How has China's WTO accession shaped the insurance market and what are the prospects for growth and foreign investment? asks David Campbell

Life insurance

After an extraordinarily high rate of growth in life insurance premium income from 2001 to 2003, with income levels reaching $17.2bn in 2001, $27.5bn in 2002 and $36.4bn in 2003, premium growth slowed in 2004 with the market reporting income of $38.6bn for the year. This is the result of two main factors. Firstly, the regulator stopped the industry writing new, participating health products after 1 October 2003. Secondly, the interest rates paid on bank deposits increased in 2004, leading to a sharp drop in bancassurance sales.

Looking ahead, an ageing population, social security reform and the low levels of state support for health care and pensions are the key long-term drivers of the life insurance industry.

Reform of the state health insurance system is driving demand for health insurance. While still small in absolute terms, at around EUR1bn, the average growth rate for health insurance premiums over the three years ending 2004 was around 60%, compared with a 30% increase for total life premiums as a whole. Although health insurance had previously been the exclusive province of the life insurers, specialist health insurers came into existence in 2005 with the China Insurance Regulatory Commission (CIRC) authorising four new start-up companies. In addition, non-life insurers can now offer accident products, also previously the exclusive domain of the life insurers.

Reform of state and corporate pension arrangements will ultimately determine the shape and size of the insurance industry's participation in a potentially enormous private pensions industry. It is not clear how this will play out but two domestic companies, Ping An and Tai Ping, were selected some time ago to participate in a trial of the new arrangements. In August, the first formal licences for new style pension business were issued to a small number of banks, insurers and asset managers.

Bancassurance has seen a recent surge in growth. The share of new life premium sold through the bancassurance channel has grown rapidly, from 1% of total life premium in 2000 to 27% in 2004. Single premium five-year participating endowments have been far and away the most popular product.

Insurers have recently been trying to shift the mix towards regular premium, longer-term policies in order to increase margins. Other forms of alternative distribution have made little progress so far.

This year, for the first time, foreign life insurers can apply for licences to sell business anywhere in China. Previously, they were restricted to just one or two cities, selected from a short list of the more economically advanced and internationalised urban areas. Many of the established companies have ambitious plans to extend into as many as ten cities. Competition for agents and the inherently more conservative consumers in these new locations may make growth harder to achieve even for those who have been successful in their initial markets.

Previously the sole domain of domestic insurers, 2005 saw the group market open up to foreign insurers. However, while foreign companies may now offer group products, they will be up against the strong established relationships between domestic insurers and their corporate clients.

The top two life insurers, China life and Ping An were successfully listed on the foreign stock markets in 2003 and 2004. Medium size insurers, who have been working towards domestic listings, have so far been unsuccessful.

Poor market conditions and a cautious securities regulator have delayed these listings until now and some companies have turned to other means of raising capital such as subordinated debt or seeking private equity investment.

Around 15 foreign joint venture life insurance companies now operate in China (see figure 1). There are also a large number of new domestic start-ups, some of which have minority foreign shareholders. There are still a number of opportunities for would-be investors into these domestic start-ups and capital-hungry larger companies at the present time, though successful deals are hard to pull off.

Non-life insurance

China's non-life market has experienced a boom in recent years, with an average growth rate of over 16% per annum over the last three years, consistently higher than the GDP growth (around 8-9%) for the same period.

Non-life income hit $8.3bn in 2001, rising to $9.4bn in 2002 and $10.5bn in 2003. Premium growth rocketed in 2004, rising 25.4% to $13.2bn.

Motor insurance business dominates, accounting for around two-thirds of the market in terms of premium volume, followed by commercial property, which makes up around 15%. These two sectors are driven by the rapid growth of the domestic economy, as well as a growing acceptance of the need for insurance.

Liability is a relatively small class and the market has not yet seen the levels of liability claims which are common in more advanced economies.

There are potential, substantial legacy liabilities in connection with asbestos and pollution exposures, though it is hard to say if and when these would directly affect the industry.

Current reported underwriting profitability is around 1% to 2%. The portfolio loss ratio fluctuates between 75% and 80% and the expense ratio is around 20%. There have been heavy losses in certain credit lines relating to car purchase financing, but these are small scale in comparison with the market as a whole.

In January 2003, regulation of motor premiums was abolished. The market subsequently experienced a period of falling rates but this was not as extreme as it might have been as management in domestic companies began to focus on profitability instead of absolute premium volume. Part of this refocussing can be attributed to IPOs and new reserving standards imposed by the regulator. Companies are now required to use actuarial methods to calculate reserves. The rapid growth in the car market makes compulsory third party liability insurance a big business, although regulators do not allow foreign companies to underwrite these risks. In practice, this means that foreign insurers can only operate in the motor market through reinsurance-type arrangements and thus find it difficult to leverage their underwriting skills.

The largest non-life insurer, PICC, was listed on the Hong Kong stock exchange at the end of 2003. International insurers have usually entered the market through a branch, although for regulatory and capital efficiency reasons these are now being converted into subsidiaries. Some international insurers, such as AIG and ACE, have made strategic investments in domestic insurers in order to leverage their skills over the whole China non-life insurance market, particularly the motor sector.

Several new insurers have been licensed recently. These include three specialised agriculture insurance companies. The first specialised motor insurance company has also opened for business. The first specialised construction insurance company is preparing to start up (see figure 2).


The insurance regulator has recently approved three new reinsurance licences for foreign players. Swiss Re, Munich Re and General Cologne Re have all now commenced formal operations in the mainland.

The only domestic reinsurer, China Re, has strong client relationships and a large market share. Following the run down of compulsory cessions from the direct non-life companies, China Re has been relatively successful in selling new commercial business. It is also now active in life reinsurance.

In order to continue the development of these reinsurers, regulations restrict the freedom to reinsure directly overseas.

The growth drivers for the China insurance market are very strong and it is certain to grow rapidly in the next few years. Stock market discipline combined with stronger competition from foreign insurers is beginning to shift the emphasis of the larger domestic Chinese insurers from premium volumes to profits. Difficulties in obtaining capital are also beginning to have the same impact on the medium-sized players.

Foreign insurers at last have an opportunity to grow beyond a narrow range of products and markets. Crucially, this includes being able to apply for licences to sell life insurance anywhere in this vast country.

However, certain regulatory restrictions remain.

Foreign companies investing in China for the first time are now faced with many more new start-up competitors and a stronger market overall.

New entrants may now see investing in existing companies as a more rapid route to establishing critical mass and jumping regulatory hurdles.

- David Campbell is Asia Pacific Insurance Practice Leader at PricewaterhouseCoopers.