Emerging Insurance Market in China

At a street comer in Shanghai, a group of three to five salesmen are selling life insurance, side by side with street food vendors. Tables are laid out in parks where people on holiday are convinced to sign up for insurance contracts. China is witnessing a robust insurance industry. According to the World Bank, insurance business revenue in China total was over US $ 25 billion in the year 2000.

Chinese and foreign insurance firms are vying for a bigger share of the vast market. Three foreign insurers have been granted operation licenses. Seventy-seven insurance firms from 13 countries maintain representative offices in China.

Rebirth of insurance business

Before the founding of the People's Republic of China in 1949, more than 200 Chinese and foreign insurance firms operated in China with the latter dominating the market. For 30 years until 1979, the People's Insurance Company of China (PICC), a government-run insurance company, monopolized the entire industry. The insurance business in China came to a standstill in late 1950s and only foreign-related or import-export insurance operations were sustained at some vital ports.

The domestic insurance business was restored after 1979 and had made great strides since then with the average annual premium growing by over 40%. The Chinese insurance witnessed a restoration period in the 1980s and a market-nurturing period in the 1990s.

The 1980s signified the early days of a transition from a central planned economy to a market-based economy. The insurance industry operated as a single government agency playing a supportive role to the social security system. Prior to,1990, as a sole insurance company, the PICC's offices were in all parts of the country with about 90,000 employees. Business operations had stretched to about 300 different types of insurance products with premiums growing from RMB 600 million in 1980 to RMB 14.8 billion in 1990.

Since 1990, the Chinese government has nurtured the insurance market and opened it within limits to the outside world to encourage competition, thus paving the way for greater growth in the industry. The insurance enterprises in the country swelled from one to 26 in 1995. At present, there are three national and comprehensive firms - the PICC, China Pacific Insurance Co. Ltd. (CPIC), and China Ping An Insurance Co. Ltd. (PingAn), all others are regional and specialized companies, including three foreign companies.

Table 1: Premiums of major companies (1990-1994) (in RMBbillion)

Limited market opening to foreign companies

The three foreign companies with operation licenses in China are the American International Group Inc. (AIG), Tokyo Fire & Marine Insurance Co. Ltd. (TFMI), and the Ming An Insurance (Hong Kong) Co. Ltd. (MAI). All of them are restricted to regional business. AIG and TFMI are confined to Shanghai while MAI to Shenzhen and Hainan. AIG and MAI are engaged in both property and life insurance while TFMI can sell property insurance only. The British Sedgwick Insurance and Risk Management Consultants, the sole foreign-funded consulting firm, can only undertake insurance risk consulting in Beijing. The Chinese insurance market is diversified, embracing state-owned insurance companies, share-holding insurance companies, nationwide insurance companies, regional and specialized insurance companies as well as foreign-funded insurance companies.

The entry of foreign insurers has encouraged the inflow of expertise in areas such as product variety, fund management, administration and actuarial analysis, which are crucial for the further development of the social security system in China. Foreign companies bring competitive pressure on Chinese insurers as well. Since AIG started its business in 1993, the market share of PICC in life insurance in Shanghai has witnessed a significant decrease from 88% in 1993 to 60% in 1995. Nevertheless, more people in China believe that competition will benefit the economy in general and strengthen the quality of the social security system.

Attracted by the market and encouraged by the success of the earlier entrants into China, over 70 other foreign insurance companies are speeding up their process for securing business. Realizing that obtaining a license for business operation is the very first key to moving into China, foreign insurers contact high-level government officials frequently to establish connections and make friendly gestures. Some have made donations to establish schools to train insurance professionals, who are needed to help start their businesses once established.

Figure: Premiums Shares in 1995

Expanding industry with great potential

With 1.2 billion in population, China's insurance market is full of vitality. By the end of 1995, the 26 domestic insurance companies employed over 180,000 employees and 300,000 full and part-time agents. Insurance revenue grew from RMB 14.8 billion in 1990 to RMB 61.5 billion (US$ 7.41 billion) in 1995. The accumulative total of premium income hit RMB 201 billion (US$ 24.2 billion) by 1995. The annual indemnity rate is between 50% and 60%. Repayment of indemnities from all insurance companies totaled about RMB 120 billion (US$ 14.5 billion). Reinsurance also made progress with Chinese insurance companies maintaining reinsurance ties with over 1,000 insurance firms from over 100 countries and regions. More important, the insurance consciousness of the public has improved:

For all the advancement made in the insurance industry in the past )0 years, a great gap remains between China's insurance market and that of the advanced countries in the world.

By the end of 1995, the income from the insurance industry in China made up merely 1.06% of GNP. The 1993 global insurance data show that total premium income of China ranked 23; premium income made up 0.98% of GNP, ranking 66; the per capita premium averaged merely US$ 4.5, ranking 75. However, China has only 26 insurance companies compared with 4,800 insurers in the US and 800 in the UK.

China's insurance level has lagged behind the average world level. Per capita premiums average US$ 2,000 in the US, Japan and other developed countries. The per capita premium of developing countries such as India and the Philippines is much higher than that of China. Evidently. the insurance business in China is inadequate both in quality and in quantity. It does not fit the requirements of the rapid economic development in the country and cannot meet the unceasing demand for improved livelihood of the people. While the insurance market in China is still in the early phases of development, there is great potential for it to grow.

The World Bank predicts that by the year 2000, China's total insurance business revenue will reach US$ 25 billion with the potential to hit US$ 31.25 billion. The Chinese insurance industry took the first step toward a market-based system in the 1991-1995 period. The 1996-2000 period will see a rapid growth of the industry.

Reforming industrial structure

China's insurance market is still in its infancy and a fairly competitive market is not yet formed. Regulations are not complete and the supervisory structure, especially self-regulatory mechanisms, are not well built. Professional ethics are blurred. However, many changes are foreseen in this industry.

In October, 1995, China published its first Insurance Law. Meanwhile, the People's Bank of China (PBOC), which oversees the insurance industry for the country, set up the Insurance Administration Department to ensure the implementation of the law. Detailed measures, including the Provincial Regulations of Administration of Insurance Industry and Interpretation of Questions Regarding the Insurance Law, are under formation. In early 1996, the PBOC released the Interim Regulations on Management of Insurance Agency. The central bank is working out control measures on insurance brokerage firms and other intermediaries. The government is making a great effort to control the insurance intermediaries to improve the market. The government will also encourage the creation of self-regulatory organizations in the insurance arena that codify the managerial acts of the insurance companies and set guidelines for behavior of insurance employees. As a result, the insurance companies will be able to do business under a complete legal framework of fair competition and joint advancement.

To cater to the development of the market, the insurance industry began reforming in 1996. In January 1996, the PBOC approved a plan to establish five domestic insurance companies -- New China Life Insurance Co., Tai Kang Life Insurance Co., and Hua Tai Life Insurance Co., are nationwide companies; Yong An Insurance Co. and Hua An Insurance Co, are regional companies. The insurance companies are expected to swell in a large number in 1996-2000 inChina, focusing on life insurance.

Pursuant to the Insurance Law, several nationwide insurance companies will separate property and life insurance businesses. The PICC is to be restructured as a state-owned undertaking with three separate subsidiaries specializing in property, life insurance and reinsurance. Other insurance companies will follow suit in reforming their businesses.

Meanwhile, China is increasing its effort in international cooperation. Based on the newly issued Insurance Law and many developments in the recent years, the government is modifying the Shanghai Regulation for Foreign Insurers, which was released in 1992 and is the only guideline for foreign insurance companies in China. The Chinese government will use more foreign funds to promote the insurance industry and has already begun widening the business scope of foreign-funded branches. Recently, approval has been given to AIG to operate in Guangzhou. The PBOC has agreed in principle to the formation of China's first joint venture insurance company in Shanghai with a registered capital of RMB 200 million – the Zhonghong Life Insurance Co. Ltd. It is a joint effort between the Manufacturers Life Insurance Company of Canada and China Trust and Investment Corporation for Economic Relations and Trade, a key member of the China National Chemicals Import and Export Corporation. China intends to open more insurance business and geographic areas to foreigners. In addition, it will forge closer collaboration with international insurers in the reinsurance business to reduce operation risk.

Analysis of the Life Insurance Market in Shanghai

(Source: Watson Wyatt)

Market & market share for life insurance

The most popular insurance coverage by age group in 1996 & 1997

Market Summary and Trends

• The most popular product (1994 & 1995): endowment plan
• The lowest market penetration (1994 &1995): medical and retirement plan
• The biggest increases in coverage (1994 & 1995): Accident & Dismemberment & Life insurance
• Future market expansion:
• Unemployment insurance
• Medical insurance
• Retirement plan

You Wang is the secretary general of the Insurance Institute of China and a professor at the Central Institute of Finance and Banking.

Jun Wu is a lawyer in the Law Department of the People's Insurance Company of China.