SPEAKING
FREELY Fighting for China's life
(insurance) By Richard Daniel
Ewing
Speaking Freely is an Asia
Times Online feature that allows guest writers to
have their say. Please click hereif you are interested in
contributing.
Competition is
increasing in China's life insurance market. While
the three dominant domestic insurers, led by China
Life, still dominate the market, a host of foreign
carriers and new firms are battling for market
share. As a result, the competitive landscape is
changing quickly. A wave of large IPOs (Initial
Public Offerings) over the past year has injected
billions of new capital into domestic insurance
firms, WTO (World Trade Organization) requirements
have recently opened all of China to foreign
competitors, and several large carriers are
seeking foreign partners.
China's life
insurance market is still relatively small but
growing at phenomenal rates. With approximately
$40 billion in annual life
insurance premium in 2004, China
ranked eighth in the world. Premium growth has
averaged over 30% since 1996, although this growth
slowed to 8% last year as insurers emphasized
profitable growth. Among emerging markets, China
has the second-largest life insurance industry,
and the fastest growing. With 1.3 billion people
and a strong economy, China's market for life
insurance products could exceed $100 billion by
2008 and become one of the largest life insurance
markets in the world by 2020. Chinese spend about
$35 per capita on life insurance every year, and
life insurance accounts for three quarters of all
insurance sold in China.
What's driving
that rapid growth? China's vast domestic market,
fledgling financial services industry, and the
transition away from state-provided social
security are the major drivers. More specifically,
China's savings rates are approximately 40%, some
of the highest in the world. Also, insurance
penetration is low at about 2.3% premium to GDP.
That ranks China eighth in Asia, with Japan
spending nearly four times as much (8.6% of GDP)
on insurance. More broadly, economic reforms are
reducing the government's role in providing social
safety nets and retirement benefits for its
citizens. Many Chinese are turning to insurance to
meet the risks of a market economy. Demographics
are an additional factor. With the "one-child
policy" enacted in the early 1980s, China's birth
rate has slowed. Over the next ten years, the
average age in China will rise from 29 to 39 years
old. Finally, Chinese have limited choices for
investing and saving money. The majority of
savings are in low-interest bank deposits, and few
Chinese invest in the highly volatile stock
market.
The recent increase in competition
is part of a larger program by the Chinese
government to transform the state-run insurance
industry into a vibrant, competitive market that
is capable of serving the needs of its citizens.
The modern insurance industry in China is of quite
recent origin: it was effectively reborn in 1984
after being dismantled by Chairman Mao in 1952.
The government-owned China Life Insurance Company
controlled all life insurance operations in the
country for many years. Then, in the early 1990s,
domestic competitors were founded and foreign
insurers began opening representative offices.
Foreign competition was tightly restricted until
China signed its World Trade Organization
agreements in 2001. The accession agreement
required China to gradually open its financial
services sector to foreign competition over a five
year period. State-owned China Life launched a
$3.5 billion overseas IPO in late 2003 to
accelerate change. Despite increased competition,
the government's recently-privatized China Life
still controls approximately half of the life
market.
Led by China Life, domestic
carriers dominate the market. The incumbent China
Life holds 43% of the market, down slightly from
last year. Ping An and Pacific Life are the next
two largest firms with 17% and 11% of the market.
Several startups have been successful. New China
Life is making strides and Hezhong Life, launched
one year ago, has seen sizzling growth. Several of
these firms are considering overseas IPOs.
Troubled by eroding capital reserves, Pacific Life
is poised to sell nearly one quarter of its equity
to the Carlyle Group, an international private
equity firm. New China Life was planning for an
overseas IPO, but may now be seeking a private
placement.
In January of 2005, foreign
life insurers became free to do business anywhere
in the country. Previously, foreign carriers were
confined to a few urban markets like Beijing and
Shanghai and to selling individual policies. 20
foreign life insurers (19 joint ventures and 1
wholly owned subsidiary - AIG's American
International Assurance) operate in China, and
more are on the way. Foreign carriers have vaulted
from 2.6% market share to 12.7%, with Italy's
Generali China Life landing a massive $2.4 billion
pension plan contract. While this single deal may
exaggerate the true national presence of foreign
firms, international carriers have gained
significant share in the cities in which they have
been able to compete (Shanghai 14% and Guangzhou
16%). Free of government restrictions, foreign
carriers are moving quickly to expand their
distribution networks into key markets across the
country by opening new branches and partnering
with local companies.
Most life insurance
in China is sold through captive agent networks,
with the top four carriers employing more than one
million agents. In addition, bancassurance is a
significant distribution channel with between one
tenth and one quarter of all individual life
premium income sold through low-cost bank
channels. Independent brokers and direct
distribution are small but growing channels.
The life insurance sector's successful
transition toward a competitive market faces a
number of challenges. To start, many carriers such
as Pacific Life are hobbled by negative interest
spread policies. These policies, sold in the
high-interest rate period of the mid-1990s,
guarantee 10% returns to policy holders.
Subsequent interest rate reductions have left
carriers facing persistent and significant
investment losses. Next, Chinese insurers are
required to invest the majority of their assets in
bank deposits. This keeps investment income at a
minimal level. The government has recently
loosened investment guidelines, and insurers can
now invest a limited amount of their assets in
domestic stock funds and corporate bonds. Third,
mutual funds and other investment products are
starting to vie for China's vast savings. In 2004,
mutual fund investments grew dramatically while
life insurance premiums slowed. The China
Insurance Regulatory Commission (CIRC) has been
cautious in increasing competition, and it could
decide to slow growth in this sector and/or
protect domestic carriers through policy actions.
Finally, the prospects for China's life insurance
industry remain intimately linked with China's
economic development.
Overall, with more
foreign competitors and more market forces
steering the domestic carriers, China's life
insurance industry is entering a stage of
unprecedented competition. That in turn could help
China's life insurance market to grow at 15-20%
annually until 2020. Under pressure from foreign
competitors, China's domestic insurers should
become increasingly professional and market
oriented. In particular, risk management, product
sophistication, and corporate governance
structures are likely to improve. Foreign life
insurers will almost certainly capture a
significant portion of the market over the next
several years. China's insurance regulator, the
CIRC, has cautiously increased competition in the
market but could be prepared to slow growth if the
market becomes volatile or consumer interests are
hurt. In addition, independent insurance brokers
and direct channels should capture a significant
portion of China's rapidly growing market. Direct
marketing to consumers is expected to increase as
competition rises nationwide.
Richard Daniel Ewing is a
non-resident fellow at the Nixon Center in
Washington, DC.
Speaking Freely
is an Asia Times Online feature that allows guest
writers to have their say. Please click hereif you are interested in
contributing.
