The Assessment of Competitiveness and Potentiality in Property Insurance

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more market competition while the foreign insurance companies came into the market.

In fact, some foreign insurers that concentrate on some property insurance products have made high profit (Yang, 2005).

4.6.2 The Assessment of Competitiveness and Potentiality in Property Insurance Business

With the entry of foreign coming visitors, the competition in property insurance market is getting stronger and stronger. It is important to study the strength of the existing property insurance market and predict the potentiality. Some factors will be discussed in this section, such as the limitations of regulation, bank marketing channel, individual agents and direct marketing channel, human resources, product innovation, and IT spending.

1. The Limitations of Regulation

The requirement about minimum registered capital of building a new property insurance firm no matter for local or foreign investors is too high and is a kind of protection for the companies that already get the license and will block the new coming insurers to enter the market and reduce the market competition. Also, it will reduce the effectiveness of service and increase the cost of regulation. Moreover, the system regarding the property insurers how to withdraw from the market is still unclear and unsound and that means it cannot efficiently eliminate the bad-performed insurers through competition (Xu and Lin, 2008).

The strict regulations concerning the rate and investment also bring the limitations toward the property insurers in China. Under the fixed rate, property insurers cannot develop the underwriting ability and in order to reach the higher market share, they will try to use different ways to reach the purpose of low premiums, such as the higher commission and the return of premiums. Even while the claims happen, the insurers will pay for the policyholders to gain the main customer’s future purchase or refuse to pay the compensation for the individual to lessen the loss. All of them will incur the disputes and hamper the competitiveness of property insurance industry; to solve the problems, the improvement of regulations and enhancement of the CIRC’s supervision are useful.

2. Bank Marketing Channel

Chinese insurance was developing more and more marketing channels. One

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insurance company usually utilized several channels at the same time, with dissimilar business lines focusing on different channels. In such a rapid-growing insurance market, distribution channels and the method of delivering insurance products are key means for insurance companies to gain competitive advantages (Zhang, 2010).

After WTO, Chinese officials have begun to restructure the domestic industry to build strength for the coming competition. Setting up alliances between domestic insurance companies and Chinese banks can provide both insurance and other financial services for their customers, and the trend started with the largest insurance company, China Property Insurance Co, and the largest domestic state-owned bank, Industrial and Commercial Bank of China.

Shu-Yen Liu, an actuarial practice leader for Asia, PwC China, said foreign insurers still face many difficulties and challenges, but the most significant one is that many banks have been granted special approval from the State Council to invest in insurers. "Bancassurance has become a major distribution channel for many insurers in the last several years and these new bank-owned bancassurers will introduce new dynamics in the market," said Liu, in a statement.

At the moment, the main promoting insurance products are life insurance. But some property insurance products related with the needs of individuals or family are expected to rise up. Also, large Chinese insurers may continue to enlarge their client bases by acquiring small local banks. The acquisition of local banks allows large insurers to enter small and relatively remote communities more successfully. Recently, we have seen some insurers deepening their banking ties aggressively, such as in 2009, Ping An (Property) and China Everbright Bank cooperate to promote the credit insurance products for private loans.

Upon completion of the deals between insurers and banks, insurers are expected to form bancassurance ties and widen revenue sources. Under the protection from the government and the advantages of local enterprises’ connection and tactical alliances, the integration and cooperation between bank and insurance business will lead to a huge process and it is hard for foreign coming firms to catch up.

3. Individual Agents and Direct Marketing Channel

When AIA came to Shanghai in 1992, the individual agency marketing method for individual life products was introduced into China, and shortly after, in the property and casualty insurance market. Not only did the individual agent method grow up very quickly, but also some institutions began providing agents as a sideline

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business, which soon developed into a vital channel. For example, auto insurance began expanding, auto dealers became a more important channel, especially for property insurance, but they were most new car insurance (Lin and Xu, 2007).

However, many agents are just lower-level salespeople. They are not well trained, have to face heavy pressure from premium requirements and care most about their commission. The agent descend rate is very high as well. Improvement and better management are needed in the agent channel and therefore some insurance companies begin trying to cultivate high-quality, better-educated agents in order to enhance the market competitiveness. In property insurance business, compared to the individual agents, due to the requirements of professional insurance knowledge and service, the insurance broker company has more advantages while selling the commercial insurance to the enterprise insured.

Anyway, direct sales marketing once was the only channel utilized by Chinese insurance companies. The direct marketing channels remained an important marketing channel, particularly for property insurance and group life insurance. Property insurance business put particular stress on enterprise customers in China. The usual marketing way was to negotiate with enterprises directly. As a consequence, direct marketing was an essential channel for property insurance business. Keeping good relationships with main customers was the key concern in this channel. Therefore, the sales talents will be required very much.

4. The Need of Human Resources

Staff turnover rates turned down in 2009 during the economic recession, but most foreign insurers expect to have a sharp rise in turnover as the economy return. In the meantime, a skill shortage in some functional areas persists. According to PwC's report, foreign insurers still find it difficult to recruit for sales-agent, sales-manager, investment management, telemarketing and head-office marketing roles. Talent poaching³⁹ is therefore a common method for domestic and foreign insurers to protect and ensure their own revenue targets. As a result, the trend has lifted up HR costs and directly increased the salary system in the insurance industry (Zhang, 2010).

Besides the sales talents, experienced underwriters and claims handlers are critical as well and in the current property insurance market. Experienced underwriters can help the insurers review insurance applications and determine the

39 It can be defined as an act of enticing important employees to move from one firm to a competitor. It has come out as the biggest HR challenge for enterprises.

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appropriate premium to charge a customer and claims handler can provide immediate support to people affected by disasters and slow down the loss. Due to the lack of talents, China’s insurers hire some talents from foreign areas, such as Taiwan, Hong-Kong or western countries, to learn from their professional knowledge and experience. Also, until 2008, there are only 141 insurance actuaries and usually a big insurance company needs 10 actuaries, and hence the need is not satisfied yet. A good actuary can precisely compute premium rates, dividends, risks according to probabilities based on statistical records, together with offering suggestions of risk management.

Moreover, most of China’s property insurance companies are still owned by the state and the leaders are arranged by the state, and therefore it is not completely dependent on the managing ability to decide the suitable leaders. The top ranking managing level of property insurers plays an important role in managing or reforming the business and can decide the development of the firm. The way to improve the competition is to reduce the interference from the state and just base on the ability of managing (Ji, 2006).

The shortage of professional property insurance talents is serious and far behind the international level. This issue will directly affect the development of property business. As a result, in order to improve the human resources, property insurers are fostering integrative risk management talents and offer education across various disciplines and based on prevention, preparation, response, recovery and risk transfer.

5. Product Innovations

China's property insurers need to expand the business by offering new insurance products. At the moment, the potential need of property insurance products is not satisfied fully, especially in the areas of the family property insurance and liability property insurance products. Besides, the main contents of property insurance products and rates still need the CIRC to approve before selling to the public. As a result, the competitiveness of property insurance products is weak and need to develop the products that can meet the practical need of customers (Xu and Kao, 2009).

Due to the late development, most of the property policies come from foreign countries. Also, insurance actuarial data is necessary for creating a new product and the lack of quality data makes it challenging for risk carriers to design a new product, effectively assess and price the risk. Insurance products need to be affordable and

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profitable. Therefore, bringing the well-developed property insurance products directly into the market is necessary at the beginning.

The product innovation in China can refer to the combination, improvement, or adjustment of different property insurance policies, for instance, designing a special comprehensive insurance product for small and medium enterprises including commercial risk and the owners’ personal risks. Also, the risk management service for the insurants can be accompanied with the process of selling the products (Zhang, 2008).

Besides, with the establishment of legal framework, the Chinese liability insurance market can be increasing rapidly; particularly some products are not common in foreign countries but can be accepted and rearranged in China, like environmental liability insurance. Liability insurance business requires specific knowledge and expertise to be prudently underwritten. Potential development in this area is expected and most of the insurance companies point out that they are looking to write such risks in the future.

Another barrier for product innovation is the rate regulation, which lead to the characteristics of property insurance products cannot be distinguished and cannot meet the real nature of property insurance products. Once market premium rates are totally liberalized, competition among insurance companies will become more intense and companies that constantly improve loss control will be able to lower their premiums, bringing benefits to the insured. Relaxing controls on non-life insurance premiums and products in different stages is useful to stop cutthroat price competition, malicious competition from doing destruction to market order (Zhou, 2007).

6. IT Spending

Property insurance companies in China have more and more accepted the significance of information technology in improving the competitiveness of enterprises and have subsequently invested a greater amount of resources in IT spending. Most of China's insurance companies are still in the infrastructure-oriented construction phase of development. Investments in hardware, wide area networks, and Internet access, telephone, and other communications infrastructure accounted for more than 50% of firms' total investment in information technology.

At present, China's population is more than 1.3 billion people, with merely about 180 million that would be treates as middle class. The Chinese middle class, however, is growing rapidly and this emerging trend has the potential to drive huge profit

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growth in a broad variety of consumer oriented factors. Currently, there are around 200 million internet users in China. Middle class Chinese citizens, who have cars and other personal property, get used to e-commerce. This represents a strong and rapidly increasing niche market for an online insurance company (Benzinga, 2010).

Looking ahead, it would encourage insurers to develop telesales and Internet sales. Improving business processing systems, data warehouses, business intelligence and customer relationship management will be the focal point of future IT investments. China’s domestic insurance companies should strengthen their investment in improving their business processing systems. With the huge population and numerous enterprises, the access of Internet and telesales will benefit the property insurance business. Also, for foreign investment, this is another way to show their advanced management skill and backup services through the design of website and telesales besides the focus more on broadening sales channels o rapidly expand their market share (Celent, 2008)