Chapter 3 International Property Insurance Market
3.2 The Property Insurance Market in Taiwan
3.2.2 The Development after ECFA
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
insurance companies to evaluating the appropriateness of their premiums on a regular base and alter the premiums when needed, and to reinforce management of their solvency.21
The Taiwan Insurance Institute has already built up a dedicated actuarial unit that will set up criteria for an actuarial databank. The FSC has worked out related regulatory measures for a premium adjustment instrument, and non-life insurance companies that achieve the criteria for the establishment of the statistical databank will, in principle, be permitted to decide the contents and prices of their products on their own launching on Jan. 1, 2009.
Those who have worked in the Chinese insurance industry clearly know that a lot of talent and know-how has been learned from Taiwan, for instance, China's Ping An Insurance, a Shenzhen-based company that is the industry's benchmark for service and customer-value creation. Analysts and industry experts have attributed Ping An's success to its ability to learn and operate best practices from the Taiwan market, as well as from other foreign insurance companies. At the beginning, all of Ping An's marketing team and sales talent came from Taiwan, for example; they supported build the company's underwriting and claims systems (Radwan, 2010).
The stimulus for borrowing Taiwanese insurance talent and rules goes beyond common language to the fact that customer buying behavior and culture are similar in both markets. Also, the similar insurance products are accepted more easily under the same Chinese culture. Taiwanese experience can be copied and carried out in China.
On the other hand, we need to notice that compared to the insurance market in neighboring China, which has been predicted to have a considerable growth in foreign investment in the insurance segment, yet the Taiwanese counterpart business is not viewed as an attractive financial scheme (Thomas, 2010).
3.2.2 The Development after ECFA
With the improvement of cross-strait ties, recently, the CIRC has approved Fubon Insurance Life Insurance to set up a general insurance company, which is Fubon Property & Casualty Insurance in Xiamen with the registered capital of RMB
21 See “ New Systems for 2010 Will Benefit the Public,” Taiwan New Economy Newsletter, 108, http://www.cepd.gov.tw/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
400 million. This is the second property insurer, which is invested from Taiwan set up in China. In 2008, Cathy Century Insurance was allowed to build in China. On June 29, 2010, the signing of Economic Cooperation Framework Agreement (ECFA) is a meaningful and historic event that advances the prosperity of the peoples of both sides of the Taiwan Strait and facilitates the development of regional and global trade.22
The FSC notes that in accordance with the financial “Early Harvest” list of the implemented ECFA between Taiwan and China, the insurance subsidiaries of Taiwanese financial holding companies, as well as insurance firms that do not belong to financial holding companies, are permitted to go into the Chinese market through mergers or strategic alliances. Insurance companies that participate in such mergers or strategic alliances and still have to obey the rules regarding China’s “532” entrance for access into the market there and that requires they must have capitalization of at least US$5 billion, must have been established for at least 30 years, and must have operated an office in China for at least two years, and in that case, they may set up subsidiaries in China.
Further, in view of the fact that the Chinese subsidiaries of Taiwanese insurance companies may not be able to control their fixed costs, the FSC has withdrew limitations on investment in Chinese real estate by Taiwanese insurance firms for the exploit of their Chinese branches or of enterprises in which they hold at least 50% of the shares. They are also now permitted to build up wholly owned companies for the intention of purchasing such real estate.
The FSC states that insurance companies investing in Chinese real estate are required to propose an application for each purchase, and that in the initial period of purchase, the amount of space utilized by the branch or enterprise with equity participation may not be below half of the total area of the real estate purchased.
Further investment in real estate to fit the needs of business expansion must meet the annual goals of the branch or enterprise with equity participation for expansion in area of use. The total amount invested by a Taiwanese insurance firm in real estate in China and other foreign countries may not go over 10% of the company’s owners’
equity. Additionally, the total investment by an insurance company in Chinese real estate and securities may not surpass 10% of the amount agreed by the FSC for that
22 See Press Release, Ministry of Foreign Affairs Republic of China, available at http://www.mofa.gov.tw/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
company’s total overseas investment.23
After the restrictions removed gradually by the government, it is argued that the sales and managing talents will move to China and affect the property insurance market in Taiwan. The issues of human resources and arrangement of insurance resources should be taken into consideration, but the problems cannot be solved if Taiwan’s insurance enterprises just rely on the protection from the government or have the anxieties about the competition while Chinese investors come into Taiwan.
On the other hand, Taiwanese property insurance companies will be marginalized without entering the China’s insurance market. After all, the risk management of property insurance needs the support from co-insurance and reinsurance industries and the support by foreign industries is necessary.
Besides, the current Taiwan’s market scale is not as big as China’s market and the potentiality of expanding the inland property insurance business is limited due to the market factor. The rapid improving sector is to develop a new market and China exactly provides a good opportunity from Taiwanese property insurance companies.
With the advantages of the same language and culture, Taiwanese enterprises have easier access into China’s property insurance market; however, it is not enough for them to win a priority place if only depend on the benefits of the language and culture.
As a result, it is suggested that Taiwan’s property insurance companies need to consider the risk management and operational strategies carefully and additionally the only way to compete with other foreign or China non-life insurance is to improve their own competitiveness, such as the education of staff, the design of new insurance products, the control of claims, and capability of solvency.
3.3 Summary
In sum, the property insurance business was affected under the financial tsunami, but with the economic recovery, the international property insurance industries are expected to grow up step by step and will have an improvement in prices and interest rates; especially the dramatic growth in the property insurance business of the emerging countries.
Next, we can predict the future development in China’s property insurance
23 See“Taiwan insurance industry given access to Chinese market,” Taiwan New Economy Newsletter, 117, available at http://www.cepd.gov.tw/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
industries by comparing the market shares and insurance coverage ratio with the situation in the USA, UK, Japan and Taiwan. Although at the moment the development is far away from the world average; particularly the ranking of China’s GDP is top 3 property insurance and China still has the issues of disparities on regional development. However, it is believed the property insurance business will have huge potentiality.
At last, the property insurance market is steadily developing in Taiwan. With the rate deregulating, the property insurance business has to improve the effective risk and capital management practices. And some shocks will occur after the official signature of ECFA, a new breakthrough in economic relations across the Taiwan Strait.
The FSC grant the permission for insurance firms that do not belong to financial holding groups to go into the Chinese market by means of strategic alliances.
Following the opening of the investment of Taiwanese insurance funds in Chinese securities, the FSC also has permitted the island’s insurance companies to invest in Chinese real estate for their own use. This permission will furnish more operational flexibility to Taiwanese insurance companies in China. Meanwhile, this is a good chance for Taiwan’s property insurance companies to make their business more competitive.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Chapter 4 The Development of PropertyInsurance Market in China
The global financial crisis has affected people’s disposable income, which is expected to have an effect on the demand for insurance. In 2009, falling disposable income, new accounting policies and industry adjustment are a few challenges that China’s insurance business is supposed to face.24 However, in the early 2010, we find the property insurance premium volume of 2009 was growing up around 19% while the property insurance markets declined sharply in the other countries. Without any doubts, it is expected that the development in China’s property insurance market will continue to rise up dramatically.
In this chapter, the current China’s property insurance market will be discussed and the property insurance products will be evaluated as well. In particular, the main insurance products will be clarified, such as the motor, property, liability and microinsurance products. However, in China, export credit insurance and agricultural insurance are policy-oriented function of insurance products and the policy-oriented insurance is strongly supported by the government. Also, disaster insurance is with the characteristic of national policy. As a result, this chapter is only focused on commercial property insurance products. After that, the insurance marketing channels and reinsurance markets will be stated respectively. At last, it is critical to mention the dilemmas of foreign property insurance companies in China in order to view the competitiveness and potential development of the whole property insurance industries.
4.1 China’s Property Insurance Market
China’s insurance market is still at a phase of relative immaturity in spite of rapid economic growth in recent years. Historically, the role of the State and affordability were significant constraints on demand for insurance. Social and economic reforms are possible to encourage demand for property insurance. Liability,
24 See “The China Insurance Market,” Towers Watson Newsletter, December 2008, available at http://www.watsonwyatt.com/asia-pacific/pubs/China_insurancemarket/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
credit, property, pensions, and health insurance should also be promoted and increased.
Although China’s economy is going up at one of the fastest speed in the world, it has difficulties in comparison to the growth of its property insurance industry. With the long-lasting achievement of economic reforms that was in progress since the late 1970s, there has been a swelling demand for insurance policies. This is partly owing to the increasing income and higher quality of life demands, and partly owing to the development of a more market-oriented social security structure. China removed geographical and most business boundaries on foreign insurers in 2004 to comply with WTO promises made upon its access into the global trading group. Fifty-two overseas insurers have built local operations, the CIRC said in December 2010, almost tripling from 18 before the nation became a member of the WTO on Dec. 11, 2001.
China has permitted foreign property and casualty firms to insure large-scale risks nationwide upon succession of WTO. Chinese insurance carried on developing in 2008-2009 and the total premium in Chinese property insurance market was RMB367 billion. The property insurance penetration was 1.1% in 2009 and the insurance density was USD40, increasing by around 18.7% from 2008. However, the insurance market in China still keeps largely untouched. With the low insurance penetration and density, China stands far behind than the global average of insurance industry scale.
In the first half-year of 2010, all the property insurance companies produced around RMB201.7 billion premiums from property insurance. The growth rate reached 33.5%. Table 2-4 gives out the market share of all property insurance companies in 2010, we can see that of total premiums, the three biggest companies held 66.3%, including PICC Property’s share of 39% with RMB 81.4billion in premiums, Ping An Property’s share of 14.3% with RMB29.9 billion in premiums, and Pacific Property’s share of 12.9% with RMB27billion in premiums. As the foreign property insurance companies, Chartis Insurance Company China Limited remained the top foreign non-life insurer, with premium income of RMB0.7 billion in the first eight months in 2010. This is an increase of 22% compared with the same period last year.
Besides, the claim payment in the first half-year of 2010, the total claim payment is RMB147.3billion and RMB75.93 billion in the property insurance business, grow
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
6.3% compared with the same period in 2009. The underwriting profit25 is RMB3.96 billion and completed by 24 property insurance companies. The motor insurance starts to turn loss into profit and the underwriting profit is RMB2.27 billion.
Table 4-1: Market Shares of All Property Insurance Companies in China─2010 Premiums (RMB billion) Market Share (%)
PICC Property 140.2 38.40
Ping An 55.5 15.21
Pacific Property 46.6 12.77
China United Property 17.9 4.91
Other Chinese firms 101.11 27.70
Foreign firms 3.8 1.04
Total 365.1 100.00
Source: China Insurance Regulatory Commission, the Statistics of Property Insurance Premiums http://www.circ.gov.cn/
Where non-life insurance businesses are concerned, PICC Property & Casualty Insurance is the biggest player, which accounted for 42.5% of market share in 2007, 39.92% of market share in 2009, and took up 38.4% of market share in 2010 (table4-1). Although the market share is decreasing step by step, the whole property insurance market is still controlled by the state. China Pacific Property Insurance and Ping An Property & Casualty Insurance ranked second or third in turn with a smaller market share respectively compared to PICC.
PICC Property, Ping An, and Pacific were the companies with the longest histories and the biggest national branch networks. Most other companies were new and only ran business in limited areas. The top three companies have been decreasing steadily for 10 years and this trend would continue as new companies developed.
However, most scholars recognize that the Chinese insurance market still desires time to turn into a more mature market with a balanced structure.
Domestic non-life insurers’ gross premium income grew by 32% and stood at RMB268.9 billion from January to August in 2010. The growth was driven by people rising demand and constant insurance product innovation. During the 2006-2010
25 Underwriting profit consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums.
‧
period, as Chinese people spend more money on cars, houses, education and travel, the establishment of enterprises, and national construction, the insurance demand remains growing continually, according to a document released by CIRC. With a 1.3 billion population and an aging society, insurance will be viewed as a greater role on the improvement of social services.
China gives their promises to create a healthy environment for the development of the insurance industry before 2010, with improved legal system and people's enhanced awareness towards insurance. The government encourages insurance companies to explore markets, introduce more product varieties, improve the service, and set up the risk-control and solvency system. China plans to build a modern insurance industry with large insurance companies to face the international competitiveness.
4.2 China’s Property Insurance Products
Property insurance products are on the rapid increase. The market is chiefly concentrated into two sectors, such as motor and commercial property insurance.
Motor insurance accounts for more than 70% of premium written in non-life insurance part. But there are many other rising non-life insurance products like product liability, credit, family property& casualty, marine insurance and so on, which will establish a long-term capability of the property insurance market. For that reason, there is a strong need to concentrate on these emerging insurance sectors.26
The property insurance products can be divided into several areas, for example, property, liability, cargo, motor, construction, trade credit, agriculture and disaster insurance (Giao and Wang, 2009). In cargo insurance, it includes different means of transportation insurance and the market will grow potentially with the coming foreign investors and economic growth and infrastructure improvement in China’s various regions. On 1 January 2011, the ICC's Incoterms 201027 come into force; it will bring some conflict to the insurance business, and the timing for transfer the risk will affect
26 See “Motor Insurance to Drive Chinese Insurance Market,” Rncos Industry Analysis, available at http://www.rncos.com/
27 The International Chamber of Commerce launched the new Incoterms 2010 rules on 16 September 2010. The new rules will take effect on 1 January 2011, replacing the current version published in 2000.The rules have been generally updated to make them more user friendly and they have been adapted to the modern language of international trade. In addition, there are changes to deal with cargo security, insurance, handling charges and the increased use of electronic communication. See
http://www.icc-cpi.int/
‧
the insurance rate and premium incomes. Meanwhile, the marine cargo insurer needs to face the competition from the foreign marine cargo insurance firms located in overseas countries. As for the other main insurance products, like motor and property insurance products will be discussed in the subsequent sections, as well as the potential liability insurance and the emerging microinsurance products.
Table 4-2: The Premium Income and Market Share of China’s Main Property
Source: Jiang, S. Z. (2008), The Developing Report in Chinese Insurance Industry
4.2.1 Motor Insurance Products
China has become the top one of manufacturing cars and the biggest market of selling new cars. Expansion of car ownership and the increasing productivity of the car industry have been key factors. With 70 million cars in China for a population of 1.3bn, there is considerable potential for growth. Newly granted entrance to the domestic market for foreign car manufacturers and the availability of car finance should supply additional movement.
Over the past years, motor insurance in China has skyrocketed on account of the nationwide achievement of compulsory motor third party liability insurance in 2006.
For non-life insurance companies, the underwriting circumstances remain difficult and in particular the compulsory third party motor insurance consequences are now expected to be poor after the initial favorable results when the business initiated in
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
2006.28
In 2009, China passed the U.S. to turn into the world's biggest market for automobile sales. The potential is huge, with the average number of vehicles per capita well be lower that of developed nations. Chinese customers at present lean to view the product as a necessary evil, and leave insurers to manage pricing wars, high attrition, high fraud expenses, and low profits. The Chinese motor insurance market is overwhelmed with fraudulent claims. Working together with other insurers will be a good way to crack down the fraud and what's more the reason fraud can collapse is because the society improves and insurance awareness increase (Radwan, 2010).
China advanced almost 50 million vehicles in the six years since 2004, as said by the China Association of Automobile Manufacturers, and overtook the U.S. as the major auto market in 2009. On the other hand, the government is concerned about foreign companies dominating China’s insurance market; China cannot permit foreign
China advanced almost 50 million vehicles in the six years since 2004, as said by the China Association of Automobile Manufacturers, and overtook the U.S. as the major auto market in 2009. On the other hand, the government is concerned about foreign companies dominating China’s insurance market; China cannot permit foreign