China is relaxing restrictions, but how will foreign insurers fare in a market where having the right connections is vital and many believe insurance brings bad luck? Benjamin Chang writes

The opportunities for those looking to invest in the People's Republic of China are huge. But, while there is an abundance of possibilities, there are also a number of risks which first need to be identified and then managed.

Foreign direct investment in China amounted to $52.7m in 2002 with a similar amount invested in 2003. Gross domestic product has grown at around 8% for more than five years in succession and currently stands at $1,066 per capita. The population is 1.3 billion and there are around 350 million households.


China's geographic structure is complex. It is the third largest area in the world after Russia and Canada but only 13.5% can be cultivated.

It has 22 provinces, five autonomous regions and four municipalities with dense population and development in some areas. China is also susceptible to a number of natural perils, including typhoons and severe windstorms, earthquakes and flooding. Fire is also a major problem, posing a significant threat to all densely populated areas.

On average, natural disasters are believed to lead to a direct economic loss of between 3% and 6% of total GDP and the deaths of thousands of people every year. Flooding is the most regular, destructive and changeable natural catastrophe. For example, in 1998, the total loss, including uninsured losses, as a result of flooding was estimated at $16.5bn.


One of the biggest challenges to doing business in China is understanding the culture. 'Guanxi' (connections) is probably one of the most important elements of Chinese society. Without Guanxi there is no status or standing.

Guanxi is vital in a country where red tape is endemic and conducting business relies heavily on friendly negotiations based on joint ventures with both operating partners and suppliers. It boils down to rapport and respect one can leverage upon others. The right Guanxi network is essential to minimise the inevitable risks, barriers and set-ups that are encountered in China and to ensure efficient and effective operation.

Negotiations can be extremely lengthy, and compromise plays an important role as avoiding loss of face is also vital. In China, the negotiation process is perceived to be more important than the result - a concept that many westerners find hard to grasp.

The market

Culture also has a strong influence on the insurance market. Many Chinese believe that insurance brings bad luck. As a result, insurance penetration is relatively low. Despite its huge population, China was only the 11th largest insurance market in the world in 2003 with total premium income of $47bn.

When China joined the World Trade Organisation in 2001 it committed to relaxing restrictions on foreign insurance companies over a period of three years, but so far foreign insurers have failed to make a significant impact. State insurers continue to dominate both the life and non-life markets.

The People's Insurance Company of China (PICC) held the monopoly for over 40 years and still accounts for 71% of the non-life market. China Pacific (CPIC) and Ping An account for around 13% and 11% respectively.

Together, the three companies can provide up to $800m in property damage and business interruption cover. A ready supply of cheap reinsurance has fuelled competition and helped to maintain a soft market when conditions in the rest of the world were hardening.

The main foreign insurers include AIU/AIA, Royal & SunAlliance, Swiss Re, Tokio Marine, Hyundai, Samsung, Sampo, Mitsui Sumitomo, Winterthur, Chubb, Allianz and Munich Re. However, the market share of foreign non-life insurers is still less than 1% of the total market.

Currently, foreign non-life insurers are only permitted to write business for foreign invested enterprises, and foreign life insurers may only enter the market as a 50:50 joint venture. But, by the end of 2004, foreign insurers should be able to establish branches anywhere in the country and to write most classes of business for both foreign and domestic clients.


The Insurance Law of the People's Republic of China is the main legislation governing the market. It does not distinguish between captives and any other type of insurance company.

The solvency level of insurers is defined by the authorities. The China Insurance Regulatory Commission (CIRC) is empowered to take action if an insurer's solvency level falls below that required, and can also order a takeover. It is also responsible for approving policy wordings, new products and all changes to existing products.

Non-admitted insurance is prohibited, so everything has to be insured in China with a local insurer. The Chinese government has, however, committed to allowing marine and transport insurance to be written on a non-admitted basis.

There are also geographical restrictions on the writing of business within China itself. Companies are authorised on a branch-by-branch basis and branches are not permitted to cover risks outside their designated areas.

Property insurance
While many Chinese enterprises are uninsured, foreign-invested enterprises are usually insured on an all-risks basis. Insurance companies and foreign branches are allowed to write master policies covering all the properties of a single enterprise located throughout China, but there must be a separate sum insured for each location, and multi-location first loss limits are not allowed.

Typhoon can be covered under a standard property cover. Earthquake is generally written as an extension to a fire or a property all risk policy.

While business interruption is very common for US and European multinationals, it is by no means an automatic buy for state-owned Asian and Chinese enterprises.

Policies are generally written on a gross profit basis with indemnity periods of 12 or 18 months.

Liability cover

The Chinese are traditionally a non-litigious society. This is rapidly changing, but levels of compensation still remain relatively low in western terms. Standard Chinese policies are similar to the UK policy forms, but generally poorly worded. They are written on an occurrence basis with costs and expenses payable in addition to indemnity limits which rarely exceed $250,000 for domestic concerns or $10m for foreign-invested companies.

Pollution is excluded and no pollution liability insurance is available in the market.

Although directors' & officers' (D&O) liability forms have been developed, and despite foreign interest, D&O insurance is not popular in the Chinese market. Professional indemnity insurance was introduced in 2000, but penetration is extremely limited.

Marine cargo and aviation

The marine cargo market is free rating. Despite falling rates, loss ratios are consistently around 40%. The Chinese aviation industry currently comprises three state-owned holding companies. Most aviation insurance is written by the three largest insurers, namely PICC, CPIC and Ping An. There is also a local satellite pool.


All business, with the exception of pure life, has to be ceded to China Re. The cession is currently 10%, reducing to 5% in 2005 and nil in 2006. Almost all reinsurance, except for the compulsory cession, is placed overseas.

Claims management

The nature and perception of risk in China do not necessarily match those in many other countries. The Chinese have little experience with claims management and loss adjustment, so effective and professional claims handling is of utmost importance. Guanxi plays an important role in respect of claims management and it is not uncommon for insurers to make a judgement on claims based on their willingness to continue a relationship.

China's Commitment

On 29 September, Meng Zhaoyi, director of the international division of China's Insurance Regulatory Committee, confirmed that China's insurance industry will fully open to the outside world by the end of 2004, three years after China's accession to the World Trade Organisation. China Radio International reported his statement that China will remove all restrictions on foreign insurance companies by the end of this year, including business location, scope of business and market access.

Mr Zhaoyi said that the premium income of foreign insurance companies in China during the first half of this year has increased by over 50% from the same period last year, with 39 foreign insurers are now operating in China.

Gen Re licensed

This summer, Berkshire Hathaway Inc's subsidiary General Re Corporation announced that it had been issued a license to operate as a composite reinsurance company in China on a nationwide basis. Gen Re's branch is located in Shanghai, with the company also maintaining its previously existing representative office in Beijing and its branch in Hong Kong.

Gen Re has been active throughout Asia for many years, with offices in Beijing, Hong Kong, Shanghai, Taipei, Seoul, Singapore and Tokyo, and had been operating as an offshore reinsurer in China, working with the leading Chinese insurers.

- Benjamin Chang is regional director, global and risk managed accounts at Aon Asia Limited.