Prospect of China’s Bancassurance Development

Although have to provide higher than banks’ savings return, lower mortality savings and interest gains, because of relatively inexpensive cost, policy maintain cost, and customer service cost, insurers can rely on expenses loading ( ) to earn profit at present year. Moreover, large quantity sales can bring in considerable cash flow and customer resources. Some China’s domestic insurers won market share and operation capital by expanding Bancassurance businesses (Deng, 2006).

A number of emerging insurance companies knew that Bancassurance could build up sales number quickly, so they entered in this battle. Some insurers were interested in acquiring ownership in domestic banks to further develop their Bancassurance businesses. For example, Pin An Life insurance company, the pioneer and leader of Bancassurance in China, bid for a 60% stake in Shenzhen Commercial Bank.¹³ Fortis Bank, one of the leaders in Bancassurance in the Benelux countries and Spain, was interested in acquiring ownership in domestic insurers as well. I acquired 25% of Taiping Life Insurance Company in 2001. In addition to the above cross companies’ investments, China Construction Bank and the Bank of China had submitted applications for a license to operate their own life insurance companies (Daniel, 2006).

The key point of the success of Bancassurance is not only on the choice of operation model, but also internal integration within the operation model, such as organization structure, information convection, training courses for sales people, incentives system, etc.

Sales channel and product diversified on Bancassurance channel will be the

13 See Benfield Limited, China Insurance Market Review, September 2006.

development trend. Bancassurance market participants have to do innovation unceasingly to satisfy customers’ financial service demand. Nowadays the foreign insurers had brought in many new ideas for diversified marketing, which will generally affect China’s insurance market.

Nowadays, it is not easy to collect the detailed data of Bancassurance channel’s cost and profit if compared to other distribution channels in China, but the successful experiences in France and Italy, Bancassurance channel is more advantageous than tradition agent and broker channel.

Bancassurance is not only providing a new profit source for the gradually saturated banking market, but also opening a new opportunity for competitive insurance industries (Tan, 2008). I believe an even higher proportion of premium will be sold through Bancassurance channel in the future.

4.6 Summary

The development of Bancassurance channel is the major topic of this chapter.

The operation model of Bancassurance, the historical development of Bancassurance, and the comparison of Taiwan and China’s Bancassurance operation status are discussed amply.

After reviewing the history and whole process including initial stage, exploring period, development period, and transformation period, we know that the business model is not a brand new model; in Western countries, especially France, and in Taiwan, the business model successfully create a win-win situation.

Although there are still many problems not solve yet such as employee’s quality, low profit for insurers, vicious competition, high homogeneity of products but low protection, Bancassurance will be providing a profit source and opening a new opportunity for competitive insurance industries. Following the development

footsteps of Taiwan and many advanced countries, we are sure that Bancassurance will also be the most important channel of insurance industry in China.

HAPTER 5

Conclusion and Suggestion

Within this 200-year history from 1805 to 2005, China enjoyed tremendous development started in 1993, and has continued its upward trend to present day.

China’s every step forward has been amazing, no matter implemented open policy or acceptance to the WTO.

China’s insurance industry had undergone a period of chaos from 1952 to 1978.

To help stimulate the recovery of the insurance market, the Chinese Government adjusted, or legislated many new laws. The insurance business recommenced around 1980, but the great changes began in 1992 after President Deng Shao-ping delivered a speech to confirm and encourage economic development.

Since 1980, China's insurance industry has a significant change and growth. In this chapter, conclusions and suggestion about the change and growth of China's insurance industry will be presented.

5.1 Conclusions

According to need-hierarchy theory (Maslow, 1943), following the increase of income, people begin to fulfill their basic physiological needs, they will also seek higher class needs in order satisfy their need for safety, love/belonging, esteem, and self-actualization. The Chinese government devoted to build up a fairly prosperous society, and that will also bring the needs for safety after the basic needs have been satisfied, when will be the timing for life insurance development. And China has entered a new era, which the government should focus on safety and stable needs.

Conclusions of the study are summarized as below:

1. Economic reforms cause fierce competition in the life insurance industry China’s insurance market was under a long-term oligopoly, but following more and more open economic environment, and the acceleration of reforms footsteps, China attracted numerous giant companies to enter the market under Sino-foreign joint venture model, branches model, or subsidiaries model. As of April 30^th, 2009, there are 29 Chinese insurance companies and 27 foreign insurance companies in the market. Nowadays China has become the first-class battle.

Life insurance businesses in fact started in 1982 after the People’s Insurance Company of China (PICC) re-established itself in the life insurance field. Therefore, the historic development of China’s life insurance market was just on initial stage if compared to western countries. Although the foreign insurers thronged to China immediately and did bring some changes, but the three pillars in the insurance market were still domestic insurance companies: China Pacific, China Ping An, and PICC;

accounted for 63.08% market share.

2. Insurance Law creates a basic, stable environment for investors

The moment that open policy confirmed was also the beginning for the insurance industries recovery. Following the enactment and issue of the Insurance Law in 1995, the Chinese government issued step by step structured related regulations. From the government’s role to strengthen regulations aspects, and create a basic, stable environment for investors.

Many important achievements happened during 1992 to 2008, for examples, agency channels appeared in 1992, Chinese first experience life table worked out in 1995, insurance law was implemented in 1995, life insurance exceeded property insurance in 1997, China Insurance Regulatory Commission (CIRC) was set up in 1998, new product types were introduced in 1999, Bancassurance developed in 2001, and China entered the WTO in 2001.

3. Entering into the WTO attracts foreign capital into China

Successfully entering into the WTO was another breakthrough for the development of China’s insurance market. Foreign capital was continually being invested in China’s insurance companies. In 2005, foreign insurance enterprises generally expanded their businesses to interior China to open up second war zone.

Total premium in the end of 2001 was only RMB 3.33 billion, but rapidly increased to RMB 36.1 billion in 2008. The market share went from 1.44% of 2002 to 4.56% of Q1 2009.

Entered into the WTO was not only attract foreign capital to flow into China, but also helped China’s enterprises to walk out. As of the end of 2006, domestic insurance and non-insurance enterprises had set up 41 insurance operating institutes and 9 agencies, which are mainly distributed over Hong Kong (25 operating institutes), Britain (9 institutes), and the USA (6 institutes). The People’s Property Insurance Company was successfully listed in Hong Kong Exchanges & Clearing Limited and was making OTC trading on 6 November 2003. In the same year on December 17^th and 18^th, China Life Insurance Company was listed in New York Stock Exchange and Hong Kong Exchanges & Clearing Limited. Ping An Life Insurance Company was listed in Hong Kong Exchanges & Clearing Limited on 24 June 2004.

Thus China’s domestic insurance companies were formally connecting with the international market.

4. Reform of property right causes great success of life insurance market

One of the most important reasons that why China can have a great success was the reform of property right. North found that an efficient organization came from adaptable arrangements of systems and property right establishment to bring about a kind of motivation for people’s economic activities. The appearance of a guideline name “The Decisions for Perfect Planned Economy under Socialism from the Central

Government” for state-owned enterprises in October 2003 was a revolutionary breakthrough for China’s development. North’s theory did not just explain the western world rise, but also interpreted China’s high-speed development.

5. China’s life insurance market is still full of potential

In 2008 the total premium of life insurance came to RMB 744.74 billion, which accounted for 76.12% of the insurance market. Insurance depth and insurance density obviously enhanced, but at low levels. Although the insurance ratio increased from 0.1% of 1980 to 2.85% of 2007, and insurance density increased from RMB 127.7 of 1980 to RMB 533 of 2007, compared to the insurance density of world average and insurance penetration, China’s room for growth is still extensive. I can see that China’s life insurance market did not affect by financial tsunami, still maintained rapidly growth.

A report from PricewaterhouseCoopers mentioned that foreign insurers believe the Bancassurance channel will enjoy further market expansion, and Telemarketing will receive increased attention. According to the report, the participation of Bancassurance channel to bring continuous growth of China’s life insurance market is predicable. China’s total premium of Bancassurance increased from only RMB 5 billion in 2000 to RMB 169.8 billion in 2007 and RMB 359 billion in 2008. The proportion of total premiums reached 48.92% on Bancassurance, even surpassed the proportion of the total premiums of traditional agency channel.

Competition among insurers has reached new levels, but I believe an even higher proportion of premium will be sold through Bancassurance channel in the future. The continuous development of Bancassurance channel will be the key driver for the growth of China’s life insurance market, and Taiwan’s development experiences of Bancassurance including products design, channel promotion, sales

training, will be the best references to China.

5.2 Suggestions

China no doubt obtained a primary achievement on economic development, but we still raise some suggestions for future operation needs. There are four suggestions as follows:

1. Chinese government can start to keep eyes on negative spread problem and prepare appropriate policies

The interest risk is significant inasmuch as interest assumption follows Central Bank’s basic interest, which was over 9% before 1997, but the one-year term rate decreased 7 consecutive times starting from 10.98% in May 1996 to 2.25% June 1999, meanwhile five-year term rates took a nosedive from 13.68%to 2.88%.

Due to the assumed interest rate of traditional products also fixed at a high level, and the assets of the insurance industry was basically invested in government bonds or deposited in banks, which eventually brought a huge negative spread. To prevent new negative spread from happening, in June 1999 the China Insurance Regulatory Commission asked that the assumed interest rate not rise over 2.5% which effectively decreased the negative spread. Thus the implicit risk of traditional products was exposed: firstly, the negative spread was significant to those original policies with high assumed interest rate.

To prevent new negative spread from happening, in June 1999 the China Insurance Regulatory Commission asked that the assumed interest rate not rise over 2.5% which effectively decreased the negative spread. The negative spread came from deficiency of risk and vicious competition.

The CIRC and the China Securities Regulatory Commission (CSRC) announced regulations on October 25^th, 2004, to allow insurers’ directly investing in

the stock market. Moreover, the Chinese government is going to loosen investment limitations to increase insurance companies’ operating flexibility.

The CIRC decided to open medium and small-scale insurers to directly invest into the stock market; meanwhile approving the insurers ability to expand its bond market investment scale to buy infrastructure related bond, local government bond, and unsecured bond issued by non-financial institutes. This is definitely positive news to the economy which will make the market more vital and active.

2. Chinese government should break monopoly situation and create a sound financial environment for foreign insurers

Number of insurers increase is obvious, but the insurance market is still a monopoly market. At the end of 2008, Sino-capital insurers still dominated 95.08%

market share, in which three Sino-capital insurers China Life Insurance Company (40.28%), China Pacific Insurance Company (9.01%), and Ping An Life Insurance Company (13.79%) took 63.08% of life insurance market, and other Sino-capital insurers took 32% of it; foreign-capital insurers only took 4.92% of life insurance market. The situation explains that China’s insurance market is still a monopoly market though a sound market system was basically formed.

Why do foreign insurers not occupy more market share? Director of International Department of CIRC, Mong, Zhao-Yi ( ) gave an answer 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.”

3. Chinese government should require insurers to pay more attention on risk management

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 government can do something to help insurers control risks:

(1) Perfect the market system through continuously enact regulation, 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.

4. China’s insurers should develop different kinds of insurance products on Bancassurance channel

According to the most updated information from Commercial Times, Taiwan’s giant insurance companies all represent how much they pay attention to China’s Bancassurance channel by build up close relationship with banks. But there are some problems need to be solved.

The room of Insurers’ profit become smaller and smaller. Due to the product design for Bancassurance was low protection-oriented, the profit source came from interest gain and loading surplus. When the commission becomes higher, the profit space will be compressed.

The proportion of premium income of savings products in Bancassurance channel reached 99% in the top 5 domestic insurance companies in 2005. The proportion was obviously too high, and consequently it would make insurers’

requirement of yield rate, but it needed a sound investment environment and enough investment tools; otherwise, it would be a significant payment risk for insurers when the term at maturity.

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