SHENZHEN - One day recently, while this
writer was sitting in a Beijing hotel lobby,
waiting for a business lunch, a nicely dressed,
glasses-wearing young Chinese man pleasantly tried
to start a conversation. After an exchange of
business cards, he turned out to be - you guessed
it - an insurance man. Scenes such
as this, long common in other parts of the
world, have now come to China - in a big way.
A rising standard of living invariably
brings with it an insurance industry, as people
try to protect what they have. With more than 3
million workers in the sector, China now has an
exciting, fast-growing insurance industry. It is a
remarkable change from the
recent past. Only 20 years
ago, perhaps 95% of Chinese did not even know what
insurance was. Today, hundreds of millions of
citizens hold policies of every sort, from health
to life to property. The commercial insurance
business has come a long way, from non-existent
during the Mao era to an exploding market today;
and the Chinese public has made equally rapid
strides in accepting insurance products as a
routine part of life. In today's urban China,
talking to an insurance agent is nearly as common
as talking to your neighbor. Industry observers
expect that, in time, holding insurance policies
will become as popular as having a mobile phone.
The business has grown most dramatically
in the last 10 years, with an annual compounded
growth rate of 26%. By 2004, China's total
insurance assets reached US$143.3 billion. In
terms of percentage of GDP, this is still only
about 2%, still small compared to Japan's 11% and
8% in the US. But as incomes increase further,
China's insurance market will become more and more
significant to the economy as a whole. These
assets are held by some 70 insurance players, both
Chinese and foreign.
Industry experts now
feel that China is well on its way to becoming a
top insurance market. One of its biggest strengths
is that Chinese life is still family-centered.
This is true, in general, in the rest of Asia and
is one reason why Japan's insurance industry is
relatively larger than that of the US, as
mentioned above. Indeed, in the 1980s, Japan had
the biggest insurance companies in the world,
partly due to the strong family ties in Japanese
society.
International
involvement As with most industries in
today's China, foreign giants have rushed in to
the insurance sector. There are already 37 foreign
insurers operating in China, and more are coming.
These players include AIG, Liberty Mutual and
MetLife of the US; Samsung Life of South Korea;
Mitsui-Sumitomo Insurance and Nippon Life of
Japan; Manulife of Canada; and Allianz, AXA, ING
and Munich Re from the European Union. Due to
policy restrictions, their operations have been
limited to a few major cities such as Beijing, Shanghai, Guangzhou and
Tianjin. Also, most of
them operate through joint ventures. In reality,
most of these foreign players are only testing the
water so far; as a result, they jointly hold only
about a 5% market share. But this will soon
change. As is true for the banking, stock
brokerage and fund management sectors, these
foreign insurance players will gain more
opportunities soon due to China's accession to the
WTO.
The insurance business as we know it
today originated in Europe starting in the 17th
century. So the international insurers are nothing
if not experienced. But they have few additional
tricks to apply to China; rather, their best
weapon is manpower. They must send out countless
agents everywhere in the country to get clients.
They even set up desks in front of hospitals and
shopping centers to find customers, large and
small. (The young man at the Beijing hotel, as it
turned out, worked for AIG.)
Not every
foreign insurance company is committed to China,
but the interest in doing so is strong even in
companies that are not licensed to operate in the
country. Very often, foreign insurers send in
agents from Hong Kong and other overseas cities to
get mainland Chinese clients. Though this practice
is illegal, it often gets results. One time, a
Hong Kong insurance agent working for a major
Western insurance company told me excitedly, "I
just sold a $8 million policy to a Shanghai CEO!"
Building Chinese insurance
companies Despite the booming market, most
Chinese insurance managers agree that there is
still much work ahead in building the Chinese
players into strong insurance companies. The
biggest problem is that Chinese insurance
companies, such as China's state banks and
state-owned companies in general, have yet to
become truly independent business organizations.
In a scenario that is all too familiar to
observers of the Chinese economy, almost all the
Chinese insurance companies are tied to an
assortment of government units. For example, the
biggest Chinese insurance company, China Life,
which is already a top-500 global company and
listed on the New York Stock Exchange, is run by
the central government. Ping An (Safe Life)
Insurance is run by the Shenzhen city government,
and Dazhong (Everyone) Insurance is owned by 23
state companies belonging to Shanghai, Zhejiang and Jiangsu provincial and
municipal governments. Another insurer, Yong An
(Everlasting Peace), has shareholders from
numerous large companies in the oil,
telecommunications, rail, postal and other
sectors, all of which are controlled by the
central government.
This organizational
structure is standard for the entire state sector.
Under it, the biggest state companies are run by
the central government, while small- and mid-size
state companies are run by provincial and local
governments. But the insurance sector has some
noteworthy exceptions to the general rule.
Specifically, some insurance companies run by
city- and province-level government units have
outperformed. In particular, within the last two
decades of its existence, Ping An Insurance has
emerged to take the second spot in China's
insurance sector. This is mainly due to Ping An
Insurance having strong leadership. In particular,
the company has appointed more than a dozen senior
executives who have previously worked for global
financial and consulting firms. Under their strong
management, the company has been able to attain a
dominant position among domestic insurers.
One regional executive working for a big
four global accounting firm has been very
impressed by the Ping An management and said:
"They are very pro-international and eager to
follow global professional standards. This has
become a top strength for the company." Many
international investors agree with him, and
furthermore, some foreign giants like Morgan
Stanley, Goldman Sachs and HSBC have become
significant shareholders in the company, which is
now listed on the Hong Kong Stock Exchange. In
particular, HSBC has continued to increase its
stake in Ping An and now holds 19.9% of the
Chinese insurer, a limit set for a single foreign
shareholder by Beijing.
But many other
Chinese insurance companies have had a luckluster
performance so far. The basic problem is built
into the system. That is, these companies are
organized in parallel to government structures,
and their top managers are government officials,
not insurance professionals. This bureaucratic
tie, which has already created disasters for
China's banking and brokerage sectors, is casting
a shadow over the insurance industry as well.
Numerous Chinese insurers have already
suffered terrible losses despite the rapid growth.
Some highly inexperienced and substandard
decision-makers have involved their firms in
high-risk deals such as highly illiquid real
estate projects, which predictably resulted in
financial distress. But separating business and
government has been a chronic problem for Chinese
society at large and will not be resolved soon for
the insurance sector either.
Limited
investment choices Another important
challenge confronting China's insurance sector -
as well as the financial sector as a whole - is
the very limited choices for company investments.
Insurance company investment portfolios are
restricted to mainland China only, which has posed
a huge problem. For example, Kong Tai (Prosperous
Life) Insurance of Beijing puts about 80% of its
assets into bonds, and most other domestic
insurers do about the same. This portfolio
structure limits asset appreciation and therefore
the long-term health of the industry. One Chinese
investment officer at a Chinese insurance company
said to me: "We badly need to widen our investment
choices and go global. For now, we are so
limited."
The ability to choose the most
promising from a vast menu of global investments
is the way today's global insurance companies
became powerhouses in the first place, and the
Chinese insurance and financial companies must
follow their example. One former chairman of a
leading Chinese investment company strongly
affirmed that globalizing Chinese financial
businesses is a must. "The sooner, the better.
Otherwise [investment limitations will damage] the
health [of] China Inc in general."
Unfortunately, at this point, the
government is behind the curve. It has imposed
countless restrictions on the ability of Chinese
companies, especially financial companies, to move
capital out of China. Even moving capital to Hong
Kong is next to impossible. Making policy changes
in Beijing is always two steps forward, one step
back, as the old government mentality with its
traditional protective measures, and officials'
desire to retain their influence over businesses,
both remain strong.
Gaining
independence An even bigger concern than
optimizing investments is achieving independence
from government influence. In China's state
sector, all senior managers are appointed by
higher government offices. Compared to Western
professionals, these managers are hobbled because
their activities and careers are dependent on
maintaining the approval of those who appointed
them. Privately, most business managers in the
state sector deplore this situation and would like
nothing better than to operate their firms the
same as their colleagues in developed nations.
But without direct power to change the
situation, they have tried to promote their
interests in other ways. Becoming a publicly
listed company or having international partners,
or both, are the most realistic options. These
actions have helped Chinese managers to protect
their professional interests. As with the rest of
the state sector, Chinese insurance companies are
eager to get listed, especially on overseas
markets. Listing and foreign tieups both promote
better quality corporate governance, which
benefits the most competent managers.
Becoming more service-oriented A
huge gap in quality of service still exists
between most developed-country industries and
their Chinese counterparts. Putting market needs
first is a new concept to China Inc, and insurance
companies are no exception.
In general,
Chinese insurers have performed well in sales -
getting new clients. Their great weakness thus far
has been truly satisfying client needs, especially
with respect to after-sales service. Professional
service standards remain weak. Quite often,
consumers encounter problems when they really need
help from their insurance companies. Effectively
responding to claims has been an issue, and there
have been numerous cases of companies failing to
deliver on their promises to clients. In today's
China, it is easy to find disgruntled insurance
customers; the litany of complaints includes
misleading descriptions of coverage and the delay
of refunds for months or even years. One
dissatisfied auto insurance policyholder said, "It
has taken more than a year to get [my] claims
[refunded] after I had a car accident."
In
most countries, a government consumer protection
agency would be responsible for assisting the
public in such cases. But in China, government
watchdogs are more often than not ineffective in
protecting consumers' interests. The deep
entanglement of businesses and government bodies
has certainly not helped the situation. Indeed,
the governance problem is built into the system.
Helping aggrieved insurance customers would in
effect require one government unit to fight
another. Until this problem is addressed, the
industry cannot reach its full potential.
Headhunting reveals intense
competition One sign of hotter competition
in the sector is headhunting for the most
competent managers; recently, for example, Kong
Tai Insurance hired a top marketing executive away
from Ping An Insurance. An important concern for
Chinese insurers going forward is the possibility
of losing their top management talent to
deep-pocketed foreign insurers, who will be
looking to hit the ground running as they enter
China after 2006, when WTO commitments will
require further liberalization in the industry.
Some executives might even take their best clients
with them.
In spite of such issues,
overall, the looming competitive pressure from
foreign-invested companies is making the Chinese
firms work harder and is therefore a positive
factor in the insurance industry's development.
Greater openness will promote greater
competitiveness, which will help to create a
healthy industry in the long run. In the end,
Chinese citizens will be the biggest winners:
millions of them are gaining access, for the first
time, to the "peace of mind" that is ultimately
the insurance industry's only product.
