Liability Insurance Products

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promotion, marketing channels, and also it is not the main developing products in most of the property insurance companies.

As for the enterprise property insurance products, the corporate purchases of property insurance can reduce the probability and therefore the expected costs of financial distress. And by so doing, the corporate use of insurance can reduce borrowing costs and/ or increase debt capacity, decrease the overall cost of capital, and increase firm value. Unfortunately, at the moment, the development of the business property products cannot catch up with the economic growth under the price cutting competition and unreasonable low rate (Zou and Adams, 2009).

4.2.3 Liability Insurance Products

In 2006, the premium volume of liability insurance business is only around RMB5.6 billion and sharply exceeds RMB10 billion in 2010; it has double growth in China. But the business still far from that in foreign countries and still has the huge space to rise up compared to the need of rising economy, especially the development of non-motor liability business in property insurance industry is accounting for about 3.5% and below the world average 16%.

Although China’s property insurance market is still in early development, China’s liability business has been evolving with some trends. In China, there are three traditional liability insurance products; they are employer’s liability, public liability and product liability. As more foreign branches, subsidiaries and reinsurance firms have entered China over the last few years, importing experience and expertise from mature markets, a variety of new products including professional indemnity, medical malpractice, director’s & officer’s (D&O) liability, and pollution liability, has been increasingly brought in into China (Ford, 2009).

Passenger carrier liability is measured by 90% of the local companies as an area for growth. Several companies believe by being involved in those compulsory schemes forced by the government, for instance, the fire public liability, it would be easier to produce a large volume. Foreign companies’ pattern looks very unlike as they mostly give attention to product liability. According to the research, liability loss ratios come out to be the order of 38-47%, and expense ratios lean to be counted approximately 30%. The average market combined ratio is 83%, 72% and 76%, for employer’s liability, public liability, product liability and passenger carrier liability

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business is usually viewed as very profitable and attractive.²⁹

Next, in product liability insurance, pricing competition is not so strong as the others likely due to the fact that some local companies do not participate in export product liability. The product liability insurance has the nature of long-tail duties and requires the more professional underwriting skill, so foreign companies have experienced more rate decrease as compared to local companies.

However, actually he largest claims in the market are mostly product liability claims. The average outcome by types of companies shows big distinctions. Foreign companies in average have 40% of the product liability business including overseas jurisdiction, whereas for local firms it is much less. This is fairly a rational consequence since it links with the access to global companies, access to overseas claims experience and knowledge to the overseas legislation and regulations, which benefits the foreign firms. In addition, the foreign companies’ product liability policies are written on occurrence basis, whereas for local companies it is merely roughly 25-27%. This may be clarified by the fact that the basis for most local wordings in the domestic PICC wording, which is on claims made basis, whereas some foreign companies may possibly exercise an international version.³⁰

Moreover, Article 92 of the Insurance Law provides that liability insurance is a major category of property insurance, which provides legislative basis for the introduction of D&O insurance into China. Both the Guiding Principles for listed Companies of Establishing Independent Director System in Listed Companies and the Code of Corporate Governance for Listed Companies set forth that listed companies may buy liability insurance for their independent directors and other directors.

Consequently, the legitimacy of liability insurance for the directors of listed companies is propped up on a policy level (Pan, 2006).

In spite of the important development in the range of liability insurance products available, lots of these products don’t be put on the market well. Actually only a few liability insurance products have become large-scale business. These products contain school public liability, production safety liability for high-risk industries, and medical malpractice. The quick expansion of these lines is chiefly based on strong support from the government, like local compulsory regulations, local government paying the

29 China liability Survey 2008, August 2008, from Cologne Reinsurance Company plc. Shainghai Branch.

30 In general the market is careful with the use of “occurrence” based wordings, in order to deal with long tail claims more effectively and to reduce the incurred but not reported (IBNR) problem.

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insurance premiums, economic incentives encouraging enterprises to procure insurance; and administrative measures to require the insurant to pay money for insurance. The government plays a crucial role in the promotion and development of liability insurance (Giao and Wang, 2009).

There are two key barriers to liability insurance development in China, and one is the little insurance demand from society, given the low consciousness of insurance and non-litigious essence of Chinese society. The other is the restraint of insurers’

distribution channels that causes overly high gaining costs as promoting liability insurance products to lots of individual customers. It is not easy for insurers’ own sales forces to sell liability insurance products for the reason that selling these products call for higher technical skills and take more time to explain. Accordingly, sales people lean not to offer resources to sell liability insurance products since it is easier and quicker to sell uncomplicated motor insurance for potentially more premiums (Ford, 2009).

Nevertheless, if there is physically powerful government support, usually a local scheme will be organized by the government to make sure wide participation of insurants. Therefore, the stronger the government’s backing, the better the enlargement of a liability insurance product. Under the strong encouraging actions from the government, this is the most cost-effective method to build up liability insurance business. Moreover, to extend new incomes from liability insurance business, an insurance firm has to constantly generate innovative products to make different itself from its competitors.

For example, as for the environmental pollution liability insurance must be relied on strong government to promote a large extent. China has to improve relevant laws and regulations and make the environmental liability legalized. As for insurance companies, take the insurance loss and risk assessment into consideration, the attitude toward the emerging businesses is fainter; on the one hand, they feel like capturing the market, but on the other hand, they are worried the product is too risky. By reason of the defense of public interest, it is necessary for Chinese government to build up the regulations to compel those enterprises having pollution accidents to obtain the insurance product and control and adjust the market.³¹

31 Yue, P(2008) “China establishes liability insurance system for environmental pollution,” Chinese Environmental Protection Administration (SEPA). See

http://www.environmental-expert.com/resulteachpressrelease.aspx?cid=27278&codi=28860

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Generally speaking, as domestic insurance firms endeavor into new lines of business, they require strong technical support from well-known international reinsurance partners, such as policy wording, rate setting, underwriting, risk management and claims managing. Even China’s insurance supervisory body would push insurers to look for assistance from sound and reputable global reinsurance firms specially when developing complicated insurance products. This is an area where reinsurance companies and insurers can offer mutual value-added profits to each other as reinsurance companies achieve access to local business and insurers obtain both capital and technical backing from their reinsurance partners (Ford, 2009).

Finally, in 2010, China gets a new Tort Law and this law has been in the works for nearly a decade and its arrival represents the completion of China's civil code. The Tort Law is the mechanism by which individuals or legal entities can protect the rights enshrined elsewhere in the code. This is a big footstep towards China establishing a civil society. Under the legal protection, the legal liability will be formally taken into consideration in the practical court’s decisions and that means the need of purchasing liability insurance policies will increase in order to manage the legal risk and compensate the loss. Most of the companies are looking forward to a growing liability.

Meanwhile, it also points out that most insurers consider liability business to be a strong opportunity for growth, and possibly a profit producer as well.