sbrchina

Covering the Market

FEW OBSERVERS of China’s insurance market fail to comment on the rapid growth that it has seen in recent years. By the end of 2013, China’s insurance industry had accumulated total assets of USD1.34tr, and research by Munich Re says that between 2006 and 2013 China moved from being the tenth-largest market by premium volume to fourth place. Researchers also predict that China will rise to third in the world by 2020. A range of different players are operating in the sector, including foreign firms, SOEs, domestic Chinese enterprises, and various joint ventures. “It is hardly surprising that foreign insurance companies are interested in China, as premiums are rising by between 15 and 20 per cent annually,” says Andy Ng, China insu-rance leader at EY.

A number of different elements of China’s economic reforms are contributing to this growth. From the perspective of commercial insurance, Tim Mathieson, COO of insurance broker Willis notes that reforms of state owned enterprises mean that many of these industrial behemoths are increasingly trying to manage their risks better. “While this will involve them in activities such as risk assessment, analysis and risk control, risk transfer through insurance still has an important role to play,” he says. “Meanwhile, Chinese companies looking to expand overseas are facing more complex risk management challenges, and insurance and advisory services from brokers with global capabilities are in demand,” he adds. At the level of private individuals, further insurance is becoming necessary as part of China’s healthcare reforms, more and more cars are on the road which and so need insurance, and as Chinese consumers gain even more possessions, the demand to insure these is also growing.

However, despite the interest in these deve-lopments from foreign players, the insurance sector in China remains dominated by the so-called “Big Five” Chinese insurance companies — China Life, Ping An, China Taiping, PICC, and China Pacific. Together, these firms controlled 75 per cent of the life insurance market and 74 per cent of the property and casualty insurance market at the end of 2013.

“Because domestic insurers are so dominant, a foreign player will need to be a high-rising star to gain market share,” says Ng. Indeed, foreign insurance companies still have far to go: at the end of 2013, foreign life insurers’ market share stood at just 5.6 per cent, with those in the property and casualty sector even lower at just 1.3 per cent.

Penetration strategies

Vittoria Depino, general manager at Pacific Prime (insurance agency), says that “foreign insurers and brokers are more cautious than local players in regard to business target planning and market strategy implementation”. She sees this as being one of the major reasons why foreign players have struggled to gain market share. Another, she adds, is that “Large capital investment and resources are required to achieve a sustainable local operation”. Ng agrees, also noting the need for foreign insurers to put in capital to make progress in China.

However, despite this, Ng says that foreign insurers remain optimistic and are trying to gain share in the China market through acquisitions. This has become increasingly apparent this year. In February, French insurance company AXA announced that it had completed its acquisition of a 50 per cent stake in Tian Ping Auto Insurance Co for Rmb3.9bn (USD630m), and in March, the Starr group, led by Maurice “Hank” Greenberg — CEO of AIG until an accounting scandal intervened — said it had taken control of Dazhong Insurance.

For Mathieson, this is an interesting development, both for the insurers themselves and the market more broadly. “Foreign insurers who have aligned with local companies may be in a stronger commercial position than the others,” he says. “Also, I think this strategy is most beneficial for the insurance market as well, as you can really get the foreign expertise and the Chinese experience working in harmony. As such, I see this trend continuing into the future.”

On top of these, there are a number of joint ventures between Chinese and domestic players. In the small but fast-emerging health insurance sector, South African insurer Discovery has 20 per cent equity of giant SOE Ping An’s health insurance division, along with open access to each other’s intellectual property. The latter is perhaps particularly significant. Ping An Health’s general manager, Andrew Scott, states that “In 2005, Ping An saw the opportunity in health insurance and won one of four licences to operate in this sector. However, they felt the need for specific expertise in the sector and so approached Discovery about setting up a JV.” As the market for private health insurance grows — and China’s evolving healthcare system suggests that it will — Scott sees little chance of the venture collapsing. “Discovery invested for the long haul,” he says, “and there is still a lot to do. How we manage our data will be key, and while we now have a platform, we can become an awful lot more sophisticated firm in the future.” For this, experience of other health insurance markets will remain important.

Insurance subsectors

Still, despite having seen significant growth in recent years, health insurance makes up a comparatively small percentage of the overall insurance industry in China. Life insurance remains the largest by a wide gap, though vehicle insurance has also risen significantly — compulsory third-party liability alone accounted for 72 per cent (USD64.6bn) of China’s aggregate non-life premium in 2012, a figure that has increased significantly since then. Changes in regulations in 2012 meant that foreign insurers were able to provide motor insurance, and several players have since done so – the AXA Tianping merger being one of the most significant.

Away from life and motor insurance, other lines are much smaller. “One of the things that surprises me is the limited penetration of insurance at the personal level,” says Mathieson. “Life insurance is a huge market, though still with plenty of room for growth, but health insurance and personal insurance on property is relatively limited. Likewise the insurance penetration in the Small and Medium Enterprise sector is very weak. This is especially noticeable when big earthquakes and other natural disasters hit China: the insurance loss is embarrassingly low.” Mathieson attributes this to the fact that insurers have not managed to fully access the market, despite their large sales forces. “I suppose also there are some moral hazards, and it is a high-maintenance and high-cost business,” Mathieson said, “but there is a need to market these products better in China. Foreign brokers are only licensed to handle large commercial clients at present, but local brokers could be helpful in this; however in China growth in the personal lines area will most likely come from greater online sales”.

Scott too remarks on the challenge of distribution. “In the last year or so, we have been fairly successful at selling health insu-rance to the middle classes, but this is quite a recent development. It has taken us a few years to match the product to the distribution channel,” he says. This is clearly a key consideration, and Ping An Health is in the fortunate position of being able to sell through Ping An Life’s sizeable network of salespeople. Scott adds that “Without this local presence and knowledge, I think it would be very difficult to grow at the rate at which we wish.”

With time this may change, Depino notes that of public awareness of the importance of private insurance will be critical. She predicts that “People and entrepreneurs will be more knowledgeable about insurance needs, as well as risk identification”.

Online marketing

An EY report from the start of 2014 suggests that one way foreign insurers can reach Chinese consumers is through the rapidly developing digital sphere. “Foreign insurers see digital channels as a way to overcome their limited geographic presence, to build brand awareness and to offer value pro-ducts,” the report says. However, the report is careful to note that using online tools for insurance is more than about channels and branding. “It is also about data analysis, smart underwriting, product development, innovative pricing, and interactions with customers and insurance intermediaries,” it says.

Certainly the opportunities online are significant, especially in China. In a survey carried out this year by Accenture, 93 per cent of Chinese respondents said that they would consider buying insurance online – the highest figure of the 11 countries surveyed. One company that has responded to this opportunity is AXA Tianping, which was formed through the merger of AXA and Tianping Auto. Their CEO, Wu Hu, said in a statement that the company would now position itself as an “e-insurance company”, adding that through online and even mobile sales the firm was aiming to drive its direct sales channel to 60 per cent.

Despite these moves by some foreign players, it is still the big Chinese companies that are dominant online. According to the Insurance Association of China, domestic companies had 52.2 million online clients in 2013, relative to 6.9 million in 2011, whereas foreign companies had 2.2 million in 2013 compared to 1.3 million in 2011.

Regulatory rigours

One reason foreign insurers surveyed by EY say that they have struggled to make progress in securing business online is regulatory obstacles, though the report does not fully accept this. “It may be somewhat unfair to elevate the regulatory constraints, as the regulator has always encouraged digital developments. Regulatory uncertainty might be a more appropriate concern,” the report says.

Perhaps the most significant regulatory change is the upcoming implementation of a new set of regulations known as the “China Risk Oriented Solvency System (C-ROSS),” which will be introduced in 2015 with the aim of strengthening capital requirements, risk management, and governance in the Chinese insurance industry. Zhao Yulong, deputy director of finance at the department of China Insurance Regulatory Commission, stated the background to these regulations in a recent article: “A few cases of ‘not looking after the interest of customers’ have been seen in recent years, including misleading sales and difficulties making insurance claims. The China Insurance Regulation Commission (CIRC) conducted an analysis and concluded that the existing simple, but overly strict, regulation environment had contributed significantly to these issues arising, and so brought in the new regulations,” he wrote.

Mathieson says that the new rules include increased capital requirements and more re-gulatory complexity for insurers, and wonders whether “some smaller non-life companies may be put under pressure”. He also notes, “Barriers to entry seem to have been raised in both the insurance and broking sectors”, a comment that Depino agrees with. Mathieson adds that the implications of these are that the brokerage industry in China might become less vibrant.

Such implications remain to be seen. However, Mathieson remains generally positive about developments in Willis’ particular sector. “The insurance broker market in China has only been in existence for about ten years, and foreign firms arrived at the same time as the market opened,” he says. There are three global broker firms in the top ten in the country, and in contrast to foreign insurers, Mathieson notes that “foreign brokers have made more significant inroads into the market in China than their insurance company counterparts”. He adds that in many developed insurance markets, about 95 per cent of commercial insurance is bought through a broker, so the future for brokers in China looks optimistic.

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