China's insurance industry has grown at a staggering tempo since the introduction of economic reform and opening-up policies in 1979. The main driving forces behind this growth have been the steady, speedy, and healthy development of the country's economy, and a relatively smooth implementation of reforms, particularly the reform of the social security system. This led to an ever-growing demand for insurance by individuals and the society at large, and eventually the prosperity of China's insurance industry.

In 1980 China's total GDP was 451.78bn yuan. By 2000, it had increased to 8,940.4bn yuan, representing annual growth of 9.7%, ahead of any other country in the world. The disposable income per capita of urban households was 477.6 yuan in 1980, but the annual average from 1996 to 2000 was 5,511.7 yuan. Net income per capita for rural households increased from only 191.3 yuan in 1980 to a five-year average of 2,128.3 yuan between 1996 and 2000, a growth rate rarely found in the world.

The development of China's insurance industry has always been tied to the country's economic development. In 1980, the first year that China resumed its domestic insurance business, premium income was only 460m yuan. In stark contrast, premium income in 1999 reached 139.3bn yuan, with an average annual growth rate of 35.1% over the last two decades, three and half times that of GDP.

Reform and opening
China's explicit policy of reform and opening to the outside world stresses self-reliance, but calls for closer economic cooperation with foreign countries, on the basis of equality and reciprocity. It encouraged China to make full use of the world's advanced technology, equipment, and management expertise. Special Economic Zones were established along coastal areas of Guangdong Province and Fujian Province. Laws and provisions were enacted to facilitate the development of the special economic zones.

Two decades of robust growth demonstrates the advantage of the Chinese special economic zone. Bold experiments were carried out: institutional renovation, system renovation, and organisational renovation. The distinct positive results have provided economic momentum. For example, the garden city of Shenzhen, a coastal fishing village in the old days and the first city to be opened, has seen an average annual growth rate of about 33.2% in the 20 years since 1979. The city has become an important centre renowned for its intensity of hi-tech companies and the presence of comprehensive industries including transportation, post and telecommunication, real estate, finance, and insurance. Thanks to the policy of opening-up, the insurance industry of the city has also prospered. Shenzhen has attracted both domestic and foreign insurance enterprises. With a population of only 4m, its premium income reached 3.423bn yuan in 1998, accounting for 2.5% of the country's total.

The opening of Pudong in Shanghai in April 1990 has had a significant strategic bearing on promoting economic and trade relations between China and other countries, and attracting more direct foreign investment. It provides a vast space for the rapid development of the city's insurance industry, and has attracted a cluster of both domestic and foreign insurers. Shanghai is being opened to foreign insurance enterprises, and now has the largest number of insurance companies in China. Already the number of foreign insurers has exceeded the number of domestic players.

Social security
With a population of over 1.2bn, China has abundant insurance resources. However, due to the long-time dominance of a planned economy, people were fully dependent on government “from cradle to grave.” Provision of adequate medical care and pensions for the world's largest population has not only become a severe burden to the government, but also has restricted development of the life insurance industry.

In 1990 the government carried out social security reforms, amending practice related to employment, medicare, and retirement benefits. The reform brought about vast opportunities for the development of commercial life insurances. Many life insurance products popular in the world began to emerge in the market, and the life insurance business boomed. In the late 1990s the annual growth rate of life business almost exceeded that of non-life. Since 1997, life insurance premium has accounted for more than half of China's total premium income.

No doubt, China's insurance sector has made compelling achievements during the last two decades. Meanwhile, it has made a significant contribution to the country's economic growth, and played an important role in international economic exchange and cooperation. Yet the Chinese insurance industry is still an infant when compared to the insurance sector in developed countries. Premium income was 139.3bn yuan in 1999, accounting for only 0.72% of global premium. Insurance density and penetration are 110 yuan and 1.63% respectively, both very low global rankings. This indicates China has great potential to grow, especially in view of the country's vigorous economic development.

We are fully aware that considerable effort should be exerted to cultivate the market, deepen the reform of insurance mechanisms, broaden the scope of market opening, strengthen the insurance law and regulations, and restructure the insurance supervisory system. Based on the primary targets framed in the Government's tenth “Five-Year Plan” (2001-2005), China's insurance regulatory body has oriented itself towards the shaping of China's insurance market in accordance with the internationally accepted rules, as well as taking into account the characteristics of the domestic situation.

The proposed framework will be composed of diverse players, a market-oriented and intensively operated management system, a governmental regulation and legal framework, and professional practitioners. Thus the industry's progress should follow global trends.

Experts estimate that the Chinese insurance industry will grow at an annual rate of 12% in the first few years of the 21st century. By the end of 2005, total premium income should reach 280bn yuan, bringing insurance density and penetration to 230 yuan and 2.3% respectively. To realise the proposed framework, the regulatory body and insurers should work to implement an effective legal and supervisory system, and structure industry policies and principles for advanced operation and management mechanisms. They also need to achieve the following:

China has to restructure its insurance market and foster more intermediaries while increasing the number of general and life insurers. With the increasing number of insurance companies and the enlarging scale of the business, intermediaries become indispensable for providing various services to insurance companies and policyholders.

Other than the existing forms of intermediaries, including insurance agents, brokers and adjusters, other professions who will also serve the insurance industry need to be included and developed. These include law firms, accountancy firms, rating agents and others. More reinsurance companies are needed in this market to satisfy direct insurers, risk transfer and risk diversification requirements.

Reform of the insurance system has to go further. State-owned insurers should be restructured into state holding companies or shareholding companies. All shareholding insurance companies could be listed, should they comply with required conditions. Shareholding companies should be encouraged to increase their capital and expand shares by attracting overseas capital and foreign shareholders, to optimise their equity structure and strengthen incentive and control mechanisms.

Warranted by the strategic decision of Chinese government to develop north-western China and measures taken to attract foreign investment in the mid-west, both domestic and foreign insurers are encouraged to open offices in that region and start operating. Some preferential policies should be offered to these insurers.

Gradual opening
The Chinese government is determined to honour its undertakings related to entry into the WTO by gradually opening up the local financial market:

  • Foreign insurers should be allowed to enter into the Chinese market by way of joint ventures, branches and subsidiaries, etc.
  • Confinement to regional operations and limitations on the scope of business of foreign insurers should be gradually relaxed.
  • Overseas reinsurance companies should be allowed to operate in China in the form of branches or joint ventures.
  • National treatment and fair competition should be realised for both domestic and foreign companies.
  • While expanding the scale of opening to the outside world, a positive open policy should be adopted domestically. More Chinese insurers should be licensed, and encouraged to set up branches in the mid-western and north-western parts of China, so as to widen territorial scope and meet the public's demand for insurance.
  • More effort should be put into the study of insurance clauses in the transitional period after entering the WTO, and into the support of national insurance development.
  • Chinese insurers should also be encouraged to walk over the border and set up offices and operations in other countries.

    Legal reform
    Insurance law and regulation should be revised to facilitate the establishment of a market economic system, the development of the industry, and the forthcoming entry into the WTO.

  • The Insurance Law enacted and implemented in October 1995 has played an important legal and regulatory role in the healthy growth of the Chinese sector. However, the past five years saw remarkable economic transformation. The situation is changing within the Chinese industry, which makes it necessary to amend or supplement some of the clauses in the law.
  • The Chinese legislative body has decided to revise the Joint-Ventures Law. The revision is necessary in order to meet the need to further open up the market, to coordinate with the proceeding of China's entry into the WTO, to follow WTO rules, and to meet China's undertakings. The revised law will allow operational independence to Sino-foreign joint ventures. The governments will concentrate on macro control functions, and no longer intervene in the production and operational activities of the companies. Based on the principles of the Joint-Venture Law, the Chinese government should enact as soon as possible the law Administrative Regulations on Foreign Capitalised Insurance Companies to replace the present Administrative Stipulations on Shanghai Foreign-Capitalized Insurance Organisations of 1992.
  • To meet the requirement to develop the insurance intermediary market in China, a legislative environment needs to be created in favour of the growth of intermediaries. Regulations on agents, brokers and adjusters enacted since 1996 need to be amended and revised.
  • A system of regular information disclosure must be established for insurance companies, which will increase the transparency of insurance operations.

    The rapid development of China's insurance industry calls for an insurance regulatory body of a much higher standard to set up and ameliorate the insurance legal system, make continuous efforts to perfect the supervisory mechanism, uplift the level of supervision, and close the gap with the international system.

    Trial implementation of the Regulation on Solvency Index of Insurance Companies should be encouraged. With the reinforcement of self-discipline among insurers and a more regulated insurance market order, Chinese insurance regulation should transfer from combined market activity and solvency supervision to a form where solvency regulation is the focus. In 2000, the insurance regulatory body of China instituted the Regulations on Minimum Solvency Margin and Supervision of Index of Insurance Companies. The aim of the regulation is to provide guidelines to insurers for monitoring various indexes, detecting impacts on their own operations, and making timely adjustments to their business strategies to ensure minimum solvency margins are maintained. Based on a trial implementation, the regulator needs to further upgrade the risk assessment and alert systems, and establish a solvency regulation index system for insurers.

    Insurance regulation should be further improved to close the gap with international conventions. The regulator should bring its guiding role and macro control function into full play. Its main role is to institute policies for industry development. It should improve the way insurance products are approved to increase efficiency. There should be more clarity and transparency in the approval process. Product innovation should be encouraged.

    The China insurance regulatory body should endeavour to establish a regulatory system with healthy and efficient regulatory mechanisms and appropriate regulatory form, and create an insurance market where the players can compete fairly, the rules are just, the process is clear, and the outcome is effective. All insurance institutions, regardless of its ownership (national, foreign or joint-venture), organisational structure, or area of operation and size, will compete fairly, enjoy the same rights, and fulfil the same obligations.