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Illegal insurance business rampant
in China
BEIJING - China's
battle against illegal sales of insurance policies
may take longer than anticipated, unless local
firms can begin offering services that are on a
par with their foreign counterparts. Analysts warn
that these illegal sales - worth US$1.59 billion
every year - are spreading rapidly and undermining
the growth of local insurance firms by taking the
most lucrative business.
One year after
declaring war on these illegal policies - which
have no legal protection on the Chinese mainland -
the China Insurance Regulatory Commission is
fighting an uphill battle, according to industry
analysts. The illegal agents, mostly hired by
insurance companies based in Hong Kong, are simply
moving further underground rather than quitting
the job, according to industry observers.
Their annual sales are now worth the
equivalent of one-third of Hong Kong's total
premium and one-tenth of the Chinese mainland's
life insurance premium. Complaining that little
progress had been made in the commission's
campaign, an anonymous industry analyst pointed
out: "Many of these illegal agents are taking
their clients to Hong Kong to sign contracts."
But what is angering regulators even more
is that these criminals are no longer happy to
contain their activities to the Pearl River Delta
region, which neighbors Hong Kong, as they did in
recent years, but have been advancing in recent
months to other wealthy regions of the nation,
particularly Beijing and Shanghai. Around 40
illegal policies, worth more than $500,000, are
reportedly being sold to Beijingers every day.
"It is just rampant," warned Li Jing, vice
president of the Beijing branch of Ping An Life
Insurance Company of China. And it is not just
confined to well-off parts of the country, said
Li, adding: "The numbers have grown large even in
Xinjiang," a less-developed autonomous region in
western China.
But the regulator remains
optimistic in the face of these trying
circumstances, insisting that its efforts have
achieved some initial success. Chen Wenhui,
director of the commission's Life Insurance
Regulatory Department, said the growth of illegal
insurance policies "has been brought under initial
control". The insurance authorities of the Chinese
mainland, Hong Kong and Macao, as well as the
mainland's police, launched the crackdown last
year.
Commission officials have warned
overseas insurers that illegal sales of policies
on the Chinese mainland may endanger their efforts
to legally enter this massive and lucrative market
in the future, and have stepped up efforts to
educate the public about the risk of buying
illegal policies. While industry analysts and the
regulator may differ on the impact of the
crackdown so far, they generally have the same
explanations for this disturbing phenomenon.
"One major reason is the huge potential of
the mainland market. Driven by the prospect of
profits, some overseas insurance companies are
using various methods, such as offering 100%
commission, to encourage agents and other
intermediaries to coax mainland residents into
buying their policies," warned Meng Zhaoyi,
director of the commission's international
department.
Insurers both at home and
abroad have in their sights the top 20% of the
nation's wealthiest depositors, who hold 80% of
the 13 trillion yuan ($1.6 trillion) of private
savings in China. And agents find the temptation
of this simply irresistible. It is a common
practice for these illegal agents, mainly hired by
smaller Hong Kong-based insurers, to typically
keep all the premiums the policyholder pays in the
first year and more than 10% of premiums paid in
subsequent years.
"What industry can offer
such a rate of return?" said Liang Hongjie,
president of Heng'an Group, a leading insurance
intermediary in south China's Guangdong province,
where illegal policy sales are the most rampant.
In sharp contrast, mainland insurers pay their
agents 25-30% of the first year premiums and a
mere 3-5% of premiums after that.
Meng
pointed out that mainland insurance firms lag
behind insurers from developed markets in terms of
products, services and investment returns, making
it much easier for some overseas insurers to
promote their products. Backed by diversified
investments in overseas financial markets, illegal
insurance policies typically offer returns two or
three times higher than those sold by mainland
insurers, who were prevented from directly trading
stocks in the domestic market or entering overseas
financial markets until very recently.
Annual returns on domestic life insurance
policies now stand a little above 2%, close to the
yield on bank deposits. "And the protection is
quite good," pointed out Li Yu, whose
Beijing-based employer, a foreign-invested
company, has bought its employees' health
insurance from illegal agents. "Everything is
covered," she added.
For many analysts,
the gap in what the products offer is the very
reason that illegal insurance policies are selling
so well on the Chinese mainland. "It's that simple
by comparison - the returns [on domestic insurers'
policies] are really low, and the overseas
policies offer far better protection," said Liang,
who is also the deputy director of the
Intermediaries Committee of the Guangdong
Insurance Association.
While most analysts
pointed to China's growing middle class as the
source of the majority of the buyers, some say
corrupt officials account for a major proportion
of the illegal agents' customer base. "Government
officials are a big part," said one source
familiar with the situation. "The value of a
single contract is sometimes as much as a few
million yuan or more than 10 million yuan."
The most obvious impact of illegal policy
sales on the mainland insurance industry is the
drainage of premiums. While it is generally
difficult to calculate the sales figures, "that is
the best part of the market", said Liang,
referring to the fact that the buyers are all
potential high-end clients for domestic insurers.
"And the high-end clients increasingly tend to
compare the products offered by domestic insurers
with those from overseas before they make their
decisions," said Yu Wenbo, honorary director of
Taikang Life Insurance Co Ltd. "That will affect
the growth of the domestic insurance industry."
The mainland life insurance industry's
growth has already slowed to a meager 7% from a
double-digit rate in recent years, as major
players trimmed unprofitable businesses to improve
competitiveness. And the policyholders are also
likely to fall victim to the risks associated with
these contracts. Regulators have repeatedly warned
mainlanders that overseas-incorporated insurance
policies are not protected by Chinese laws, and
policyholders would have to file expensive
overseas lawsuits should any legal disputes arise.
"What they [buyers] are most concerned about is
fraud," said Yu. "That is a big risk."
The
commission's Guangdong bureau has reportedly been
receiving mounting complaints in recent weeks from
buyers of illegal insurance policies. Reasons
include invalid contracts or the insurer's refusal
to settle claims. But regulators have yet to find
an effective way to smoke out these illegal
agents. "It's quite difficult to spot the illegal
agents because they mostly sell through friends or
acquaintances," said Taikang's Yu.
The
agents then typically take their clients to Hong
Kong, under the guise of being tourists, to sign
the contracts, media reports say. Such "tourist
groups", which average 50 members, are being sent
from Beijing on a monthly basis. The fight to root
out illegal sales will not be a short one. "With
its opening up and its continued development, the
local industry will grow to levels close to that
in Hong Kong," said Yu. "But it will take fairly
long."
(Asia
Pulse/XIC) |
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