life insurance market recorded its highest growth in premium income
in a decade. For listed domestic insurers the reward has been
plummeting share prices, while for foreign insurers as a group it
has been a boom that has to a significant extent passed them
by.
China’s life insurance industry has presented a mixed picture so
far this year with surging premium income contrasting with sharp
reversals in investment performance of a number of major players
and substantial falls in share prices of listed insurers.
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This is no better reflected than in the performance of China’s
largest life insurer China Life which commands a market share of
over 40 percent, more than three times larger than its nearest
rival, Ping An.
China Life “faces strong headwinds” in 2008, predicted LII in April
following release of the insurer’s 2007 results that
reflected a 95 percent rise in net profit. And indeed those
headwinds came in the first six months of 2008 in the form of what
the insurer’s chairman Yang Chao described in a statement as
“unprecedented challenges in its business operations and
development.” Not least of the challenges was a 50 percent slump in
the Shanghai Stock Exchange (SEE) Composite Index in the first six
months of 2008.
Taking their toll in the first half of 2008, the headwinds left
China Life’s net profit attributable to shareholders at CNY15.838
billion ($2.32 billion), down almost 32 percent (based on Hong Kong
accounting standards) compared with the first half of 2007.
The most significant damage to profits was caused by a CNY17.33
billion reversal in the fair value adjustment on investments held
for trading from a CNY10.842 billion unrealised gain in the first
half of 2007 to a CNY6.495 billion unrealised loss in the first
half of 2008. Net realised gains on investments also fell sharply
from CNY2.262 billion to CNY742 million.
One positive factor resulting from the equity market slump, at
least in terms of China Life’s profit in the first half of 2008,
was a significant fall in dividends attributable to with-profit
policyholders – from CNY13.39 billion to CNY1.92 billion.
Notably, the realised profit fall was despite what China Life
described as a “considerable return from its $260 million
investment in the initial public offering of US payment card
company Visa.” According to a statement filed with the Hong Kong
Stock Exchange, China Life reduced its investment in Visa from an
original 6.8 million shares to 3 million shares during the first
half of 2008.
Life insurance death and other benefits also took their toll on
profits, rising by CNY1.52 billion (17.9 percent) to CNY10.02
billion. The insurer attributed the increase primarily to business
growth and maturity benefit payments, though the impact of claims
from the earthquake in Sichuan Province which killed more than
69,000 people also took their toll. According to China Life it had
received 13,181 earthquake-related claims for an estimated amount
of CNY230 million as at 11 June.
China Life’s fall in net profit came against the background of a
solid sales performance that saw net premium income increase by
24.2 percent compared with the first half of 2007 to CNY78.74
billion. The growth pace for the half year was however below the
39.5 percent increase in premium income in the first quarter of
2008.
On a positive note, China Life also reported that its market share
had lifted from 39.7 percent at the end of 2007 to 42.8 percent in
the first half of 2008, reversing a declining trend evident for
some years. China Life attributed the improvement in its sales and
market share to how it “stepped up its frontline sales efforts
through its local branches, sales teams and intermediary
outlets.”
Stepped up in particular was the insurer’s already formidable
exclusive agent network which was increased by 38,000 agents (6
percent) from 638,000 at the end of 2007 to 676,000. In addition,
in the bancassurance channel covering 92,000 outlets, the number of
service managers was increased by 25 percent to 22,500 while the
number of financial advisors increased 14 percent to 6,100. China
Life’s direct sales force remained unchanged at 13,000
representatives.
Put in perspective, China Life’s total sales force of 717,600
agents is approaching the equivalent of the population of a city
such as San Francisco which, according to the US Census Bureau,
ended 2007 with 765,000 inhabitants. China Life’s sales force is
also more than double Ping An’s agency sales force of
315,000.
Natural disasters buffet Ping An
Ping An, in which UK bank HSBC has a 17 percent stake, fared better
than its larger rival in the first half of 2008, reporting a net
profit of CNY9.49 billion, down 2.1 percent compared with the first
half of 2007. The decline came thanks to a sharp reversal in the
fortunes of its general insurance unit where the Sichuan Province
earthquake and earlier major snowstorms resulted in a significant
underwriting loss that reduced the unit’s net profit by 55.4
percent from CNY760 million in the first half of 2007 to CNY339
million.
Life insurance was a strong performer with Ping An Life producing a
net profit of CNY8.325 billion, up 29.1 percent compared with the
first half of 2007. However, below industry average growth in gross
written premiums (including policy fees and premium deposits) left
Ping An’s market share at 12.8 percent, down from 16 percent at the
end of 2007.
During the second half of 2008 Ping An reported a 23.5
percent increase in total gross written premium income to CNY42.284
billion driven primarily by a 27.4 percent increase in first year
gross written premiums to CNY12.433 billion. According to the China
Insurance Regulatory Commission (CIRC) the life industry’s premium
income in the first half of 2008 increased by 64 percent compared
with the first half of 2007 to CNY431.9 billion.
Ping An attributed the fall in its life insurance market share to a
below-industry-average growth rate in its sales via the
bancassurance channel. This is a particularly telling reflection of
growth in the bancassurance channel given Ping An’s own significant
growth in sales via this channel of which it was a pioneer in
China.
According to Ping An the bancassurance channel contributed total
first-year gross written premiums of CNY6.855 billion in the first
half of 2008, an increase of 76.5 percent compared with the first
half of 2007. This increase expanded the bancassurance channel’s
contribution to Ping An’s total first-year premiums from 48.7
percent in the first half of 2007 to 55.9 percent in the first half
of 2008. Bancassurance sales accounted for almost 40 percent of
China Life’s premium income.
Market share of China’s third-largest life insurer China Pacific
Insurance also slipped in the first quarter of 2008, falling from
10.2 percent at the end of 2007 to 9.1 percent. However, outdoing
both its bigger rivals significantly China Pacific reported a 44.2
percent increase in net profit to CNY5.51 billion.
Clouded outlook
Overall, investors have taken a dim view of China’s big-three life
insurers and have dished out harsh punishment to their share prices
over the past 11 months.
Ping An has taken the hardest knock, falling by some 55 percent
from its high in October 2007. China Life’s share price has
retreated by some 45 percent while China Pacific, which completed
its initial public offer (IPO) on the SEE in December 2007, has
seen its share price fall two-thirds from its post-listing high to
about CNY19 per share, almost 40 percent below the IPO placement
price. China Pacific has shelved plans to list on the Hong Kong
Stock Exchange. Investor sentiment would not have been bolstered by
Chao, who in China Life’s half year financial report provided
little clarity on expectations for the second half of 2008. He did,
however, note that competition in the life insurance industry “will
become more intensive.”
Notably, Chinese broking firm Oriental Securities forecasts that
China Life’s net profit for its full 2008 financial year will fall
by 36 percent to CNY25.1 billion while the insurer’s net assets are
expected to fall by 14 percent to CNY177.5 billion.
China Life’s investment strategy also suggests that it is not
anticipating a sharp revival in the fortunes of the SEE, having
reduced its equity exposure from 22.95 percent of total investment
assets at the end of 2007 to 13.28 percent as at 30 June 2008.
Exposure to debt securities and money market investments was
increased from 72 percent to 79.5 percent.
So far this has proved to be a wise strategy, with the SEE
Composite Index having by early September fallen by a further 20
percent since the end of June.
However, equity market weakness has not dampened Chinese consumers’
enthusiasm for invest-linked products. Building on the exceptional
increase in premium income growth in the first six months of 2008,
sales in July accelerated to take total premiums to CNY481.9
billion in the first seven months of 2008, up 66.7 percent compared
with the first seven months of 2007, according to the CIRC.
This was the fastest premium income growth rate in 10 years and,
according to the CIRC, investment linked products accounted for
almost 80 percent of sales. Notably, the surge in sales in July
coincided with a recovery in the SEE Composite Index which ended
the month up 7 percent compared with its 30 June closing level and
at its best in the third week of July was up almost 10
percent.
In July 2008 business for the big-three insurers boomed. China Life
led the field, recording sales of CNY12.8 billion – up 98 percent
compared with July 2007. Ping An’s sales increased by 48 percent to
CNY7.5 billion, and China Pacific sales increased by 55 percent to
CNY4.8 billion.
July’s sales surge brought China Life’s total premium income in the
first seven months of 2008 to CNY203 billion, Ping An’s to CNY61.4
billion and Pacific Life’s to CNY43.7 billion. These figures
represented increases of 54 percent, 30 percent and 44 percent,
respectively, compared with the first seven months of 2007.
Can this sales boom continue? Renewed equity market weakness would
suggest it will not. Neither would statements by the CIRC’s
vice-chairman, Chen Wenhui.
Quoted by China’s official news agency Xinhua, Wenhui commented
that the surge in life insurers’ sales in the first seven months of
2008 was “hardly sustainable.” He also cautioned insurers to lower
the pace of sales via the bancassurance channel and improve their
product sale mix by focusing more attention on regular-premium
protection products. According to another Xinhau report, sales via
the bancassurance channel increased by 153 percent in the first
half of 2008.
Also quoted by Xinhua, China Pacific’s chairman Jin Wenhong warned
that rapid growth in the sales of investment-linked products
exposed China’s life insurance industry to the risk of extreme
volatility.
Foreign insurers’ uphill battle
One of the more notable features of booming life insurance sales
during the first half of 2008 has been the inability of foreign
insurers to keep pace with their Chinese competitors. Indicatively,
the CIRC attributed a market share of 4.8 percent to foreign life
insurers in the first six months of 2008, well below the record
level of 8 percent achieved in 2007 and also well below the 5.9
percent achieved in 2006. At the end of 2007 there were 24 foreign
life insurers and 21 domestic life insurers operating in
China.
At the end of 2007 in the general insurance market there were 15
foreign and 27 domestic insurers. In a market which generated total
premium income of CNY208.64 billion in 2007, foreign general
insurers held a 1.16 percent market share representing premium
income of CNY2.42 billion.
The top three domestic life insurers had a combined market share of
65.9 percent, more than eight times the combined market share of
foreign insurers. The fourth and fifth largest domestic life
insurers, Taikang Life and New China Life had market shares of 6.9
percent and 6.6 percent, respectively.
Total premium income of foreign life insurers in 2007 amounted to
CNY39.58 billion with by far the lion’s share being attributable to
American International Assurance (AIA), a wholly owned unit of US
composite insurer American International Group and the only wholly
owned foreign composite insurer operating in China. AIA achieved
life insurance premium income of CNY889.650 million in 2007 which
gave it a 22.48 percent share of premium income generated by
foreign insurers and a 1.79 percent share of the total market, an
achievement ranking it as the eighth largest life insurer in
China.
AIA has also gained the respect of its fellow foreign
insurers, reveals a study conducted this year by professional
services firm PricewaterhouseCoopers (PwC), in which 19 foreign
life insurers and nine foreign general insurers with operations in
China participated. The study was authored by Brian Metcalfe,
associate professor in the Business School at Brock University,
Canada.
In a peer group review conducted among the insurers AIA was voted
the most admired competitor in the fields of life insurance savings
and protection products and health insurance and personal accident
insurance products. AIA was also selected as the top insurer in the
fields of customer relationship, marketing strategies and the
technical competence of staff.
Undoubtedly AIA has also shown that foreign insurers can gain a
meaningful share of China’s far from fully-developed life insurance
market. And indeed, the PwC study found considerable optimism among
foreign insurers that this is an attainable objective.
Of insurers surveyed by PwC that responded to a request to estimate
foreign insurers’ market share in 2011 the majority, 14, predicted
that the share would reach 10 percent. A further six predicted that
foreign insurers’ market share would be below 10 percent and,
optimistically, one insurer predicted 25 percent, three predicted
15 percent and one 12 percent.
On their own premium income growth prospects Metcalfe noted that
most companies’ forecasts are in the 30 percent to 50 percent range
for annual growth between 2008 and 2011.
More specifically, 18 of the life insurers surveyed believe their
combined premium income will increase from CNY33.75 billion in 2008
to CNY92.2 billion in 2011, a CAGR of just under 40 percent.
Of the 19 life insurers surveyed, 18 also provided details of
current and anticipated policyholder numbers. From a combined 4.1
million policyholders at present, the insurers forecast that the
total would reach 8.9 million in 2011 with five companies
anticipating having 1 million or more policyholders in that
year.
However, to achieve their goals foreign insurers have significant
challenges to overcome. Respondents to PwC’s survey stressed that
they were not on an equitable regulatory footing with their
domestic competitors. Among constraints on foreign insurers cited
was that they can apply to open only one new branch at a time and
that approval can take six months or longer.
Limitation on foreign ownership is also viewed as an unfair
restriction. A number of insurers highlighted that their partners
were unwilling to inject additional capital into joint
ventures.
In addition, foreign insurers also believe competition is
intensifying in the market and emphasised that several domestic
insurers now represent formidable competitors. A European survey
participant stressed that while in the past foreign insurers were
seen as innovators many foreign insurers were now closely
monitoring product innovations by domestic insurers such as Ping
An.
A skills shortage is another significant area of concern to foreign
insurers. Twenty-two of the 28 participants in PwC’s survey
assigned human resources a score of eight or above on a difficulty
scale of one to 10. Areas of concern include recruitment of senior
management, actuarial personnel and branch and middle management.
As a result of skills shortages, wage inflation in these areas is
anticipated to be 15 percent or higher in 2008.
However, Metcalfe found that insurers believe the most serious
skill shortages are in sales and marketing. This is particularly
significant given expansion plans in this area with the foreign
life insurance companies surveyed estimating that their combined
agent force will more than double from 108,250 in 2008 to 224,500
in 2011.
Participants in PwC’s survey also believe the bancassurance channel
will continue to expand. However, they are unclear on how
successfully their products will be allowed to compete with banks,
noted Metcalfe.
In essence uncertainty has been sparked by a more accommodating
stance being taken by the government towards investment in
insurance companies by banks.
“As the major banks line up insurance investments, the foreign
insurers are unsure of their future distribution relationships,”
explained Metcalfe. However, despite what Metcalfe termed the
“potential channel conflict” respondents to PwC’s survey believe
bancassurance will continue to expand.
The CIRC has confirmed that it has received applications from four
domestic banks to buy stakes in insurers. The banks are China’s
largest state-owned bank, Industrial and Commercial Bank of China,
China Construction Bank in which US bank, Bank of America, has a
10.75 percent stake, Bank of Communications in which HSBC owns a
19.9 percent stake, and Bank of Beijing in which Netherlands
bancassurer ING has a 19.9 percent stake.
Clearly for good reason participants in PwC’s survey anticipate
that competition in the market is set to intensify even
further.
