Globalization and the Development of Life Insurance Industry

Before China successful entering the WTO on December 11th 2001, there were 49 insurance companies including 20 Sino-capital and 29 foreign capital insurers. At the end of 2001, the total premiums of China’s insurance market was RMB 210.94 billion, in which foreign capital accounted for 1.57%. Total assets were RMB 459.13 billion, in which foreign capital accounted for 1.95% (Hong, 2007).

According to China’s Insurance Yearbook 2008, there were 47 foreign insurance organizations ( ) from 15 countries and regions that had set up 121 business institutes ( ); 135 foreign insurance organizations set up 200 representative divisions ( ) by the end of 2006. Comparing before and after access to the WTO, foreign insurers’ total premiums grew about 9 times.⁴ Foreign insurers’ market share was increasing at a stable rate. Foreign insurers’ market share was 2.64% in 2004, 8.9% in 2005, 5.91% in 2006, 8% in 2007, 4.92% in 2008, and 4.56% in 2009 Q1;⁵ in coastal areas like Beijing, Shanghai, Shenzhen, and Guangdong, the foreign insurer’s market share even reach about 20%.⁶

When China made commitments to open the market in order to enter the WTO, the market had many problems that needed to be conquered. Firstly, the monopoly degree was immense; only Shanghai and Guangzhou were opened to foreign insurers.

Secondly, the development of brokers and the reinsurance market were in need of a serious overhaul. Thirdly, many insurers did not have solvent enough. Fourthly,

4 Foreign insurers’ total premium is 3.33 billions RMB at the end of 2001, but 34.12 billions RMB in 2006, which almost increased 9 times. Foreign insurers’ market share is 2001 is 1.58%, but is 5.91%

in 2006.

5 See China Insurance Regulatory Commission, http://www.circ.gov.cn/web/site0/tab61/.

6 Beijing, Shanghai, Shenzhen, and Guangdong because opened earlier than other cities, a lot of foreign insurers gathered, and their market share reached 19.43%, 17.37%, 10.14%, and 8.46%, which were much better than the nationwide average. The statistics is from CIRC’s director of International Department, Mong, Zhao-Yi ( ), who accepted an interview of China Business Times on 7 December 2006. See China.com.cn,

http://www.china.com.cn/finance/txt/2006-12/07/content_7471243.htm.

market operation concept was not established yet: product unity and the service quality were not good. In 1996, People’s Bank of China consecutively decreased the interest rates which caused the insurance industry to bear a significant interest gap.

Other problems such as lack for professionals, unsound regulations, and level of supervision need to be enhanced or revised.

While trying to fulfill the commitments to enter the WTO, the Chinese government also paid attention to the improvements that foreign insurers brought to its insurance market. As Mong, Zhao-Yi ( ), Director of International Department of CIRC said, “the government will guide the foreign insurers’ to develop endowment, health insurance, and liability insurance.”⁷ Not only attracting high quality foreign capital to invest in the insurance market, but also, enabling Sino-funded capital to go out into the international community.

Nowadays, Sino-capital has already set up 43 insurers and 9 insurance representative offices in Hong Kong, Macao, Europe, and North America. Setting up insurance representatives in foreign lands has helped increase the global awareness of the Chinese insurance market. Through participating and promoting the Asia Forum of Insurance Regulators ( ) and International Organization of Pension Supervisors (IOPS, ) China’s connections with institutes like World Band and Asian Development Band become closer and stronger.

According to the WTO’s regulations, China’s insurance industry is undergoing a 5 year process to actively absorb international insurance supervision advanced experiences to accelerate to link with international standard. The China Insurance Regulatory Commission builds up and completes insurance supervision systems through solvency supervision, market behavior supervision, and company

7 See China-Insurance Corporation ( ), http://www.china-insurance.com/news-center/

newslist.asp?id=93140.

management structure supervision, which further enhances the efficiency and transparency of insurance supervision. Opening the insurance market imported international advanced skills and experiences to help management levels increase, and strengthen innovation ability.

Director of International Department of CIRC, Mong (2006) said on Foreign Insurance in China Forum, “Local companies should be internationalized, but foreign companies should be localized. Foreign insurers should research local market, and combine its characteristics to carry out localized operation.”⁸ During the first five years that China entered in the WTO, foreign insurers brought advanced operating models and concepts, pushed competitions of domestic insurance market, and increased the international standing of China’s insurance market. But he also mentioned that there are some problems that exist. First, an imbalanced development of insurance market; secondly, it’s more difficult to control financial risks, and finally, foreign insurers are difficult to localize. Foreign insurers’ operating models and sales models do not always adapt to China’s circumstances; therefore, they are not easy to develop and win a greater market share.

Participating deeper into the international society illuminates some problems that the Chinese government needs to monitor. Nowadays, China’s finance industry can still enforce the principles for operating and managing by different industries, but it seems that this status is truly becoming more international and not just Chinese controlled. Banks, insurance, and securities’ companies integration of capital and business aspects will be generally become more integrated. The probabilities of risk transmission across industries will also increase. The insurance industry will inevitably face more risk factors coming from the international markets. The

8 See China Securities Journal, 31 October 2006, http://www.cs.com.cn/bxtd/02/200610/

t20061031_1011402.htm.

difficulties of identification, early warning, prevention, and reconciliation are great.

Meanwhile, China’s comprehensive financial operation is getting continuously growing. The insurance industry is going to become one of the members to join into the operation to compete against, cooperate with banks and securities.

Besides, following the market reform of interest rates, and the forming of the mechanism of exchange rate, the uncertain factors of foreign investment and published price of insurance products were more visible. It is no doubt a massive challenge for insurance industry to manage risks.

The strategies for opening the insurance market and decreasing risks are (Liou, 2008):

1. Perfect the market system, and stably increase main market bodies through encouraging qualified insurers to restructure or merge to become internationally competitive insurance holding companies. Encourage large-scale enterprises or private enterprises to invest in setting up share-holding insurance companies. The Chinese government can also lead qualified insurance companies to increase capital and enhance development strength through public raising and listing.

2. Encourage the development of every kind of professional insurance company on endowment, health, agriculture, and liability insurance, and stably develop insurance asset management companies.

3. Cultivate the reinsurance market and perfect reinsurance a market system.

4. Develop the broker market; reform and perfect agent systems.

5. Build up market access and withdrawal mechanisms.

3.4 China’s Economic Growth and the Development of Life Insurance Industry