Foreign insurers’ market share woes

While no one expects entering a
market dominated by established players to be easy, foreign
insurers in China appear to be finding the going tougher than they
had imagined. This comes through strongly in a survey by
PricewaterhouseCoopers (PwC), Foreign Insurers in China.

Significantly, PwC found that all 21 foreign life insurers
and 10 foreign general insurers that participated in its survey
have “dramatically lowered” their expectations of any increase in
market share for 2010 and for the next three years. Life companies
expect their total market share to continue to hover at the current
level of 5% in 2013, while general insurers expect their total
market share to remain at around 1% in 2013.

PwC noted that this is a “dramatic”
reduction in expectations compared with a survey it undertook in
2009, which found that private life insurers expect their combined
share of China’s life market to reach 8% in 2012. A PwC survey in
2008 found that foreign life insurers were looking to achieve a
combined market share of 10% in 2011.

Foreign life insurers enjoyed their
highest market share in 2005 when their combined premium income
stood at some CNY32bn ($4.8bn), 8.9% of the total.

Stiff domestic
competition

“Foreign insurance companies
operating in China have tried in vain to gain traction and increase
their market share,” commented PwC insurance industry leader for
Hong Kong, Peter Whalley.

He added: “Established domestic
insurers and the aggressive geographic expansion of the smaller
insurers are giving the foreign players a run for their money.
Because of the stiff competition, some foreign partners are
considering diluting their shareholdings, and looking towards
domesticating their operations.”

Indicative of the gulf between
foreign and domestic life insurers, the largest market share held
by a foreign player in the first half of 2010 was 0.69% by Generali
China Life. By comparison, domestic industry giant China Life held
almost a 38% market share, second runner Ping An held an 18.3%
share, and third in line New China Life held a 10.3% share.
Generali China Life’s market share ranked it joint 12th among all
55 life insurers in China.

PwC actuarial practice leader for
China Shu-Yen Liu said: “In the post-financial crisis era, many
European insurers have been forced to re-examine their China
positions. Other foreign players that have been in the market long
enough and have failed to generate satisfactory profits are also
taking a long, hard look at the future feasibility of their
relationships with the local partners.”

A number of moves in this respect
have already been seen by foreign players. In July 2009, Canadian
insurer Sun Life Financial and state-owned conglomerate China
Everbright Group announced a restructuring of their Chinese joint
venture (JV) Sun Life Everbright Life. This entailed the
introduction of new strategic investors to Sun Life Everbright, a
move aimed at more than doubling its registered capital to about
CNY3bn and reducing Sun Life’s equity stake in Sun Life Everbright
from 50% to 20%.

In December 2009, ING Group
followed with an agreement to sell its 50% stake in Pacific Antai
Life, a JV with China Pacific Insurance to China Construction Bank,
for an undisclosed sum. The deal is still subject to regulation
approval and is part of the Dutch group’s restructuring under which
all its insurance operations are being sold.

Notably, China Pacific Insurance
announced in December 2010 that it intends on selling its 50% stake
in Pacific Antai Life. China Pacific is seeking about CNY940m for
its stake.

In another reshuffling of
stakeholders involving ING, its original JV partner in ING Capital
Life, Beijing Capital Group, sold its 50% stake in the insurer to
Bank of Beijing for CNY682m in February 2010. ING Capital Life was
subsequently renamed ING-BoB Life.

But restructuring in China is not
always straightforward. In September 2009, Standard Life announced
it was in the final stages of talks with Chinese regulators for
state-owned Bank of China to take a majority stake in its 50:50 JV
with state-owned investment agency Tianjin TEDA International, Heng
An Standard Life.

15 months later, Standard Life
issued a statement noting: “It has not proved possible for the
parties to reach agreement. Standard Life will continue to develop
Heng An Standard Life in partnership with its existing joint
venture partner.”

At the time the proposed deal with
Bank of China was announced, Standard Life said the rationale was
to gain the benefit of Bank of China’s extensive distribution
capability. In the first half of 2010, Heng An Standard Life was
one of only two foreign life insurers to experience a fall in
premium income compared with the same period in 2009. It reported a
9.6% fall in premium income and Pacific Antai Life a 3%
decline.

Views among foreign life insurers
on further consolidation or otherwise are mixed. PwC found that 15
of the 31 companies surveyed expect the number of foreign life and
general insurers to stand at between 50 and 59 in 2013. A further
six companies anticipate a more significant increase in numbers to
between 60 and 69.

Taking an opposite view, 10
respondents anticipate that consolidation will reduce numbers.
There are currently 46 foreign insurers in China – 28 in the life
insurance sector and 18 in the general insurance sector.

Among potential new entrants cited
by respondents are Japanese insurer Sony Life, Korean insurer
Korean Life and US insurer Prudential Financial. A more definite
future entrant is the US’ largest health insurer WellPoint, which
announced in January 2010 that it is seeking a JV partner in
China’s health insurance market.

WellPoint clearly has its eye on
the potential of China’s under-developed private health insurance
market. In a recent study, rating agency Standard & Poor’s
noted that China’s government plays a modest role in health care
with its spending stable at about a quarter of total costs over the
past three decades. However, with an increasing number of people
not enjoying employer sponsored health insurance, the proportion of
total health expenses covered by individuals has risen from 30% in
1980 to about 40% at present.

Bancassurance

Foreign insurers participating in
PwC’s survey also expressed concern over the direction of
bancassurance as more banks enter the insurance space as direct
competitors. This development follows recent relaxation of
regulations limiting banks’ direct involvement in insurance and
vice versa.

Illustrating the blurring of
boundaries between banks and insurers, China’s largest bank,
Industrial and Commercial Bank of China, announced in November 2010
that it is to acquire a 60% stake in life insurer Axa-Minmetals
Assurance Company (AMAC) from Axa, Axa Asia-Pacific and Chinese
metals and mineral trading company Minmetals. The deal is worth
about $180m.

On completion of the deal, Axa’s
direct stake in AMAC will fall from 26% to 14%, Axa Asia-Pacific’s
from 25% to 13.5% and China Minmetals’ from 49% to 12.5%.

Also of note was the announcement
in June 2010 by Ping An that it was to increase its stake in
Shenzhen Development Bank (SDB) to 51%, in a deal worth CNY29bn. Of
the total consideration, CNY2.7bn is in cash with the balance being
contributed by the merger of Ping An’s 90.75%-owned Ping An Bank
with SDB. Ping An acquired a 30% stake in SDB in September
2009.

In response to developments, PwC
found that while some foreign insurers are re-assessing their
distribution channels, others are hoping to ride the bancassurance
wave by leveraging on their bank partnerships.

PwC found that 11 foreign life
insurers already distribute 50% or more of their products through
the bancassurance channel and that for five the channel was
responsible for between 70% and 100% of product distribution.

Eight life companies indicated that
tied agents account for 30% or more of their product distribution
with one insurer at 100% and another at 70%.

Only eight life insurers made use
of brokers for distribution with the proportion of their products
distributed through this channel ranging from 5% to 35%.

Domestic insurers are also pursuing
the bancassurance channel. Notably, China Life reported that 70% of
its CNY183.6bn premium income in the first half of 2010 had been
generated through bank branches.

At the end of June 2010, China Life
had almost 43,000 employees dedicated to the bancassurance channel
while its bank branch outlets stood at some 97,000.

Bancassurance is also significant
for New China Life which in the first half of 2010 generated 54% of
its CNY52.3bn premium income through bank branches. By contrast,
Ping An’s strategy has favoured its agent force with only about 15%
to 20% of its premium income generated through bank branches.

Discrimination

A
source of major irritation for foreign insurers in their quest for
market share is that they compete with their domestic counterparts
on a far from level playing field. This was highlighted by the
American Chamber of Commerce in China (AmCham) in April 2010.

AmCham noted: “International
insurance companies want to compete fairly in the China market.
Although they are allowed market entry, their ability to compete
fully is hampered, to the detriment of Chinese consumers. An
overwhelming number of American and other foreign insurers
operating in China are registered in China and are therefore
Chinese companies; yet, they still face regulation
discrimination.”

Expanding on foreign insurers’
problems, AmCham said that while establishment of branches and
sub-branches is critical to market expansion, there is persistent
unequal treatment of foreign insurers compared with domestic
insurers.

AmCham added that under the new
insurance law that came into force in 2009, the insurance
regulation authority must examine applications to establish a
branch and render a decision within 60 days of receipt of an
application.

AmCham stressed that foreign
insurers experience much longer waits before receiving approval to
establish branches while domestic insurance companies, even if
newly established, characteristically receive multiple branch
approvals concurrently on the same day or within days of each
other. In addition, AmCham noted that foreign insurance companies
rarely, if ever, receive multiple branch approvals
concurrently.

Determined to
stay

However, despite challenges foreign
insurers are not about to give up on China.

“Foreign insurance companies see
China as an underinsured market with huge upside potential,” said
Whalley.

He also noted that foreign insurers
“are on a hiring spree again as staff turnover is expected to
return to pre-crisis levels”.

Specifically, PwC found that among
life insurers, a 60% increase in total staff numbers (from a
current 18,799) is anticipated by 2013 while the number of agents
is expected to increase by 134%, from 107,200 to 250,000.

Despite the growing importance of
the bancassurance channel, tied agents remain a significant factor
in the distribution equation. This was highlighted by a bank
consumer study by Allianz China Life which revealed that one out of
two bank customers prefer to purchase insurance from an insurance
agent, 11% through banks and 4% through brokers.

Growth in staff numbers on this
scale will be no easy task with “finding and retaining good
personnel” cited by foreign insurers as by far their biggest
operational challenge.

Foreign insurers also face
competition for agents from major domestic insurers that have
deployed agents in vast numbers. China Life, for example, reported
having about 777,000 agents at the end of 2009. Ping An has some
420,000 agents.

Despite an overall stagnant market
share, PwC found that four foreign life insurers are anticipating
that their premium income will double in 2010, while five
anticipate premium income growth of between 50% and 70%. Only two
insurers expect their premium growth to be below 20%.

By 2013, 17 of the foreign life companies surveyed expect their
combined gross premium income to increase by 70%, from CNY62.3bn in
2010 to CNY106bn in 2013.

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