insurers
China’s life insurance industry has set a cracking growth pace and,
assisted by the full backing of the country’s government, looks set
to deliver more of the same in the years ahead. For foreign
insurers it makes for a hard-to-resist market, but one they should
enter with no illusions that it is an easy target.
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In 2000, China’s life insurance industry ranked as the world’s 18th
largest based on total premium income of RMB99.8 billion ($12
billion at the then prevailing exchange rate). By 2006, premium
income had, according to reinsurer Swiss Re, soared to RMB359.3
billion ($45.1 billion), propelling China into the position of the
world’s eighth-largest life insurance market. Despite this
exceptional performance, which represented a CAGR of 23.8 percent,
China’s life insurance industry has attained only a small portion
of its potential.
Indicative of the industry’s potential, penetration of life
insurance, though increasing, is low and stood at only 1.7 percent
of GDP in 2006, according to Swiss Re. This compared poorly with
another major developing market, India, where penetration stood at
4.1 percent of GDP in 2006.
Low penetration of life insurance in China presents huge
opportunities, not the least of them being tapping into a bank
deposit-oriented society that has one of the highest personal
savings rates in the world. According to China’s National Bureau of
Statistics, savings deposits of urban and rural citizens outpaced
growth in incomes in 2006, rising by RMB1.37 trillion (17 percent)
to RMB9.43 trillion and putting China’s personal savings rate at
about 25 percent of disposable income. Almost 90 percent of total
personal financial assets at the end of 2006 were invested in cash
or short-term deposits.
In a recent study of China’s insurance market, management
consultancy McKinsey & Company noted that, in addition to the
dominance of bank deposits, many insurance products sold in China
have strong short-term investment and savings components and
provide little long-term protection. McKinsey pointed out that in
developed countries, sales of these products are not counted as
premium income but, instead, are recorded as a deposit or liability
on the balance sheets of most insurers. If such products sold in
China were excluded, the penetration of life insurance would be at
least 30 percent lower, said McKinsey. Based on 2006 premium
income, this would put life insurance penetration at about 1.2
percent of China’s GDP.
Financial security concerns
China’s high savings rate is driven in large part by personal
financial security concerns, explained McKinsey. People are
increasingly concerned about illness, accidents, retirement,
unemployment, housing and education of children, said
McKinsey.
The concerns of many of China’s 1.32 billion people are well
founded. According to McKinsey, of China’s urban population in
2004, only 44 percent had a basic pension plan, 33 percent basic
medical insurance, 28 percent unemployment insurance and 18 percent
work-related injury insurance. In rural areas, only 13 percent of
people had medical insurance and 10 percent a basic pension
plan.
China is also faced with a rapidly ageing population, a result,
said McKinsey, of its one-child policy combined with rising average
life expectancy, which under current trends will reach 79 years in
2020. According to China’s State Development Planning Committee,
life expectancy increased from 41 years in the 1950s to 72.7 years
in 2005.
Increasing life expectancy and an ageing population compound other
major challenges facing China’s government. First, said McKinsey,
between 2006 and 2011 the government must find $1.5 trillion to
finance construction of physical infrastructure if it is to keep
its growth on track and extend economic development to smaller
cities and rural areas. Second, added McKinsey: “It must [also]
address increasingly pressing issues of social harmony and
stability, in part by tackling shortfalls in its pension and
social-welfare systems. Both of these efforts will be crucial for
narrowing the potentially explosive gap between the wealthier
coastal and urban regions and the poorer countryside.” Only 3
percent of government spending is currently allocated to social
welfare.
However, continued McKinsey: “Since either undertaking, let alone
both, will almost certainly cost more than the government can
afford, China must mobilise a market-oriented source of finance to
expand its investment capacity without compromising fiscal
discipline. It could do so, at least in part, by further reforming
the Chinese life insurance market.”
Infrastructure and social needs
The life insurance industry has a key role to play in assisting the
government in addressing infrastructure and social issues
simultaneously, believes McKinsey. The consultancy noted: “A
vibrant life insurance industry is uniquely suited to address
infrastructure and social needs alike.”
McKinsey explained that by redirecting China’s enormous household
savings away from short-term bank accounts into life insurance
products, insurers could help raise the long-term financing the
state needs for big infrastructure projects. On the social welfare
side, life insurers would provide the peace of mind people are
seeking in the form of protection products and long-term savings
products for their retirement. This would also reduce the burden on
government by supplementing the social pension and welfare
system.
Vast numbers of people in China earn enough to buy insurance, “but
few of them do”, stressed McKinsey. To attain its full potential,
China’s life insurance industry must, however, overcome a number of
obstacles. The first of these, said McKinsey, is that many Chinese
either do not know about life insurance or do not understand it
well. McKinsey pointed to a survey by China’s official news agency,
Xinhua, which found that only 6 percent of the population had even
a modest knowledge of the benefits of life insurance. Aggressive
and sometimes misleading sales practices by insurers and agents
have also created mistrust among consumers.
Life insurers have tended to focus on consumers in urban areas,
where access is easier and the average income is higher, and
neglect the rural population because average income is lower, the
people are less educated about life insurance and they are more
costly to reach, said McKinsey. This is reflected in the disparity
between the national average annual premium of $34.10 in 2006
(according to Swiss Re) and $300 or more in major cities such as
Beijing.
Government support
The Chinese government has made it abundantly clear that it
supports vigorous development of the life insurance industry. In a
recent publication, the industry’s regulator, the China Insurance
Regulatory Commission (CIRC), spelled out its intentions:
• pension and health insurance will be pushed forward aggressively
to meet the needs of urban and country residents;
• development of individual and group pension business will be
pursued aggressively;
• employers will be encouraged to increase the financial security
of their employees through pension schemes complemented by
commercial insurance;
• insurers will be encouraged to participate more actively in
enterprise annuity programmes with a view to expanding coverage of
supplementary pension schemes;
• aggressively promote the development of health insurance and
support insurers’ efforts to invest in medical institutions;
• develop commercial pension, health insurance and personal
accident insurance that meet the needs of farmers; and
• explore ways for insurers to be involved in the management of the
new rural co-operative health care services.
Foreign interest
China is, understandably, a market that major foreign insurers view
with relish and have entered in droves, almost exclusively via
joint ventures (JV) with domestic companies. The result has been a
proliferation of life insurers that led to an increase in the total
number from 13 in 2001 to 47 by the end of May this year. The
number of foreign life insurance companies stood at 26,
outnumbering the 21 domestic players.
Gaining market share has, however, proved an uphill battle for most
foreign insurers. According to professional services firm
PricewaterhouseCoopers (PwC), the market share of foreign insurers
stood at 5.91 percent in 2006 and had crept up to 6.08 percent in
the first five months of 2007. Foreign insurers held a 1.2 percent
share of China’s non-life insurance market in the first five months
of 2005.
The overall life insurance market remains dominated by the top five
domestic insurers, which, led by China Life with a 51.2 percent
market share, held a combined 88.8 percent market share in the
first five months of 2007. This is, however, down from levels in
2001 when the top five insurers had a 95 percent share and China
Life a 57 percent share.
Foreign insurers are confident that the market share trend will
continue to move in their favour. Of 16 foreign life insurers and
eight foreign non-life insurers surveyed recently by PwC, 13 (54
percent) believe that foreign insurers’ share of the total
insurance market will rise to 10 percent by 2010. This would
represent an increase from 7.1 percent in 2006.
More optimistically, four companies believe foreign insurers’
market share will be 12 percent by 2010, two forecast 15 percent
and one 20 percent. The remaining respondents forecast foreign
market share at just below 10 percent.
The most successful foreign insurer in terms of market share is
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. In 1992 AIA
became the first foreign insurer to be granted a licence in China.
During the first five months of 2007, AIA’s market share stood at
1.71 percent based on total life premium income and 27.3 percent
based on life premium income earned by foreign insurers.
AIA has also gained the respect of its fellow foreign insurers. In
a peer group review conducted among 20 foreign insurers by PwC, AIA
was voted the most admired competitor overall by 15 insurers. In
the health insurance category, all five competitors participating
in a review rated AIA the most respected player. AIA was also rated
as the top foreign player in the personal accident category, for
its marketing strategies, the technical competence of its staff,
its distribution effectiveness, its geographic expansion and its
ability to innovate. AIA was, however, beaten into second place by
a narrow margin in the investment product category by CITIC
Prudential Life, a JV between UK insurer Prudential and Chinese
services group China International Trust and Investment
Corporation.
Market share challenge
Gaining and maintaining market share is, however, a major
challenge. According to PwC, China’s life insurance market was
considered to be intensely competitive by 88 percent of respondents
to its survey. In response to the competitive pressure, PwC noted,
over the past year 50 percent of respondents had made “significant
operational and organisational changes”; a further 25 percent had
made “fundamental changes in strategy and positioning”.
Market shares of foreign life insurers are also prone to high
levels of volatility. Illustrative of this was Generali China
Life’s (GCL) market share, which stood at 1.33 percent of the total
life market in 2006 and only 0.48 percent in the first five months
of 2007. GCL is a JV between Italian insurer Assicurazioni Generali
and China National Petroleum, China’s largest oil and gas
producer.
Competition in China’s insurance market is unlikely to abate. More
than one-half (15) of the insurers surveyed by PwC believe that the
number of foreign insurers will increase from about 40 at present
to 55 by 2010. Eight companies predicted that there would be 60 or
more foreign insurers by 2010 and one predicted that there would be
70.
Insurers participating in PwC’s survey predicted that rapid growth
would be experienced in health and disability insurance, annuity
products, liability insurance and credit insurance. The opening-up
of the health insurance market, in particular, was viewed “very
positively” while the pensions market was viewed as on the “cusp of
being opened up” and offering “significant opportunities”. Notably,
only one-half the respondents viewed China’s health insurance
market as being intensely competitive. PwC noted that new entrants
were likely to include UK insurer BUPA and US insurer
UnitedHealthcare.
As positive as these predictions may be, harnessing the growth
potential of China’s insurance market presents other challenges.
One of these is the regulatory system.
Foreign companies, said PwC, do not believe that China’s insurance
market is “a level playing field” in that the CIRC continues to
favour domestic insurers. In addition, the insurance market has not
been opened up to the extent that was anticipated in terms of
China’s commitments to the World Trade Organisation, of which it
became a member in December 2001. New regulations and guidelines
also posed a problem.
On a positive note, insurers praised the CIRC for the recent
implementation of an insurance protection fund. And while
restrictions on investment of assets remained a concern, a degree
of liberalisation was beginning to result in improved investment
returns. According to the Graduate Institute of Insurance at the
National Chengchi University in Taiwan, the return on investments
achieved by China’s life insurance industry improved from a low of
2.4 percent in 2004 to 3.6 percent in 2005 and 5.8 percent in
2006.
Skills shortage
However, PwC’s survey revealed that the biggest challenge facing
insurers lies in the field of human resources. Among all 24
insurers, the two most pressing problems were seen as recruiting
and training competent staff and recruiting and training in the
distribution channels. Eighteen insurers scored human resources as
a major concern, allotting it a score of eight or higher on a scale
of one to ten. The most pronounced skills shortages are in sales
and marketing, executive directors and the actuarial area.
Human resources concerns ranked ahead of improving premium growth,
building a customer base, profit performance, increasing regulatory
demands and brand awareness, in that order.
For foreign insurers that can overcome the challenges, significant
growth appears attain- able. Many see this materialising in the
short term. PwC said 14 life insurers were able to provide
estimates on policyholder numbers. Based on these responses, their
combined total number of policyholders was expected to increase
from 2.55 million in 2007 to 6.45 million in 2010.
PwC said 17 companies provided data on corporate policyholders.
They projected an increase from 41,450 in 2007 to 1.125 million in
2010. In terms of gross premium income, 21 companies projected that
combined total would rise from RMB15.66 billion in 2007 to RMB79.9
billion in 2010.
Brian Metcalfe, associate professor at Brock University’s Business
School in Canada and author of the PwC survey, observed: “Foreign
insurers have many advantages that come from their multinational
experience and scale.” Adding a word of caution, he continued: “It
is clear from our survey, however, that competition from the big
[domestic] players and a regulatory environment that is relatively
restrictive when it comes to innovation or rapid development will
ensure that breakaway success will be hard won.”
