The recent changes in China's insurance sector, particularly following its looming admission into the WTO.

China's insurance sector has registered 10-15% revenue growth for several consecutive years. Total income from premiums is likely to top $20bn in 2001. By 2005, the total value of insurance premiums is expected to reach $33.8bn, constituting 2.3% of the total gross domestic product value. The average premium per person will be $27.78. But despite its rapid growth, the insurance industry is still only a small part of the entire economy – less than 2% compared with 11% in Japan and 8% in the US.

China's insurance industry brought in $19.3bn of premiums in 2000, an increase of 14.5% over 1999, according to Ma Yongwei, chairman of the China Insurance Regulatory Commission (CIRC), the country's insurance watchdog. The total assets of China's insurance companies reached $40.8bn, an increase of 19.3% over 1999.

Of this, $7.2bn, or 37.5%, of the total premium income came from property insurance. This marks a 14.8% increase over 1999. A total of $3.69bn was paid out to insured property, or 51.1% of property insurance premiums. Life insurance income increased 14.4% to $12.1bn, accounting for 62.5% of the total premium income, and $2.7bn was paid out against life insurance. As of 2000, 17 foreign insurance companies had been granted permission to operate some form of insurance business in China, while 89 firms had set up representative offices waiting for permission to establish their own insurance operations in China.

Once China is admitted to the World Trade Organisation (WTO), however, this figure is expected to jump dramatically. On accession, the Chinese government has indicated it will initially approve licenses for seven European companies, two Japanese companies, one South Korean company and three US companies.

China's insurance market is characterised by its small size, a limited variety of insurance products, relatively high costs, lack of Chinese consumer education about the role of insurance, and a lack of a sound legal environment, particularly in the area of enforcement.

Another limitation to the growth of the insurance industry is that China's undeveloped financial markets limit investment vehicles for insurance premiums. A second factor is China's memories of its pre-1949 experience of foreign domination and control of China's insurance industry. Analysts say foreign companies will need to do thorough due diligence before entering the market, then build up long-term relations with Chinese local governments and potential consumers. They also will need to develop business plans that prepare their companies to be long-term players.

Changes under the WTO
China is in the final stages of negotiations to join the WTO, with accession expected to take place some time this year. Once a member, several changes will take place in the insurance industry:

  • China will permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession;
  • China will expand the scope of activities for foreign insurers to include group health and pension lines of insurance, which represent about 85% of total premiums, phased in over five years after joining the WTO;
  • China will allow 50% foreign ownership and remove joint-venture requirements on foreign life insurers, and phase out internal branching restrictions;
  • for non-life insurance, China will allow 51% foreign ownership upon accession to WTO, and;
  • China will award licenses for insurance business solely on the basis of prudential criteria, with no economic needs test or quantitative limits on the number of licenses issued.

    China has market opening commitments in the US-China Bilateral WTO Accession Agreement and the EU-China Bilateral WTO Accession Agreement. Market access barriers such as restrictive licensing have been addressed in these agreements. Companies will be able to obtain a license if they have more than 30 years of experience in a WTO member country; a representative office established in China for two consecutive years; and global assets of more than $5bn.

    Additional WTO commitments include: internal branching is permitted consistent with the phase-out of geographic restrictions; reinsurance, master policy insurance and large-scale commercial risk insurance can be provided nationwide upon accession; health, pension and group products can be sold two and three years from accession, respectively; and brokerage services will be permitted.

    Shanghai and Guangzhou will be the first two cities to be fully opened to foreign life insurers upon accession to the global trade body. A dozen other cities will be opened up within two years of accession. These are Beijing, Chengdu, Dalian, Chongqing, Shenzhen, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan and Tianjin. A year later, all geographic restrictions are to be lifted.

    It is possible China will accelerate this timetable once it gets into the WTO, but the decision could hinge on the activities of the new foreign companies allowed into the market. If they consume the domestic market, Beijing will likely go slow. Alternatively, Beijing may use the prospect of a speeded-up phase as a carrot in future trade and political negotiations.

    Presently, non-Chinese insurance firms do not enjoy the same unfettered access to the market as Chinese firms do. For example, the government requires that foreign insurance companies follow a strict timetable before they may enter the market. Prior to full operations, an outside firm must first establish a representative office. Under Chinese law, these are strictly limited to offering consultations and market-study services. Then, only after operating as a representative office for two years, insurers may conduct full business operations if they receive approval to upgrade to full-service branches.

    The rules were originally intended to protect the domestic insurance industry and will be repealed to comply with the openness and equality required for membership in the WTO.

    Market potential
    The China Insurance Regulatory Commission estimates that in the next five years the annual growth rate of the Chinese insurance industry will be sustained at about 12%. The Beijing-based China Mainland Marketing Research Co in January surveyed residents of Beijing, Shanghai and 20 other cities about insurance. Almost 21% of those surveyed said they intended to buy insurance in 2001, and 51% will hold some kind of insurance policy by the end of this year. The categories of insurance policies most commonly held by the urbanites surveyed were pension insurance, medical insurance and life insurance, held by 17.4%, 15% and 14%, respectively. The percentage of those with insured property was comparatively low. Only 3% of those surveyed held policies on personal property, and only 1.7% held auto insurance policies.

    The survey also shows a dramatic increase in the number of families in the low and average income brackets who hold insurance policies. Thirty-eight percent of families with monthly incomes lower than $120.77 and 40% of families with monthly incomes from $120.89 to $241.55 bought insurance in 2000. Forty-three percent of families with monthly incomes between $241.67 and $362.32 bought insurance, and the figure for families with monthly incomes greater than $362.32 was 44%.

    Like China's banking sector, China's insurance sector will face adjustment challenges after joining the WTO. Most life insurance companies in the country have payout obligations that are significantly greater than their current return on investments.

    The sector is also dominated by just a few companies. Shortages of actuaries and professional insurance management staff have contributed to poor business practices by insurance companies. In quality of service and business skills, the country's insurance companies lag behind international ones.

    Domestic insurance companies will have to make serious efforts at adopting international business and prudential practices so that they can adjust to the international competition.

    Insurance leaders have several concerns: the industry might be subjected to cut-throat domestic competition, and some domestic companies have sold large quantities of expensive fixed interest rate insurance policies at the peak of business operations.

    But since assuming these policies, the government has cut bank savings interest rates seven times. The resulting spread in margin losses threatens the viability of local companies, and some economists say the potential losses could trigger an insurance reimbursement crisis - posing the most severe challenge the industry has ever had to face. It has been estimated that the spread in margin losses alone could cost the insurance sector as much as $6bn, against total assets of $40bn.

    Others fear that the biggest challenge posed by the increased presence of foreign companies to Chinese insurers isn't so much in gaining business as in winning consumer confidence. A survey conducted by Horizon Research late last year showed that 51% of the respondents favoured foreign insurance companies even though most of them had had little experience with foreign insurers. The reason appeared to be due to mistrust, specifically a fear that Chinese insurers might defraud them.

    China's insurance industry has its own list of complaints. For example, the government limits the use of insurance funds to control risk, which has reduced the rate of insurance investment returns. In order to expand, the industry needs to standardise and rationally expand operations by offering new insurance products and by taking advantage of investment returns that are better than the world's average.

    In January, the CIRC published a list of insurance companies that will be permitted to invest in securities funds and the amount of money they are limited to risk in these investments. Qualified firms are limited in the amount they may invest to a maximum of 15% of their previous year's total assets.

    Companies approved at the maximum rate of 15% are Ping An Insurance Co, China Pacific Insurance Co, Tai Kang Life Insurance Co, Sinosafe Insurance Co, AXA-Minmetals Assurance Co and American International Assurance (AIA) Shanghai Branch. New China Life Insurance Co and Huatai Insurance Co have a maximum investment limit of 12% of their previous year's assets.

    Companies that have 10% investment limits are China Life Insurance Co, China Reinsurance Co, Tian'an Insurance Co, Dazhong Insurance Co, Yong An Property Insurance Co, Zhong Hong Life Insurance Co, AIA Guangzhou Branch, Pacific Aetna Life Insurance Co, Allianz Dazhong Life, CITIC Prudential Life Insurance Co and China Life Colonial Life Insurance Co. The People's Insurance Co, American International Underwriters Ltd (AIU) Insurance Co Shanghai Branch and AIU Insurance Co Guangzhou Branch have been approved to invest 5% of their previous year's assets.

    In order to address domestic concerns, the CIRC said in January it will concentrate on opening the industry domestically before opening too much to foreign entities. This year's key objective remains the prevention and removal of business risks, the CIRC says. It says it will conduct a specific investigation into the manner in which insurance companies use funds, with special emphasis on whether problems arise when funds are diverted to avoid risk. Also earlier this year, the CIRC said the government will begin regulating foreign-funded insurance companies in 2001 and it will expedite revisions to the insurance law in compliance with WTO membership requirements.

    The CIRC said that while foreign-funded insurance companies will undoubtedly boost the domestic insurance industry, they also present problems:

  • some international companies do not strictly adhere to China's insurance laws and regulations;
  • some companies allegedly transfer funds out of China illegally. China has specific laws and regulations regarding the transfer of Chinese-made profits to international financial institutions; and
  • some foreign partners of joint-venture insurance companies artificially inflate costs so that less profit shows up on the books to reduce their taxes.

    Expanding across China, CIRC has set up branches in Shenzhen and in 30 provinces, autonomous regions and municipalities directly under the central government, forming a framework for national insurance regulation.

    Last year, CIRC unveiled a series of administrative rules and regulations including Regulations for the Administration of Insurance Companies. The new regulations mapped out the insurance regulatory system and expanded the operating territories of the branch offices of insurance companies. Insurance companies are now allowed to engage in large-scale commercial insurance operations and underwrite insurance outside their territories.

    CIRC has also drafted new regulations that will afford all insurance companies - regardless of national origin - equal legal status, and the proposed regulatory changes have been submitted to the State Council for review.

    In 1984, the State Council separated the state-run People's Insurance Company of China Group (PICC ) from the People's Bank of China (PBOC) and offered standard insurance products such as life, property and reinsurance services. From 1984 until 1998, in order to create a more competitive domestic insurance market environment, China permitted more than ten smaller Chinese domestic insurance companies to be established. The largest of these were Ping An Insurance Co and China Pacific Insurance Co, both providing comprehensive insurance services in all parts of China.

    Even with these newly-established companies, by the mid-1990s PICC still controlled roughly 70% of China's insurance market. In October 1996, to further stimulate and develop China's domestic insurance market, PICC was divided into three independent insurance companies called China Life Insurance, China Property Insurance and China Reinsurance Co. In 1998, PICC was abolished, leaving the Chinese companies to operate independently.

    The rapid growth of the insurance industry required the establishment of a legal framework. In 1985, the State Council issued Provisional Stipulations of Insurance Enterprises Administration as the sole regulation guiding the industry.

    In 1995 the National People's Congress promulgated a formal insurance law. Another major step was the establishment of the CIRC in November of 1998. This took over insurance regulation responsibilities from the PBOC. By 2000, CIRC had established branches in more than 30 provinces, regions and municipalities around China.

    As part of China's financial market-oriented reforms and opening to the world, China began to permit limited foreign access to its emerging insurance market. In 1992, foreign insurance companies were invited to assist China in developing its domestic insurance market through training Chinese personnel, hosting symposiums on insurance issues and supporting insurance education in China. Insurance companies were also encouraged to provide investment in China. Lincoln National Life Insurance Co invested $300m in the domestic economy.

    But at the same time, the PBOC required foreign insurance companies to meet various criteria in order to obtain permission to operate. Each local government also imposed specific requirements to receive a business license. By these procedures, the Chinese government was able to control significantly the speed at which the insurance sector opened.

    In practice, even companies with licenses faced many restrictions and limitations. In addition to restrictions imposed on all insurance companies in China, foreign insurance operations were limited to two cities. While most licenses were issued only for Shanghai, a few additional licenses were issued also for Guangzhou and Shenzhen.

    Since 1997, any foreign insurer wanting to write life insurance policies had to form a joint venture with a Chinese insurance partner, usually assigned by the Chinese government. Life insurance policies could be sold only to individuals, not groups; property insurance could only be sold to foreign-invested businesses.

    Partly because of these myriad limitations, as well as the slow rate of approval of foreign business licenses - particularly for European companies - insurance has been one of the major issues in the ongoing WTO entrance negotiations.

    As a result of the WTO agreements on insurance with the US and the EU, Chinese officials have begun to restructure the domestic industry to build strength for the coming competition. Some of the steps so far taken include:

  • establishing more domestic insurance companies and permitting existing domestic insurance companies to operate in more cities;
  • setting up alliances between domestic insurance companies and Chinese banks, starting with the largest insurance company, China Property Insurance Co, and the largest domestic state-owned bank, Industrial and Commercial Bank of China. Together they provide both insurance and other financial services to their customers;
  • providing training programs to better permit Chinese insurance companies to compete with foreigners, to provide additional capable personnel for the insurance sector, and to hire foreign insurance professionals as advisers;
  • increasing the percentage of Chinese insurance companies holding stock-based investment funds; and
  • enforcing regulations on both Chinese and foreign insurers to create a more fair and transparent insurance market environment.

    The China Insurance Regulatory Commission (CIRC) formulates and enforces related laws and regulations; oversees insurance business operations; protects the interests of policyholders; develops the insurance market, maintains order in it and ensures fair competition; promotes insurance industry reform and restructuring; and sets up a risk evaluation and advance warning system to minimise insurance risk.

    Its chairman is Ma Yongwei, the vice chairmen are Wu Dingfu, Wu Xiaoping, Tang Yunxiang and Feng Xiaozeng.

    The CIRC was set up in 1998 to regulate the insurance market and promote its development. Originally, the People's Bank of China (PBOC) was responsible for insurance, but this sector was transferred to the CIRC to deepen financial reforms, minimise financial risks, and shore up the fledgling financial services industry. Because many firms were making up losses in their life insurance business by borrowing from their property insurance business, the CIRC decreed that insurance companies could no longer handle both. The commission also declared that while property insurance firms could be wholly foreign-funded because the business is short-term, life insurance, which is fixed, must take the form of joint ventures. The CIRC streamlined state-owned firms by merging branch offices.

    Many insurance firms and foreign firm representative offices were said to be operating illegally, and offering very high agent commissions and returns and very low premiums to secure a larger market share, resulting in the firms' inability to make repayments. The CIRC set about regulating management and claims settlement procedures, and reining in the approval of new firms.

    Ma Yongwei stopped the sale of insurance policies with high interest kickbacks, promoted policies with fewer interest rate risks and demanded greater honesty. The CIRC strove to end to unfair competition by standardising all policy terms and premiums, including those offered by foreign-funded firms. The agency cracked down on unauthorised agents and planned to prohibit banks from acting as sales agents for insurance firms.

    New rules prohibited the representative offices of foreign insurers and risk management consulting agencies from getting involved in unauthorised intermediary business and recruiting sales agents in China, and prohibited domestic insurers from receiving business from unlicensed insurance intermediaries. These rules aimed to stop premium income leaving the country and reduce domestic insurers' risk.

    The CIRC also moved to increase the number of domestic re-insurers to break the existing reinsurance market monopoly.

    Since the high risks of immature domestic stock markets along with insurers' lack of risk management capabilities caused the state to ban firms' participation in the stock market in 1995, insurers were limited to investing in bank accounts or state bonds.

    But poor loan performance and repeated interest rates cuts were leading to insurers' insolvency.

    Hence, the CIRC allowed insurers to buy certain state-backed corporate bonds. As stock markets matured and irregularities were solved with the Securities Law, the CIRC in 1999 allowed insurers either to trade in existing securities investment funds on the secondary market or to use 5% of their assets to purchase newly issued stock options in mutual funds in the primary market.

    In 2000, the CIRC ruled that approved local finance departments could invest in insurers but that banks, securities institutions, the military, social groups and state institutions could not. Any registered firm with legal-person status may invest in an insurer so long as it has sound operations, makes a profit and has net assets constituting more than 30% of total assets. The shares of any single foreign shareholder may not exceed 5% of an insurer's total share value. Also, only 25% of the shares of a domestic insurer may be foreign owned. The rules do not apply to insurers that the CIRC has approved for listing, and many firms hope to list abroad soon.

    Inadequate progress on business volume, profitability, insurance coverage and products, risk, management, strategies and technology are hindering domestic firms' global competitiveness.

    The CIRC has proposed that firms lower the nominal rate of life insurance products, continue to develop new products, improve quality of service, call back non-performing assets, minimise risk via enhanced management, and adopt new tools to expand business and reduce operating costs.

    The CIRC itself plans to reform state firms; settle bad assets; enforce modern enterprise management mechanisms; allow insurance firms to undertake local foreign exchange business; and require that national insurers have minimum capital assets of $60.5m. The agency also hopes that foreign insurers will bring in advanced technologies, sales techniques, and management know-how and encourage domestic firms to hone their edge.

    Insurance Assoc. of China
    Following the establishment of the Bank Association of China, the Insurance Association of China was set up in Beijing on November, with Tang Yunxiang, general manager of the People's Insurance Company of China, as chairman.

    The association intends to broaden institutional reform, regulate the insurance market and prevent market risks as part of efforts to establish government supervision, set up an internal control system for the insurance sector, as well as increase insurers' self-discipline.