Research Background

Started in 1978, the beginning of reform, China’s insurance businesses have increased quickly, service field has been expanded, market system has been perfected day by day, laws and regulations have been completed step by step, supervision level has been improved constantly, risks have been prevented efficiently and the whole strength has been reinforced obviously, each aspect played an active role because of confirming open policy.

Life insurance industry is one of the fastest developing industries in China. In 2008, there were 56 life insurance companies including 26 foreign companies. Since 2002, the average annual growth rate of China’s life premium revenues was 27.91%, and reached 744.74 billion RMB in 2008, and which was 3.2 times of that in 2002.¹ At the same time, premium income of foreign insurance companies was 36.10 billion RMB; foreign insurance held 4.92% of market shares. In 2008 China’s premium income ranked the 6^th of the world and occupied 3.85% of global total premium income, increased by 1.45% than that in 2007 (Swiss Re, 2009).

Over the past two decades, following more and more strengthened internationalized situation, the intense competition of insurance industry was much stronger than before. Mainland China, as one of a greatest potential markets, has attracted amazing huge foreign capital and giant companies to set up branches. And in the predicable future, we believe that there will be more and more companies’ most

1 See China Insurance Regulatory Commission, Statistics of China’s insurance industry, http://www.circ.gov.cn/web/site0/tab61/.

important strategy is to start a business in China.

Just like many foreign enterprises, they have to conquer acclimatization problem, especially when they face a totally different culture. Foreign companies have to adjust to China’s local society and respect different thinking if they want to survive and develop. Insurance industry is highly supervised by government, if a company can not adjust to the local culture and follow local laws, not only the proportion of market share will decrease, but also withdraw from a market at last. There are too many examples in Taiwan such as ING Life ( ), AVIVA Life ( ), and PCA Life ( ). For the other side, follow the opening footstep, it means that China insurance companies have to adjust to international regulation and implement international operation skills to connect the world. Nowadays China’s insurance industry has entered a high intense competition period, they need to make the whole financial system sound in a sudden.

The potential of the Chinese insurance market is enormous because its current per capita insurance spending is only a fraction of that in other developed economies.

The Chinese authorities are aware that the development of insurance capability is one of essentials to China's economic restructure, and these foreign insurers will play very import role in this transforming process. Because the Chinese government knew that the process is very difficult and complicated, they progressed cautiously. They started to improve related laws, functions of official supervisor, and to liberalize the policy environment for foreign insurers.

China’s economic open policy started in 1978, and began to undergo great changes in 1992 after President Deng Shao-ping delivered a speech to confirm and encourage economic development. The Chinese insurance market has been developing rapidly since 1993, and has continued this trend to present day (Neftci and Yuan, 2007). From the beginning of the open policy confirmed, China’s insurance

market was under a long-term oligopoly; price, products, business scope, and entry restrictions were under strict supervision. Following the reform footsteps, China entered the WTO in 2001. More and more Sino-foreign joint ventures and foreign insurance companies entered the market. As of April 30^th, 2009, there are 29 Chinese insurance companies and 27 foreign insurance companies in the market.²

Competition among insurers has reached new levels. Although there are more and more distribution channels appeared, just like the more and more important role in Taiwan, I believe Bancassurance will also play much more important role than the present for the continuous development of China’s life insurance market and occupy an even higher proportion of the total premiums in the future. Moreover, the continuous development of Bancassurance channel will be the key driver for the growth of China’s life insurance market.

The insurance density of China in 2007 was USD 105.4, life insurance density was USD 71.7, and the insurance penetration was 3.3%, life insurance penetration was 202%, accounting for around half of the average value in Asia. From the experiences of America, when the GDP per capita reaches USD 2,000, the growth rate of life insurance consumption will enter into a significant increasing trend.

Profound economic reform in China has been moving the country toward a market-oriented economy from planned economy. Key features of this economic transition include the arrangement of property right: a reduction in the share of state-owned industry, and the establishment of a market system. A good social insurance system is necessary to facilitate the economic transition toward a market system.

At the end of 2004, following the complete open policy of the China’s

2 See China Insurance Regulatory Commission ( ), Statistics of Premium Income of Life Insurance Companies from January to April 2009,

ttp://www.circ.gov.cn/web/site0/tab61/i101803.htm.

government to the foreign life insurance companies, which accelerated their overall logistic arrangements in advanced cities and extend to inland cities (second-tier cities).

Because of the development strategy, foreign life insurance companies’ market share increased at 4.92 in 2008. In many coastal cities such as Shanghai and Shenzhen, the market share even achieved 20% and 14% respectively.

The foreign insurers have abundant product development experiences and advanced management capabilities, so they would rather sell indemnificatory policies to those top clients. And furthermore, some important insurance indexes such as surrender rate and premium conversion rate keep a good level. But due to the large administration expenses, for example, the ratio of management expenditure of China’s life insurance industry is only 14%, which is 10% lower than foreign insurance companies. Therefore, the late comers’ management achievements are not easy to surpass the pioneers in the short run.

Moreover, the assumed interest rate is restricted to less than 2.5%, the inherent disadvantages of small insurance enterprises on expense rate and the lacking of investment tools make it difficult for small size insurance enterprises (including foreign funded life insurance enterprises) to shake the dominant position of the leading Sino-funded insurance companies.

Longevity is an ordeal to every advanced country, which is also a significant issue for Chinese government. How to face the situation of aging population and raise good policy will be front burner. Insurance can be a very stable power to the society which can give an overall support for that government does not have enough resources to do. Aging population nowadays is a global phenomenon. Reviewing the development of the western countries, it shows that when GDP per capital surpass USD10,000, a country may enter an aging society. Comparing with China’s development, China did not complete a wealth accumulation process yet, but begin to

face aging problem. “Getting old before getting rich” is a famous description to China’s society. Therefore, no matter Sino-capital or foreign-capital insurers, they have to work out sufficient and appropriate insurance policies to fit for the society’s need. Now is a turning point and no doubt also a great opportunity for insurers too.

1.2 Methodology and Research Purposes

This study adopt mainly following methods: historical document analysis and content analysis. Historical documents about life insurance in China were collected in order to find the relative factors of China’s life insurance development. From the whole history, we can have a complete understanding with China’s development of financial system and provide appropriate suggestions. Content analysis is a kind of social science research methods. Earl Babbie (1975) defines it as “the study of recorded human communications, such as books, websites, paintings and laws.” In the thesis, a lot of information from those recorded human communications such as books and websites will be quoted.

In the past 20 years, life insurance industry developed speedily, especially in emerging economies. Although there are many studies about life insurance, most of the studies focused on those well-developed markets in advanced countries, but we can not find too much data of life insurance about developing countries. Therefore, one of the purposes of this thesis is to collect data and make the data in order for China herself. As one of the most powerful arising economy, we believe that the word is important.

Life insurance gradually becomes an important part of the financial system, no matter in emerging economies or advanced countries. Insurance offers a lot of financial services for consumers, become the main source of investments in the capital market. What makes the different consumption of insurance are still not that

unclear. According to the research before, we can generalize which factors are significant and which are not. Income and life insurance consumption are found to be strongly correlated. Education is also a significant factor, but price is found to be insignificant, which largely overthrows our primary judgment. Levels of social security are not that significantly related. Different level of economic development cause different consideration for life insurance consumption.

This study is to examine and find out answers of the following questions:

1. What are key factors affecting life insurance consumption in mainland China?

2. We also attempt to gain an understanding of the different characteristics of the life insurance market in each territory of China.

3. What the role Bancassurance play? How fast will it develop, and will it be the most important distribution channel in China?

4. What kinds of insurance products are popular in each phase of China’s development?

5. How Taiwan experiences of insurance industry affect China?

6. What does the Chinese government should pay attention to on risk management?

Generally, compare with developing countries, advance countries will arrange more consumption on insurance. As one of the greatest developing counties, we can expect China’s enormous potential of insurance market.

HAPTER 2

The Retrospect of China’s Life Insurance Development

China’s insurance market began in 1805, enjoyed tremendous development in 1993, and has continued its upward trend to present day. Within this 200-year history, China experienced significant and unstable social transformation. From the Qing Dynasty to the China’s acceptance to the WTO, every step forward has been amazing.

When the socialist regime was founded in 1949, the Chinese government reorganized the market and cut foreign insurers’ business, so foreign insurers generally withdrew from China after 1952. In the socialist era, numerous political manipulations caused an unstable society, and the insurance industry was at a standstill. The chaos continued until the government’s direction changed to economic development. To help stimulate the recovery of the insurance market from the Cultural Revolution, the Chinese Government adjusted, or legislated many new laws.

The insurance business recommenced around 1980 and has continued its developing trend present times.

This chapter is organized by time, historic trends, future prospects, and to find insufficient or deficient parts (i.e. regulations, investment tools, talent, etc.) for the development of the life insurance market. In addition to the vertical organization, horizontal analysis is also an important part of this chapter; therefore, the transition of government policies, the change of market scale, the development of insurance products are also to be discussed. In this chapter, we will detail the developing trends and the potential of China’s life insurance market.

2.1 The Transition of China’s Insurance System

China’s economic open policy started in 1978, and began to undergo great changes in 1992 after President Deng Shao-ping delivered a speech to confirm and encourage economic development. The Chinese insurance market has been developing rapidly since 1993, and has continued this trend to present day (Neftci, and Yuan, 2007). China’s insurance market was under a long-term oligopoly; price, products, business scope, and entry restrictions were under strict supervision.

Following the reforms footsteps, China entered the WTO in 2001. More and more Sino-foreign joint ventures and foreign insurance companies entered the market. As of April 30^th, 2009, there are 29 Chinese insurance companies and 27 foreign insurance companies in the market;¹ this is a reduction of 27 companies since 2005’s year end (47 Chinese insurance companies and 46 fo eign insurance companies).

The Chinese government restricted foreign insurance companies and began to merge Chinese private insurance companies from 1949 to 1970; therefore, the insurance market was forced to stop its business development. Furthermore, there was only one national insurance company in the market, the People’s Insurance Company of China (PICC). Starting in 1978, the Chinese government began its reform and began to carry out an open policy. This was the beginning for the insurance industries recovery. Following the enactment and issue of the Insurance Law in 1995,² the Chinese government issued step by step structured related regulations (Qiou, 2005) such as 2005 Regulations on Administration of Foreign-founded Insurance Companies of the People’s Republic of China

, Regulations on Administration of Foreign-founded Insurance Representative

1 See China Insurance Regulatory Commission ( ), http://www.circ.gov.cn/web/site0/tab61/i101803.htm.

2 See China Insurance Regulatory Commission ( ),

http://www.circ.gov.cn/web/site0/tab68/i94860.htm. China’s Insurance Law was enacted on 30 June 1995, and the latest revise was on 28 February 2009.

Organizations , Regulations on Administration of Insurance Companies , Provisional Management Measures for Information Disclosure of the New-Type Products

, Regulations on Administration of Insurance Companies’ Solvency Margin and Supervision Index

.

The prospe ous business activity, property insurance and later life insurance has been developing at high speed. The four developing periods will be described below.

2.2 Pre-1949

Similar to world insurance development, marine insurance appeared earlier than other types of insurance because of prosperous shipping businesses. The first two companies to introduce insurance concepts to Chinese people were British companies.

Canton Insurance Society, which was the first meaningful insurance company, was founded by British businessmen at Guangzhou port in 1805. By the end of 1838, there were 15 foreign companies operating in Guangzhou, the original insurance hub because it was the only port for trading before the Opium War (Liou, 2008).

After the Opium War (1840-1842), the foreign merchandisers swarmed China to set up insurance companies; nevertheless, life insurance still did not appear until 30 to 40 years later than marine insurance.³ Yong Fu ( ) and Da Dong Fang (

) assurance companies were set up in Shanghai in 1846 to offer life insurance business in Southern cities. Following the demand for shipping and marine insurance, a domestic insurance company named Ren Ji He was formed in 1887. In 1991 a second domestic insurance company named Hua An He Quan began operations, which was the irst domestic Chinese life insurance company. All the

3 See Insurance Institute of China (2005), 200 Years of China’s Insurance Industry.

pioneer nsurance companies choose Shanghai as a base of operation because of economic, historic, and geographic reasons. Shanghai was the insurance center at that time. The first insurance association called Shanghai Insurance Association, and the first academic organization, China Insurance Society, were founded in Shanghai in 1928 and in 1935.

From 1846 to 1949, domestic insurance companies did not play an important role because the market had been divvied around by 60 foreign insurance companies 75% market share (Neftci and Yuan, 2007). The first Chinese insurer under Sino-capital ownership was a property insurer, founded in Shanghai, named De-Sheng Co. ( ). Before the middle period of the 20^th century, foreign insurers monopolized China’s insurance market. From 1865 to 1911 before the forming of Republic of China, the number of insurance companies increased to 45 in China, 37 in Shanghai, 8 in Guangzhou and Tianjin. According to the statistics of China Insurance Yearbook 1937, there were 40 insurance companies in China, in which 37 were private and 3 were national. During the War of Resistance against Japan (1937-1945), China’s insurance market swelled in Shanghai and Chongqing. At the end of 1945, there were 59 insurance companies.

Some important accomplishments in this period were: the first China Insurance Yearbook was issued, the first insurance research institute -China’s Insurance Association- was established, moreover, the government enacted Postal Life Insurance Law , Postal Life Insurance

Articles , and Insurance Industry Law .

2.3 The Insurance Market of Socialist Period –––– 1949 1978

The People’s Republic of China was founded in 1949, in the meanwhile on October 20^th, the State Council approved a suggestion from People’s Bank of China to

set up a national insurance company named People’s Insurance Company of China ( , PICC), the first state-owned insurance company (Xu, 2005).

Because of the exceptional historic atmosphere, the principle market was narrow and depressed. The People’s Insurance Company of China, that is to say, monopolized the insurance market and there was only one sales mode, direct marketing by staff. In this period, due to restricted market development, there were less product types and simple policy designs. Initially, there was travel accident and injury compulsory insurance, group insurance, life insurance, occupational group life insurance ( ), and accident insurance in the market. These were later followed by comprehensive welfare insurance ( ) and the development of health insurance (Wu, 1997).

The Chinese government started to trim and organize the insurance market after the foundation of the People’s Republic of China. Three years later (1952) all the foreign insurance companies gave up on the Chinese insurance market and left China.

Even the domestic private insurance companies were forced to close their doors. This left PICC, as a monopoly, to run all kinds of insurance business including property insurance and life insurance. With local insurance business wiped out in 1959, PICC’s accumulated reserve was RMB 0.4 billion, but only left RMB 50 million for dealing with foreign insurance businesses, and the remaining 350 million was handed over to the Treasury. The PICC maintained its title for overseas, nevertheless, it had become an insurance division under the foreign business administration bureau of the People’s Bank of China (Zhu, 2005). The Chinese government dominated all the business activities, local insurance companies were completely nationalized.

In this period of time, some important events happened:

1. The first insurance institute named Xin-Hua Insurance Company conducted by the Communist Party and the government was founded in Harbin in 1949.

2. In Shanghai, 15 private insurance companies merged and the national insurance company participated in setting up a joint venture named Tai Ping Insurance

Company ( ) in 1951.

3. Agricultural insurance was halted in 1953.

4. Local insurance business ceased in 1958 but resumed in Guangzhou ( ), Tianjin ( ) in 1963.

2.4 The Insurance Market after Reform –––– 1979 1991

The economic reform started late 1970, so did the relevant business activities.

In April 1979, The State Council made a significant decision, which was to approve to re-establish insurance institutions and meanwhile generally resume local insurance business (He, 2008). At the beginning of this revival, enterprises’ property insurance, cargo insurance, and family property insurance were first to reappear in the market, but until 1982 did life insurance resume.⁴

In this revival period, People’s Insurance Company of China (PICC) was still the giant insurance company taking almost all the insurance business including agricultural insurance, marine insurance, export credit insurance, and reinsurance.

PICC also re-established itself in the life insurance field in 1982.

In addition to the PICC resuming its life insurance business; the Chinese government permitted new players to enter the insurance market but the places they chose were not only Shanghai. She Kou Industrial Zone of the Shenzhen Special

In addition to the PICC resuming its life insurance business; the Chinese government permitted new players to enter the insurance market but the places they chose were not only Shanghai. She Kou Industrial Zone of the Shenzhen Special