Going gets tougher for foreign players

More than a decade of
spectacular growth and the prospect of more to come have attracted
27 foreign life insurers to establish ventures in China. But with
few exceptions foreign players have made little progress in gaining
a share of a market dominated by domestic giants such as China Life
and Ping An.

Though far from
grinding to a standstill in 2009, growth in China’s life insurance
industry slowed appreciably with the China Insurance Regulatory
Commission (CIRC) reporting that premium income increased by an
uncharacteristically modest 10.9% compared with 2008 to CNY826bn
($121bn).

Growth in 2009 was considerably
below the exceptional 49.1% achieved in the previous year and the
CAGR of 28.6% in premium income between 2006 and 2008.

According to Olive Xia, an analyst
at Hong Kong-based investment bank Core Pacific Yamaichi, the
slowdown in premium income growth in 2009 had little if anything to
do with China’s GDP growth which slowed from 9% in 2008 to 8.7% in
2009.

At work, rather, was a change in
the sales mix by China’s major life insurers at the behest of the
CIRC which in August 2008 called for the promotion of CIRC
long-term saving and risk-protection products, explained Xia.

She added that the impact of a
change in product mix became evident in the second half of 2008
following an exceptional period that saw premium income growth peak
at almost 90% year-on-year in July 2008. year-on-year premium
income growth in the first half of 2008 came in at 64.2% before
slowing appreciably in the second half of the year, according to
the CIRC.

China Life
benefits

For China’s largest life insurer,
China Life Insurance, the change in business mix had a positive
impact on the proportion of new business derived from regular
business, noted Xia.

Compared with 2008 China Life
reported a modest 4.2% increase in gross premium income in 2009 to
CNY275.97bn. This growth rate was down from 47.8% in 2008 and 21.9%
in 2007.

As a consequence of its modest
premium income growth in 2009 China Life saw its market share end
the year at 35.7%, down from 40.3% in 2008 and the lowest level in
its history.

However, Xia pointed out that
notwithstanding China Life’s mediocre gross premium growth in 2009,
first-year regular premiums rose 12.2% and represented 25.4% of
total first-year premiums versus 21.4% in 2008. In addition,
long-term (more than 10-year) first-year regular premiums surged
45.6% on the back of what she termed a “successful product mix
improvement.”

Specifically, China Life reported
that in 2009 that business with a duration of more than 10 years
accounted for 69% of total first year regular premiums, up from 43%
in 2008. Regular new business with a duration of five to 10 years
accounted for 29% of the total, up from 15% in 2008. Regular new
business with a duration of under five years accounted for 2%, down
from 42% in 2008.

The increased importance of regular
premium income in China Life’s business mix had a positive impact
on new business value (NBV), continued Xia. Specifically, China
Life reported that its one-year NBV in 2009 increased by 27.2%
compared with 2008 to CNY17.713bn. China Life’s embedded value
increased by 18.8% compared with 2008 to CNY285.23bn.

Xia anticipates that China Life’s
NBV will grow at an average annual rate of 16.4% between 2009 and
2012, outpacing net premium income which she forecasts to increase
at a CAGR of 5.9%, from CNY275.08bn in 2009 to CNY326.84bn in
2012.

Off to a strong
start

China Life got of to
a good start in 2010, reporting premium income of CNY116.9bn, up
12.9% compared with the same period in 2009. The strongest
improvement was in the first two months of 2010 with premium income
of CNY39.5bn in March 2010 reflecting year-on-year growth of only
7.3%.

On the profit front China Life put
in a strong showing, reporting a net profit of CNY10.21bn, up 66.6%
compared with CNY6.13bn in the first quarter of 2009.

From a premium income growth
perspective China Life lagged the market as a whole. The CIRC
reported that in the first quarter of 2010 premium income totalled
CNY329.18bn, up 39.5% compared with the same period in 2008. In
March 2010, premium income of CNY155.34bn reflected a year-on-year
increase of 15.5%.

China Life’s below par first
quarter premium income growth saw its market share fall to a new
low of 35.5%.

China Life’s closest rival,
composite insurer Ping An, reported what it termed “a brilliant
start” to 2010 with its life insurance premium income of CNY52.35bn
up 30.4% compared with the same period in 2008. The insurer’s
general insurance premium income was up 70.9% to CNY15.31bn giving
it a market share of 14.8%.

From a profit perspective Ping An’s
performance in the first quarter of 2010 was even more impressive
with net profit reported at CNY4.617bn, up 89.6% year-on-year.

Ping An’s strong showing in the
first quarter of 2010 followed a solid performance in 2009 when it
reported life premium income growth of 31.4% to CNY130bn and a
market share of 16.5%, up from 14% in 2009. Ping An ended the first
quarter of 2010 with a market share of 15.9%.

For third position in China’s life
market in the first quarter of 2010 there was again close rivalry
between Taikang Life and China Pacific Insurance Group’s China
Pacific Life Insurance unit. Coming in ahead was Taikang which
reported premium income of CNY33.6bn, up 56% year-on-year for a
market share of 10.2%, its highest ever.

Trailing slightly behind, China
Pacific Life reported premium income of CBY31bn, up 29.6% compared
with the first quarter of 2009.

Foreign insurers
battling

Massive growth in
China’s life market has seen premium income increase more than
eight fold since 2000 and brought a surge in new entrants. By the
end of 2009, the number of life insurers in China stood at 58, of
which 30 were domestic and 28 foreign-owned. The number of domestic
life insurers increased from 29 in 2008 and 28 in 2007. The number
of foreign-owned insurers increased from 26 in 2008 and 24 in
2007.

However, for most foreign insurers
the going has been tough in terms of gaining a major portion of the
market, their combined market share having reached its highest
level ever in 2005 at 8.9% before slipping to less than 5% in 2009.
Foreign general insurers have an even more tenuous market share of
about 1%.

Foreign life insurers’ declining
market share is also reflected in their overall lackluster showing
in terms of premium income growth. In 2005 when foreign insurers
enjoyed the highest market share their combined premium income
stood at some CNY32bn. In 2009 their combined premium income was
about CNY39.6bn. Thus between 2005 and 2009, premium income of
foreign insurers reflected a CAGR of a mere 5.5% in an overall
market that delivered a CAGR of 23% over the four year period.

The position of foreign insurers
was the subject of a study by professional services firm
PricewaterhouseCoopers (PwC) in late-2009 which found that foreign
insurers have toned down their expectations.

Indicatively, PwC found that
private life insurers expect their combined share of China’s life
market to reach 8% in 2012 down from their expectation of 10% in a
similar study conducted by PwC in 2008. Foreign general insurers
believe that it may possibly for them to attain a 2% market share
in 2012.

PwC’s 2009 study was based on
interviews with 20 foreign life and nine foreign general
insurers

PwC noted that the more modest
expectations of foreign insurers is that in many cases the large
domestic insurers proved to be more resilient to the general
slowing in China’s economy. PwC pointed to a number of reasons for
this including a shift in consumer demand from investment linked
products to protection products, an area in which domestic insurers
are particularly strong.

In addition, PwC said that domestic
insurers have proved to be more innovative than foreign insurers
had initially anticipated. Domestic insurers are also continuing to
improve the quality of their businesses and enjoy the advantage of
a greater in-depth knowledge of the market.

Significantly, unlike the norm in
developing insurance markets, PwC noted that foreign insurers
surveyed for its 2009 study acknowledged that domestic insurers
were setting the trend and that they were the followers.

Indicatively, in a peer group
review Ping An was rated as the leader in both the traditional
savings and protection sectors. China Life was voted second in both
sectors while in third place and representing foreign insurers was
American International Group’s AIA unit, now the subject of an
acquisition by UK insurer Prudential. Notably, AIA ranked ninth
overall in terms of total premium income in 2009 and with a market
share of 0.86% was the only foreign insurer to rank in the top
10.

Ping An also achieved first place
in the key areas of innovation, distribution effectiveness,
marketing strategies, customer relationships and brand
awareness.

Other
challenges

Of particular significance, PwC
stressed that although foreign insurers’ commitment to the Chinese
market remains “extremely strong and resolute,” many are finding it
extremely difficult to secure economies of scope and scale.

Foreign insurers are indeed facing
domestic competitors with vast resources. China Life, for example,
reported having 777,000 agents at the end of 2009, up by 61,000
from the end of 2008. In addition to its agent force, in the
bancassurance distribution channel China Life ended 2009 with
42,000 customer service managers and financial advisors, an
increase of 8,800 compared with 2008. China Life distributes
through almost 100,000 bank branches.

Ping An had some 400,000 agents in
2009 and distributed through 50,000 bank branches. China Pacific
Life had about 250,000 agents and distributed through 65,000 bank
branches.

In comparison, the 20 foreign life
insurers surveyed by PwC reported having a combined total of
103,337 agents, a number that is anticipated to increase to just
over 232,000 by 2012. The 20 insurers had an estimated 6.19m
policyholders in total, a number dwarfed by China Life which has
some 100m policyholders.

PwC also highlighted other serious
areas of concern to foreign insurers including what they believe is
their unequal treatment compared with domestic insurers. Specific
areas of concern in this respect are obtaining licenses to
establish new branches and constraints on new product
initiatives.

Unfortunately things are unlikely
to get easier. PwC found that foreign insurers believe that China’s
already tough market will get tougher with a key factor being
increasing regulatory pressure heralded by the introduction of the
new insurance law in October 2009. Stricter controls are expected
across a broad front including solvency risk management, consumer
protection, product supervision and pricing.

Also set to make things tougher,
noted PwC, is the entrance of the big-four banks and several
mid-sized banks into the insurance market.

Troubled
partnerships

Foreign life insurers operating in
China are limited to a maximum stake of 50%, a restriction that is
adding to their woes.

PwC emphasised that foreign
insurers have experienced “challenges” working with their domestic
partners because of the partner’s limited knowledge of insurance
business. Dissatisfaction amongst their domestic partners is also
widespread.

The reason for dissatisfaction
amongst foreign insurers’ partners, noted PwC, is that that many
JVs have been going for seven years or more but have yet to
break-even. Significantly, 13 out of the 20 foreign life insurers
in PwC’s survey indicated that their domestic partner would like to
exit their existing relationship.

Dissatisfaction amongst domestic
partners is also widespread with a major reason for their
dissatisfaction being that many JVs have been going for seven years
or more but have yet to produce a profit. PwC noted that 13 out of
the 20 foreign life insurers in the survey indicated that their
domestic partner would like to exit their existing
relationship.

A number of other reasons for
dissatisfaction on the part of Chinese partners in JV were also
highlighted.

One of these is that foreign
insurers are to US- or European-centric and lack an understanding
of the unique characteristics of the Chinese markets.

Another view is that Chinese
partners would like to run the business on their own and would be
happy to see their foreign partner pull out. A third view is that
some Chinese partners want to leave the JV because they can no
longer afford ongoing demands for fresh capital as the business
expands.

All in all, the situation appears
rather untenable and would appear to portend significant changes
ahead.

Indeed, changes are already being
seen, among these a major revision this year of China Canadian
insurer Sun Life Financial’s strategy in China. In a move to reduce
its Chinese exposure Sun Life and state-owned conglomerate China
Everbright Group have agreed to restructure their Chinese JV Sun
Life Everbright Life which ranks 11th among foreign insurers with
an overall market share of some 0.12%.

Under the terms of the agreement,
Sun Life and China Everbright will introduce new strategic
investors to Sun Life Everbright which will cut Sun Life’s equity
stake from 50% to 20%.

Change could also come from the
mooted entry of banks into the insurance market and, noted PwC,
negotiations between banks and several foreign insurance joint
ventures. If banks are permitted to enter the market, PwC
anticipates that a number of banks will replace existing domestic
partners in JVs.

Opportunity still
huge

Despite the major obstacles facing
foreign insurers, China clearly remains a market with huge
potential. Expressing an optimistic view on the life market’s
growth potential, Core Pacific Yamaichi’s Xia stressed that
penetration remains low at only 2.2% of GDP while the average
annual life insurance premium is a mere $71.70.

At work in laying the foundation
for long-term growth in China’s life market is also the country’s
changing demographic structure.

European insurer Allianz noted in a
recent analysis that at present China’s demographic profile is
ideally suited to economic expansion, with 7 out of 10 Chinese aged
between 16 and 64. The population’s average age is 34.

This situation will, however,
change dramatically because of China’s low birth rate of 1.7
children per woman, well below the 2.1 children per women that
ensures population stability. As a result, noted Allianz, China’s
workforce will start shrinking from 2015 and by 2050 a third of
China’s population will be over 60, three times the current
proportion. The insurer stressed this will put enormous strains on
the economy, the poor social security system and Chinese
families.

A key part of the solution lies in
encouraging increased retirement savings through the life industry.
China’s government is acutely aware of this and has thrown its
weight behind development of the insurance industry with the CIRC
specifically highlighting the need to promote individual and group
pensions, annuities and health insurance.

However, whether most foreign insurers will get to share in a
major portion of this potential or remain overshadowed by domestic
insurers remains to be seen.

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