic issues that must be managed in the years to come. Those of us who are fortunate enough to be involved in the process carry a heavy responsibility: we must work with the authorities and the existing market to overcome hurdles as they arise, in order to create a sound, stable framework for the enhanced business opportunities of the future. We believe that the time is now right to invite the international reinsurance community to play its part in applying its resources where required.
The consistent, efficient and cost-effective provision of insurance protection is crucial to the economic development of all industries. At the same time, the welfare of the entire population has to be catered for. China is not immune to worldwide pressures on existing welfare state provisions, nor from the budget deficits seen in almost all countries around the world. Personal insurance provision must match the resulting individual demand arising from the increasing desire to be able to make private provision for life, health and savings. Ensuring a healthy market to facilitate and underwrite these developments is the key.
China's economic performance is indeed remarkable. Statistics generated by the Chinese economy are often quoted because they make such impressive reading: a population of 1.3 billion and a GDP which is already the second largest in the world in terms of purchasing power parity, and predicted to become the second largest overall within seven years. The insurance development is similarly extraordinary. Market statistics show that the Chinese insurance sector is already the 13th largest in the world. Insurance penetration, however, is only 1.47% in life and 0.67% in non-life. Therefore one can foresee a steep rise in new business growth in years to come. Indeed, growth is already enviable: the figures for 2001 show premiums increasing 42% in life and 14.5% in non-life.
Existing insurance capacity is already stretched to the limit (and in some cases beyond the limit), as the market works to satisfy this rapid growth in demand, and absorb all the liabilities exposing China's commercial sector. Although the market will see increasing numbers of new entrants, this will be a phased introduction, and one cannot expect supply to match demand through these new entries alone. The existing players are likely to turn to reinsurance to ensure, among other things, that they can maintain adequate solvency levels.
Reinsurance can ensure a strong balance sheet which primary insurers can rely upon while growing stronger themselves. This nurturing of emerging insurance markets and the individual players within them is a traditional core role for reinsurers. Younger, smaller portfolios are, of course, also more vulnerable to peaks in exposure, whether they are caused by individual risks or particular accumulations. The burgeoning economic development and related capital investment present both opportunities and threats to the primary market. Huge civil engineering projects, for example, need insurance to attract investors. A single loss from the project may, however, be more than anyone insurer or co-insurer can bear. Again, the reinsurance market can take some of the strain, and remove this potential imbalance from an insurer's portfolio.
The threat of catastrophe seems almost unfair in China, when the market faces so many other challenges. Yet in many regions of the country a significant, latent natural catastrophe exposure is added to the overall burden of expectation. China is exposed to earthquake, windstorm and flood damage. The economic loss potential of all three should not be underestimated. Needless to say, the insured loss following any event of such a nature is also growing year on year.
The large global reinsurers can, however, provide much more than just capital, and thereby capacity, to the market during its time of need; they can act as the springboard for Chinese insurers to advance into the next stage of development. As with the rest of the economy, insurers are being driven to mature at a rate far exceeding anything seen in any other country ever before. None of this can be achieved without a sharing of knowledge and expertise. A very obvious example would be the core competency of a non-life reinsurer to assess, manage and underwrite natural catastrophe accumulations.
This year, the international press has again been full of stories of flooding in many provinces in China. Managing this obvious exposure can be achieved only through a lot of hard work by all those involved. Once again, a fledgling insurance industry has to master the same risk management techniques and build the necessary internal controls - techniques which some of the more mature markets around the world have spent decades improving. With the assistance of established risk modeling methodology tailored to local scenarios, we have been working closely with the market to improve the transparency of the available data. This work cannot be done from the underwriter's desk alone. It involves travelling to see the affected regions, talking to the authorities on the risk management measures they are putting in place, and also to the local insurers about their own portfolio management systems, including items such as underwriting guidelines, risk surveying, accumulation monitoring, policy terms and conditions, and claims handling procedures.
The global reinsurer is in the unique position to experience the good, bad and ugly from insurance markets all over the world. This knowledge and expertise will be invaluable in shortening the Chinese insurance market's learning curve as it rushes to keep pace with national and international developments. This can be provided on an adhoc case-by-case basis, but a much more valuable investment in the long-term future of the Chinese insurance industry are formal training programmes, which can reach out to many more local practitioners and help build their insurance skills. Munich Re has devoted a lot of resources to this type of training, providing generic as well as tailor-made courses all over the world for Chinese clients.
It is imperative that underwriting knowledge is adequate to service the increasingly sophisticated insurance requirements of buyers. For example, the demand for liability insurance products will grow with the developing legal system in China. The ever-increasing flow of international trade requires that the associated product liabilities are understood and can be insured against. Credit and bonding insurance requirements also have to be met, and reinsurers' international experience with these classes will again be invaluable. Even highly specialist areas like the insurance against the cancellation of the 2008 Olympic Games in Beijing are not new to reinsurers, and our expertise and assistance can be relied upon.
Life and health provision are very good examples of areas where reinsurers can do much more than simply provide reinsurance capacity. The skills needed to manage life and health business are very specialised, as is the IT support needed to run the business. Leading reinsurers provide the know-how, gleaned over decades, to support key actuarial functions, provide tools to support professional substandard risk assessment and management, and generally intensive training and advice covering the wide area of financial management. All of these are critically important for the continuing development of life insurers. Our global reach as a truly international reinsurer enables us to introduce latest product designs and developments, and to support the actuarial pricing of such innovations. Chinese companies can benefit from this experience by avoiding some of the mistakes made in other markets. We can offer a full range of tools to manage mortality and morbidity risks, and, additionally, can help to manage the more substantial financial problems associated with development expenses, taxation, reserving and solvency margin issues all the way up to professional investment management. Greater diversity of classes of business and products therein are already showing their value in the market.
Even in a relatively young market, competition for the ultimate insurance commodity namely - motor - is becoming cut-throat to the extent that insurers are having to segment their portfolios and seek new revenue streams to at least match any reduced income from cancelling unprofitable accounts. New products bring with them greater margins for insurers, and the opportunity to remain one step ahead of the competition. But they also bring with them the greater risk of the unknown - and here again reinsurers can help.
Munich Re will not take lightly the opportunity granted to us to assist with and participate in the expansion of the Chinese insurance market. It would be wrong to say that we are not excited by the potential that the market offers for all participants. The development must, however, be managed with the utmost care to protect the interests of individuals, businesses, insurers and reinsurers. There are no magic solutions or quick fixes. Only the professional application of all concerned will see the market develop in line with all expectations.