With China being the word on everyone's lips at the moment, GR asked the industry about their plans to tap into opportunities in the country. Nick Thorpe presents the results.
China is the third largest insurance market in Asia behind Korea and Japan, generating a gross premium volume of $61bn in 2005, of which $45bn was in life and $16bn in non-life. Strong growth rates and rapid expansion has led to Benfield labelling the Chinese insurance market as "one of the most attractive in the world". However, Ping Chew, a director at Standard & Poor's, is a little more cautious: "Rapid expansion goes hand in hand with challenges such as weakened capitalisation, a shortage of talent and management skills, and low levels of sophistication."
Insurance is still a relatively new concept in the country, with half of the 83 insurance companies in China established in the five years since the country entered the World Trade Organization (WTO). Forty-two percent of the respondents to the GR China survey (see figure 1) confirmed they either had a subsidiary or joint venture presence in China. A further 23% revealed they had no fixed presence in the country but did some Chinese business while 19% said they were actively looking to enter the market. Almost half of respondents had set up in China in 2006 or 2007, while only 17% had been active in the country for more than ten years.
The influx of foreign investment into China can be clearly traced back to China's accession to the WTO in 2001. Total premiums increased from $26bn in 2001 to $61bn in 2005, a growth of 25% per annum on average. Respondents to the GR survey were optimistic about the future for insurers in China, with one predicting "much more interest as the rest of the business world continues to speculate on the future impact of China on the worldwide business economy". Other respondents pointed to "greater openness of the domestic market" which would lead to "greater competition, a broader product range, and wider availability of cover".
However, for every optimist there was the more pessimistic view. "There won't be any noticeable effect from the WTO on the Chinese insurance market in the near future, apart from overcapacity issues perhaps," ventured the general manager of an international reinsurance company. Another identified regulation as a hindrance to success, claiming that it will "continue to marginalise and disadvantage foreign players, possibly more subtly than at present, meaning it will never be possible for foreign entities to enjoy profitable risk selection."
When asked to specifically identify issues of concern to foreign insurers and reinsurers looking to build business in the Chinese market, 54% questioned the integrity of the legal system. A further 24% identified both the integrity of the financial system and adequacy of underwriting discipline as causes for concern. "There will only be very slow progress," predicted a managing director of an insurance company. "Tight controls will still be imposed from Beijing but increasingly the provinces will sidestep directives and go their own way."
There has been a recent rush to establish in China - including such big names as Hannover Re, Swiss Re, Marsh, SCOR, and, most recently, Lloyd's of London. The latter's reinsurance operations in China are being underwritten by CV Starr & Co's Lloyd's Syndicate 1919, whose chairman and CEO Maurice "Hank" Greenberg is unashamedly upbeat about China's prospects. "At present China is a tiny market for insurance, but it is the fourth largest economy in the world and as such the potential is huge," he said. "The global economy is growing and inflation is low, so things are looking positive."
The survey revealed that respondents were just as optimistic in their opinions on the growth prospects of the market. A massive 83% thought that China would become the world's largest insurance market at some point in the next 25 years. In fact, almost a quarter agreed with the S&P assessment that it would take only ten years.
Looking more closely at the insurance sectors, respondents picked out life as the big winner in the future, with 64% choosing it as the sector that would see the strongest growth (see figure 2). Accident & health and property followed closely behind, along with aviation/space, in line with the noticeable recent growth in the Chinese space programmes. Marine and financial guarantee both failed to make an impression on respondents, with only 16% identifying it as a growth area. Perhaps most interestingly, given the current global political climate, not one respondent identified war risk as an area for future growth.
"There are cultural obstacles and potential political/economic stability issues which will act as a brake on increasing insurance penetration," said one reinsurance executive. A partner in a law firm pointed out that "there is huge protectionism, with the state retaining a vested interest in ensuring that its market is not plundered by external participants". In a statement, Wang Simiao, deputy director of the China Insurance Regulatory Commission (CIRC) reinsurance regulatory division, said foreign competition was good but shouldn't get out of control. "An appropriate level of competition will only do good to the market as prices and terms will be more fair and services will be better," said Simiao. "But we will prevent excessive competition."
Since compulsory cessions to the state-owned China Re were halted, a more level playing field has been created. "I think this market is wide open for those who are already there and are of size," commented a partner from an international consultancy. "However, it will take time for the market to process this as large international reinsurers will have more discipline than China Re." Another predicted that although the country is very large and has the potential to allow large property casualty companies to achieve diversified portfolios, "reinsurance will not be proportional to domestic growth".
"Rapid economic development, spurred by reforms, has been the driver for growth for the country at large and the insurance industry in particular," added Angelo Unson from Benfield's industry analysis and research team. "Domestic players still dominate but foreign capital and expertise is increasingly playing a supportive role with the removal of geographical and product restrictions." Despite Unson's upbeat outlook, a large proportion of respondents held reservations about the ease of entry and regulatory regime in the Chinese insurance market. One interviewee claimed that "Chinese bureaucracy" was constantly "tinkering" with insurance regulations "to favour the home team and not foreign entities".
And finally when asked to identify the key to global businesses succeeding in the Chinese insurance and reinsurance market, the answer was clear: "Cultural understanding". Also important is the need for talent, both local and foreign. "The industry has to invest in training following the increase in number of insurance companies as there is a clear shortage of trained professionals," said one respondent. According to yet another respondent, the key to success was a universal factor: "Relationships, relationships and relationships," he said.
- Nick Thorpe is senior reporter at Global Reinsurance
CV Starr & Co, Inc, a global investment firm led by chairman and CEO Maurice R Greenberg, is currently comprised of an Investment Group and Insurance Agencies. Starr Underwriting Agencies, LLC provides complex risk solutions for aviation, excess liability, accident and health, marine and property risks in the global insurance marketplace.