Chapter 4 The Development of Property Insurance Market in China
4.5 Foreign Insurance Companies in China
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reinsurance to diversify the risk in the international market, especially the company expects to elbow into the world's top ten within ten years and plans to develop into a modern insurance company based on international standards.
In 2010, CIRC issues a new Administrative Provisions on Reinsurance Business and aims to reinforce the supervision of the reinsurance business and promote the sustainable and healthy development of the industry as a whole. Requirement on giving priority to domestic reinsurance companies removed. The relevant clause on offering priority to domestic reinsurance companies was removed from the revised Insurance Law 0f 2009. To be consistent with the revised Insurance Law, the CIRC also removed relevant clauses. The old Administrative Provisions on Reinsurance Business of 2005 provided that a primary insurer, when ceding risks to reinsurers, must give priority to domestic reinsurers. After the issuance of new provisions, primary insurers are no longer necessary to give priority to domestic reinsurance companies; instead, primary insurers may choose the reinsurance companies meet the requirements to set out by CIRC.
4.5 Foreign Insurance Companies in China
In 2003, and important achievement happened in the restructuring if state-owned national insurance companies, which was regarded as the key step to increasing Chinese national insurance companies’ competitive ability. According to Chinese law and regulations, insurance companies in China can be fully state owned, limited, or stocked limited. Most domestic insurance companies were stocked-limited companies and most Sino-foreign joint ventures were limited companies, because they usually had only two promoters.
The domestic Chinese insurance companies dominated the market and foreign insurance companies realized RMB45.80 billion premium revenues in 2009 and shared only 4.11% of the total. Among property insurance companies, foreign companies received RMB3.17billion RMB in premiums and shared 1.06% of the property insurance market while domestic Chinese companies owned 296.11billion RMB and 98.94%.35
As the Chinese economy continues to grow and expand, the country is being
35 See China Insurance Regulatory Commission, the Statistics of Premium in Different Areas of China, available at http://www.circ.gov.cn/web/site0/tab61/.
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treated as a major international market, and this is drawing many corporations from all over the world to Beijing and Shanghai in an effort to construct their profiles in the mainland market. Many of these companies have no history background in China and have encountered numerous difficulties from the cultural confusion and shock. The obstacles that foreign corporations face in the Chinese market are viewable in the nation's insurance business that is, for the most part, dominated by Chinese insurance companies.36
By the China’s requirements, companies will be able to obtain a license if they have more than 30 years of experience in a WTO member country; a representative office established in China for two consecutive years; and global assets of more than
$5 billion. China has, at current count, more than hundred insurance companies working in and around the country; however foreign corporations and investment only account for 7% of the total Chinese insurance market.
One of the main reasons that foreign insurance companies are eager to enter the Chinese market is because the increase in expatriates in the country. In recent years more and more overseas nationals have been relocating to China with the aim of capitalizing on the gigantic expansion in the economy and profit from the unique lifestyle and opportunities that the mainland provides. With the growth in expatriates, additionally produces the need for western style insurance and protection, and therefore the interest from international and foreign-based insurance organizations towards the Chinese market boom as well. These foreign corporations are so interested in establishing themselves on the mainland but they are still having so much trouble. Part of the problem may be owing to certain cultural and public issues towards which foreign visitors have to adjust.
Besides, it is this ability to bridge the cultural gaps that still, to some extent, exist between the Western and Asian economies that help to make a successful international insurance company, and sadly many top class international insurance companies do not realize this. There are, however, some exciting new changes in the Chinese insurance industry as the economy continues to further open and more and more international investment flows into the nation. The number of foreign corporations accessing the insurance market in China is growing, and will continue to grow, as the nations industrial and technological might continue to grow and gain ground on
36 Pacific Prime (2010), “China Insurance News,” available at http://www.pacificprime.com/
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western competitors.
A survey from reinsurance companies discloses that foreign companies have the lowest percentage of responses presenting they would strictly stick on the guideline.
Surprisingly, since foreign companies would be expected to apply more strict guidelines as required by their head offices, China was theoretical to be the new Eldorado for foreign insurers back in 2001 when Beijing agreed to open up the market as a condition of World Trade Organization accession. Almost ten years later foreign insurers have hardly completed any inroads at all. As said by a survey of 31 foreign insurers operating in China, PwC found that the companies estimated their combined market share in 2013 to be largely unmoved from where is today, for property insurers around 1%. While the number doesn’t look bad, the firms are possible to play against stronger competition, which is coming years with the current entry of local banks into the market.37
Only few foreign property insurers created a profit in 2008, according to the 2009 Yearbook of China’s Insurance listed by the regulator and yet some foreign insurers are retreating. Foreign insurers are struggling because of unequal treatment, stricter regulations and solvency rules following the financial crisis of 2008. Several foreign insurers experience trapped, as they are unable to grow up at a pace that would speed up profitability, the PwC report said. Meanwhile, they fear that if they go away the market, the regulator would seem to be harshly on any application to reenter at a later time.
While foreign life insurers are currently able to propose the same services that local rivals can, a constraint on overseas non- life insurers is the fact they still can’t write legally required business, as well as the compulsory third-party liability auto coverage. Foreign companies have to set up long-term relations with Chinese local governments and potential consumers. In addition, they will need to build up business strategies that make their companies operate for a long-term way (Allison, 2001).
As one of the most liberated industries in the service sector, foreign property insurance companies have been playing a progressively imperative role in China’s insurance market but there is still a long way to go for them. The CIRC has indicated that it will now allow single qualified foreign investor to own more than 20% of an insurance entity. However, the limit for foreign investors in domestic companies still
37 McMahon, D., (2010), “Low Expectations in China’s Sector,” China Real Time Report, available at http://blogs.wsj.com/.
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remains at 25%.
After years of investments and partnership in China, many foreign shareholders are now reconsidering their policy and some of them have restructured their relationships. A report by PwC has shown that foreign insurers are less optimistic now than they were a year ago about the prospect of expanding their presence in the Chinese market. This is partially because regulatory boundaries imposed on foreign players, but more significantly the domestic rivals have stifled room for foreign growth, especially during the financial crisis. The challenge is even tougher for foreign property insurance companies whose market share stayed at a low percentage.