Chapter 1 Introduction
1.4 Research Method
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the insurance products, the management of investing capital, income and benefit will be discussed as well. Also, it is very important for investors to know the exercise of insurance law and consider the intervention from Chinese government while entering the market. At last, some recommendations will be presented.
This paper targets to prove that after China entered the WTO, even there have been already many property insurance participants joining the market, for investors, it is believed Chinese market can still be operated and with good performance in the future.
1.4 Research Method
The research for this paper will rely on the collection of second-hand sources and will be conducted through the review of second-hand academic journals, books, newspapers and official statistics, which primarily come from public information conducted by China Insurance Regulatory Commission. The different official or research data will be compared to the information from the international insurance market and reinsurance companies with the purpose of checking the reliability and validity.
Besides, this paper gives an overview of China’s property insurance market along with the analysis of China’s economic growth. It will provide an insight into the market size and growth in insurance premiums. Insurance premiums are discussed in terms of non-life segments and the density and penetration levels. Therefore, the information regarding the premium income, gross domestic product (GDP), population and other data related with insurance density and penetration in different areas will be compared and used to understand the potentiality of the property insurance in China.
Moreover, the aforementioned information will be compared to the similar scaled countries so that we can predict if China’s property insurance market will follow the similar model or route. Some countries’ property insurance markets will be assessed in order to understand the international insurance environment. The paper also draws attention to the regulatory environment in which insurance companies operate and highlights the key characteristics of sound risk management. By combing official data integration and analysis capabilities with the relevant findings, the future growth of the Chinese property insurance industry can be predicted.
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Chapter 2The Overview of China’s Insurance Market
China, with a population of more than 1.3 billion is potentially going to be the largest insurance market in the world. The Chinese insurance has been underdeveloped throughout recent history. Since its economic reform, China has begun to increasingly reduce direct social security protection and insurance has become essential to numerous citizens who find themselves without the government’s social security coverage. Over the past decade, the Chinese insurance industry has undergone an evolution as it opened up in stages to foreign competition and develops a diversified financial segment.
In the end of 2010, China has endorsed the 12th five-year economic and social development plan that covers the years 2011 to 2015. China has made strong inroads in terms of industrialization, and additionally the increase in GDP per capita has given China’s internal demand market much more potential and fourth. With Chinese improved income, they can increase their consumption without having to worry about the consequences, such as property insurance, health insurance, retirement, and other such topics.
In the chapter, we will briefly state the historical background and describe the development and impact after China’s entry into the WTO. In addition, in order to understand the difference between life insurance market and property insurance market, there will be comparisons from different aspects, such as insurance market scale, insurance participants, and unbalanced development. Finally, the legal framework will be discussed with the purpose of understanding the policy, official supervision.
2.1 Historical Background
The opening of China to the West in the early years of the 20th century provided a variety of new business opportunities and in 1919, the young C.V. Starr, an American, who founded an insurance agent's office in Shanghai. In the beginning, Starr's company, American Asiatic Underwriters (AAU), served as a local representative for foreign insurers and AAU initially dealt in fire and marine
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Insurance Company, which became the first to market life insurance products to the Chinese.1After that, China boasted more than hundred insurance companies until 1949 and following the revolution, the Mao government set up the People's Insurance Company of China (PICC), which took over all insurance interests on the mainland.2 However, the Chinese government, in its effort to build up its regime, decided that insurance was unnecessary in a state where the government was intended to provide for all social welfare for its citizens. In 1959, as a result, all domestic insurance business was ended. Following the reform, PICC was converted into a department of the government's central bank.
In the 1980s, economic reforms launched under Deng Xiaoping paved the way to a rebuild the China's insurance market. In 1979, the People's Insurance Company of China was separated from the central bank and reestablished as an independently but state-controlled company. In that year, PICC started to provide general insurance policies, such as property insurance products. In 1982, PICC began offering life insurance policies, and at that time the targeting insurants were the small but increasing numbers of middle-class and government officials. PICC with authorization maintained its monopoly on the Chinese insurance market into the late 1980s.
In 1984, the State Council formally separated the state-run People’s Insurance Company of China Group (PICC) from the People's Bank of China (PBOC) and offered standard insurance products such as life, property and reinsurance services. In 1988, however, the company’s monopoly was abolished. Licenses were granted to the company’s competitors, including Ping An and China Pacific. American Insurance Group, which, in 1992, became the first foreign company to be granted a license to operate a self-standing business in China; the arrival of AIG introduced a new tied-agency system into the market, encouraging the development of branch networks.
Nevertheless, PICC continued the apparent insurance champion on the mainland, with
1 The company was built quickly into a leading insurance provider not only across the Chinese mainland, but also throughout the Asian region. Starr's company eventually evolved into American Insurance Group.
2 At first the PICC monopoly continued to run its different insurance services and by 1952, PICC represented a national network of 1,300 branches and 3,000 agency outlets. However, since the reform of socialism started in 1953, the China’s insurance business decreased gradually.
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a strong national support.
The Chinese government began a wider opening of the country's insurance market in the early 1990s. By the end of the decade, the government had granted licenses to a total of 16 companies. In 1998, the Chinese government shifted supervision of the country's rising insurance market to a new body, the China Insurance Regulatory Commission (CIRC). Under new rules, insurance companies were forbidden from operating in both the non-life and life insurance markets. As a result, PICC Group was broken up into its four primary components: PICC, China Re, China Insurance, and China Life. All four companies remained controlled by the Chinese state.
2.2 China’s entry into the WTO
In 2001, China officially joined the World Trade Organization (WTO).3 Based on the Chinese government’s promises, China would open the insurance market step by step and would withdraw almost all limitations on the access and business scope in the subsequent three to five years. The Chinese insurance market gradually became one part of the world insurance and its influence was growing progressively.
Conversely, before entering WTO, China's insurance market is characterized by its small size, a restricted range of insurance products, fairly high costs, short of Chinese consumer education about the function of insurance, and a lack of a sound legal environment, especially in the region of enforcement. Another constraint to the development of the insurance industry is that China's immature financial markets hamper investment instruments for insurance premiums. A second element is China's memories of its pre-1949 experience of foreign control and command of China's insurance industry (Allison, 2001).
After China achieved an agreement with the WTO in 2001, the commitments in the part of market access are significant. The most influential change, nevertheless, is expected to take place in the service segment, which has fundamentally been closed to foreign competition. China has promised to release essential service markets to
3 For China, WTO membership will mark the end of the selective “open door” policy it has pursued for 20 years. The liberalizations will lead to an important reallocation of resources across sectors, which will entail high economic and social costs, but which China expects will benefit growth in the medium term. Indeed, WTO membership appears as a means of re-launching reforms that are necessary for the modernization of the Chinese economy. See
http://www.cepii.fr/anglaisgraph/publications/lettre/summary/2000/let189ang.htm
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foreign service-providers. From nearly no access in the 1990s, foreign interests will be able to launch wholly owned subsidiaries and drive without important limitations.
For the establishment of models following China's entry to the WTO, foreign non-life insurers may set up their branches or joint ventures in China, and a joint venture with foreign equity could be 51 per cent. Within two years of China's accession, wholly foreign-owned subsidiaries of life insurers will be permitted with no limitation on business models. Foreign life insurers can set up joint ventures in China but foreign equity should be no more than 50 per cent. Within five years of accession, wholly foreign-owned subsidiaries for life insurers could be set up.4
However, according to the article of PRC Administration of Foreign-invested Insurance Companies Regulations Implementing Rules, “Where a foreign insurance company and a Chinese company or enterprise establish a joint venture insurance company within the territory of China to engage in personal insurance business (Joint Venture Life Insurance Company), the proportion of foreign investment shall not exceed 50% of the total share capital of the company.5 Consequently, until 2010, there is no wholly foreign-owned life insurance company set up.
The geographic constraint for these foreign companies will be eliminated within three years of China becoming a member of WTO. Business limitation will be abolished and business licenses will be issued to foreign insurers with no quantitative restrictions upon China's entry to the WTO. Besides, qualifications for setting up a foreign insurance company are as follows: the investor shall be a foreign insurance company whose nation has more than 30 years' experience as a WTO member. It shall have a representative office for two consecutive years in China. And it shall have total assets of more than US$5 billion at the end of the year prior to application.
WTO accession offers lots of business opportunities for domestic and foreign counterparts, and the critical task for competitors is exploring and expanding the market with huge potentiality. Experts believe that China, with a giant population and the projected reform of its social welfare system, will develop into the largest potential insurance market in the world. As of October 2009, the CIRC said there were 52 foreign insurers coming from 15 countries, with 277 operational institutions in China. Compared to other developed countries, the quantities of insurance
4 The news was published from Chinese official website. See http://www.china.org.cn/english/2001/Nov/22559.htm
5 The rules were promulgated by the China Insurance Regulatory Commission on May 13 2004 and effective as of June 15 2004.
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companies, the Chinese insurance industry is only in its infancy, but there are tremendous growth opportunities, the likes of which simply do not exist in more mature economies (Benzinga, 2010).
After joining WTO, the need for insurance in China is expanding not owing to the increasing competition but also owing to the rapid economic growth and increased income. Reform systems have presented a large foundation for the development of commercial insurance. For foreign investors, it is important to understand what the advantages and disadvantages of foreign insurance companies’ participation are and how to cope with deregulation and liberalization. However, until now the Chinese insurance environment and playing field have changed a lot, but for some existing or future foreign insurers and foreign strategic partners with capital concerns, this change still may not be understandable enough for them to be familiar with the market wholly.
2.3 The Comparison between Life and Property Insurance Market
In response to quick developments in the insurance market, the National People’s Congress (NPC) proclaimed the PRC Insurance Law in 1995, which set forth the framework for reorganizing and rationalizing the PRC insurance industry. One of the most significant clauses of the 1995 PRC Insurance Law was to categorize insurance into property and casualty insurance (including property, casualty, liability and credit insurance) and life insurance (including life, accident and health insurance).
For the reason that many firms were making up losses in their life insurance business by borrowing from their property insurance business, the CIRC announced that insurance companies could no longer manage both (Allison, 2001). A single entity was only permitted to provide one of the two services but the 2002 amendment of Insurance Law accepted one group to have both life insurance and property and casualty insurance subsidiaries.6
2.3.1 The Insurance Market Scale
At first, life insurance did not grow as quickly as property insurance. However,
6 See the survey from China Knowledge for China Insurance Industry, available at http://www.chinaknowledge.com/
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in 1997, this was the first time since life insurance total premium went over property insurance premiums. The total premium income reached to RMB60 billion and the number of individual agents is 2.5 billion. The reason for the rapid development was that companies adjusted the life insurance business structure. Sales of products with a short-term, a single premium, and a large savings portion shrank, while long-term products with annualized premiums were promoted. This affected the earned premium but increased future revenues. Until now, life insurance still accounted for around two-thirds of the total market.
In 2009, all the insurance companies produced around USD163 billion premiums totally and met the number that the 11th five-year national development planned for.
The premium volume of life insurance is USD109 billion and the non-life premium volume is nearly USD54billion, which is quite lower than the life insurance. In general, the non-life insurance premium is less than life insurance premium due to life insurance with saving and investing functions. With insurance density, the premium’s per capita is USD121 in total insurance business. The insurance density of life insurance is USD81 and USD40 in non-life insurance business. The penetration (in terms of GDP) is at mere 3.4% in total insurance business; 2.3% in life insurance and 1.1% in non-life insurance business.7 China stands far behind than the global average of insurance density over USD595 and industry penetration over 7%.
Table 2-1: The Insurance Premium, Density and Penetration of China─2009 Premium Source: Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
7 In the existing literatures on the international insurance comparison, commonly used methods are premium income method, insurance density method and insurance penetration method. “The premium income method” measures the overall scale of insurance market in each country. “The insurance density method” (premium/population) measures the per capita premium by taking population into consideration. “The insurance penetration method” (premium/GDP, or insurance density/GDP per capita) could be considered to an adjustment with economic factors added to the insurance density method. (Zheng, Liu, and Deng, 2008)
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In 2010, the total asset of insurance business in China is up to RMB 4,523 billion and increasing 22% compared to the same period in 2009. The total asset of foreign companies reaches RMB221.9 billion. As for the volumes of insurance companies, there are113 insurance companies, including 52 property insurance companies and 69 life insurance companies. Also, there are 9 reinsurance companies and 8 insurance
Note: The volume is counted until June 2010.
Source: Taiwan Insurance Institute, China’s Insurance Market Research, https://fsr.tii.org.tw/iiroc/fcontent/research/research02.asp
Next, concentration within China's insurance market is high. In life insurance market, the China Life Insurance Company has around 32.65% of the market, and the top three life insurance companies occupy more than 57.2% of the market. Life insurance companies have begun to increasingly adjust their business structures to progress the proportion of limited-payment premiums available.8 China’s property insurance market concentration is very high as well, with PICC occupying 39% of the market. The top three insurance companies take up over 66% of the entire property market. Foreign joint-venture life insurance companies have a smaller share, accounting for 5.15% of the life insurance market, and the top three foreign life insurance companies are Generali China Life Insurance Company Limited, American International Group, Inc. (AIG) and Huatai Life Insurance Company Ltd. The property insurance market share of foreign property insurance companies is only 1.02%; the top three foreign property insurance companies are Chartis Insurance
8 See “China Insurance Market and Technology Overview 2008,” Celent Report, May 28, 2008, available at http://reports.celent.com/
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Company China Limited (AIU),9 Mitsui Sumitomo Insurance (China) Company, Ltd., and Tokio Marine & Nichido Fire Insurance Co. (China) Ltd.
Table 2-3: The Market Share of Life Insurance Companies in China─2010
Life Insurance Companies Market Share (%)
China Life Insurance Company 32.65
Ping An Life Insurance Company of China, Ltd 15.31
Xinhua Life Insurance Company Limited 9.24
Other Chinese Life Insurance Companies 37.65
Foreign Life Insurance Companies 5.15
Note: The data is counted until June 2010.
Source: Taiwan Insurance Institute, China’s Insurance Market Research, https://fsr.tii.org.tw/iiroc/fcontent/research/research02.asp
Table 2-4: The Market Share of Property Insurance Companies in China─June 2010
Property Insurance Companies Market Share (%)
PICC Property and Casualty Company Limited 39
Ping An Property & Casualty Insurance Company Of China Ltd. 14.36
China Pacific Property Insurance 12.96
Other Chinese Property Insurance Companies 32.66
Foreign Property Insurance Companies 1.02
Note: The data is counted until June 2010.
Source: Taiwan Insurance Institute, China’s Insurance Market Research, https://fsr.tii.org.tw/iiroc/fcontent/research/research02.asp
Currently, foreign life insurers gain better than their non-life counterparts. AIA, the life insurance arm of AIG in China, is a superior benchmark of foreign life insurers’ influence in the industry. AIA’s relative achievement in China is on account of its long presence in the country. It started life insurance operations in Shanghai in 1992 and had gone in other cities previous to that. As such, the pace of AIA’s growth
9 Chartis Insurance Company China Limited is a China registered wholly owned property & casualty subsidiary of Chartis. The year of 2007 heralded an important milestone for the Company in China. In July of 2007, the CIRC approved the conversion of its branches in China into a wholly owned subsidiary. Chartis China is currently the largest foreign property-casualty insurer in China. See http://www.chartisinsurance.com.cn/en/aboutus/about_aiu.html
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in China is a much more valid benchmark to measure the development of foreign insurers (Zhao and Liu, 2007).
On the other hand, the performance of foreign non-life insurance businesses was rather disappointing. In 2009, Chartis Insurance Company China Limited (AIU), the non-life insurance arm of AIG, was ranked first among all foreign non-life insurers with a premium of RMB0.8 billion. However, it only takes up among all non-life
On the other hand, the performance of foreign non-life insurance businesses was rather disappointing. In 2009, Chartis Insurance Company China Limited (AIU), the non-life insurance arm of AIG, was ranked first among all foreign non-life insurers with a premium of RMB0.8 billion. However, it only takes up among all non-life