Chapter 3 The Market Environment and Status of China’s Life Insurance
3.4 China’s Economic Growth and the Development of Life Insurance
firstly, economic compensation functions; secondly, finance function; thirdly, implicit
society risk management function. In order for the Insurance industry to improve economic growth, it must realize these functions (Ren and Xu, 2008). Since the opening of the insurance market, the foreign market has invested capital worth over 60 billion RMB into China. This capital has been used in setting up foreign-capital insurance institutes and participating in Sino-capital insurance companies Insurance provides a powerful support to China’s economic and social development through finance, risk management, and economic compensation.
Harold (1996) pointed out the that the insurance industry to economic growth:
(1) enhanced financial stability; (2) becomes part of social protection function instead of the government; (3) promotes trading and business development; (4) increases deposit circulation; (5) creates efficient risk management; (6) reduces loss and instability; and (7) enhances asset portfolio efficiency.
During two decades from 1998 to 2008, the average income of cities and towns residents grew almost 3 times to RMB 15,781; meanwhile the average income of countryside residents grows 2.2 times to RMB 4,761. Economic enhancement accelerates the development of insurance industry.
According to Abraham Maslow’s need-hierarchy theory,9 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 need for safety means people will consider life, endowment, health insurance, and other insurance protection needs. When people’s income increase, they will also utilize idle money to buy investment-linked products or deposit insurance products.
The increase of residents’ income and development of social economy will cause the residents to face more risks than before and the demand for different kinds
9 See Wikipedia, http://en.wikipedia.org/ wiki/Maslow%27s_hierarchy_of_needs.
of insurance products will also increase. Therefore, insurance products should be innovated continuously to meet social development and people’s demands, and the channels to sell insurance products should follow people’s purchasing habits.
Table 3-3: China’s Residents Income –––– 1998 2008
Unit: RMB
Year Average Income
of Cities and Towns Residents
Average Income of Countryside Residents
1998 5,425 2,162
1999 5,854 2,210
2000 6,280 2,253
2001 6,860 2,366
2002 7,703 2,476
2003 8,472 2,622
2004 9,422 2,936
2005 10,493 3,255
2006 11,759 3,587
2007 13,786 4,140
2008 15,781 4,761
Source: The Central People’s Government of the People’s Republic of China, http://www.gov.cn/jrzg/2008-02/28/content_904663.htm, and http://www.gov.cn/test/2005-07/27/content_17541.htm.
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.
3.5 The Regional Differences of China’s Life Insurance Industry
China has 1.3 billion people separate into 33 provinces and areas. Differences exist among these regions, not only geographic differences, but also wealth differences, ethnic differences, career differences, and life style differences. The large differences even exist among cities and villages of same regions which causes the imbalanced situations of insurance market development (Guo, 2008). The reasons that bring about the regional differences of insurance market are complex; firstly, disparity of economic development level, secondly, disparity of economic open degree, thirdly, disparity of social security level, and fourthly, disparity of people’s risk consciousness.
But it is generally thought that the regional differences are caused by imbalanced economic development.
According to Table 3-4 is to represent the relationship between regional development and premiums income. In 2008, the top five provinces and cities that produced the highest total premiums among China’s 23 provinces, 4 municipalities, and 4 autonomous regions were all located in the eastern coastal areas.10 Compared to 2004, the ranking of the top ten premiums were in order Guangdong Province (RMB 67.64 billion), Jiangsu Province (RMB 59.43 billion), Shanghai City (RMB 46.83 billion), Beijing City (RMB 45.18 billion), Henan Province (RMB 44.11 billion), Sichuan Province (RMB 38.45 billion), Hebei Province (RMB 37.75 billion), Zhejiang (RMB 32.62 billion), Hubei (RMB 26.22 billion), and Liaoning (RMB 26.08 billion). Shandong Province and Zhejiang Province were eventually replaced by Beijing City and Henan Province.
10 See The Central People’s Government of the People’s Republic of China,
http://www.gov.cn/test/2005-06/15/content_18253.htm. Hong Kong and Macao were not included.
Table 3-4: China’s Regional Premium Income of Life Insurance Industry ––––2008
Unit: RMB million Region Total Premium Life Insurance Accident Insurance Health Insurance
Country 744,738.69 665,837.18 20,355.61 58,545.90
Beijing ( ) 45,180.68 39,057.63 958.46 5,164.60
Tianjin ( ) 13,380.17 11,870.40 251.98 1,257.79
Hebei ( ) 37,745.04 35,105.24 704.45 1,935.35
Liaoning ( ) 26,076.59 23,334.42 454.43 2,287.74
Dalian ( ) 8,013.77 6,989.90 210.49 813.38
Shanghai ( ) 46,826.69 38,205.92 1,208.44 7,412.32
Jiangsu ( ) 59,429.18 52,819.00 1,831.10 4,779.08
Zhejiang ( ) 32,618.22 28,805.57 1,225.87 2,586.77
Ningbo ( ) 4,676.36 4,106.56 248.77 321.03
Fujian ( ) 18,213.64 15,980.88 570.58 1,662.18
Xiamen ( ) 3,126.92 2,628.85 120.78 377.29
Shandong ( ) 43,530.89 38,953.50 1,206.41 3,370.97
Qingdao ( ) 7,441.15 6,322.95 174.61 943.59
Guangdong ( ) 67,638.90 60,176.35 2,052.54 5,410.01
Shenzhen ( ) 15,597.65 13,289.66 714.55 1,593.44
Hainan ( ) 1,957.31 1,752.63 86.09 118.59
Chongqing ( ) 16,279.71 14,895.04 526.63 858.04
Table 3-4: China’s Regional Premium Income of Life Insurance Industry ––––2008 (Continued)
Unit: RMB million Region Total Premium Life Insurance Accident Insurance Health Insurance
Sichuan ( ) 38,451.27 34,495.59 1,180.89 2,774.80
Guizhou ( ) 5,137.39 4,543.42 282.65 311.33
Yunnan ( ) 11,018.74 9,169.28 618.73 1,230.72
Tibet ( ) 38.70 9.478 15.99 13.23
Shaanxi ( ) 17,150.75 15,923.63 382.23 844.89
Gansu ( ) 7,483.53 6,882.07 172.72 428.74
Qinghai ( ) 782.91 667.41 42.66 72.84
Ningxia ( ) 2,231.54 1,810.90 84.61 336.03
Xinjiang ( ) 10,826.19 9,471.55 347.74 1,006.90
Inner Mongolia
( ) 8,775.14 7,914.75 346.16 514.23
Guangxi ( ) 9,344.07 8,250.36 458.69 635.03
HQ ( ) 234.45 92.43 136.69 5.3382
Sources: China Insurance Regulatory Commission ( ), http://www.circ.gov.cn/web/site0/tab3061/i92056.htm.
The top five regions produced RMB 263.19 billion in premiums, which equaled 35.34% of total premiums in 2008; the percentage decreased in comparison to the 38.79% of 2004. Meanwhile the premiums of the 12 western inland provinces including Inner Mongolia, Xinjiang, Shanxi, Shaanxi, Gansu, Qinghai, Tibet, Sichuan, Guizhou, Guangxi, Hubei, and Hunan totaled RMB 169.37 billion, which accounted for 22.74% of the total, which increased from 15.57% in 2004. Although the western inland provinces are thought to be conceptionally unaware of insurance, the speed of premium increase is impressive.
The imbalances of regional development will restrict continuous development of the insurance industry. Following the speedy growth of economy, some factors that
affect regional development of insurance industry are environment factor, market supply factor, and market demand factor. Environment factor includes economic development level, resident income level, marketing levels, inflation rate, social factor, population factor, and conception factor. Market supply factor includes resources for running insurance business; insurance capability, operation skill and management level, and premium rate. Market demand includes risk factor, and economic system factor (Chen and Qi, 2008). The strategies to solve problems of regional imbalances are: (1) implement regional variation management; (2) implement regional variation supervision; (3) implement regional variation policies; and (4) cultivate human resources and enhance people’s risk consciousness.
3.6 The Status of China’s Life Insurance Industry
The first quarter of 2009, Sino-capital life insurers’ total premiums reached RMB 241.03 billion, and foreign-capital life insurers’ total premium was RMB 11.51 billion; Sino-capital life insurers’ still dominate China’s insurance market. Compared to the same period of 2008, Sino-capital life insurers’ premium income was RMB 218.73 billion, grew 9.25, and foreign-capital insurers’ premium income was 12.01 billion RMB, negative growth rate of 4.16%.
2008 was a year best described as tumultuous in regards to financial markets, but China’s insurance industry still experienced strong growth. The total premium income was RMB 978.41 billion, an increase of 39.06%, in which the premium income of life insurance was RMB 665.84 billion, an increase of 49.17%; the premium income of health insurance was RMB 58.55 billion, an increase of 52.4%;
and the premium income of personal accident insurance was RMB 20.36 billion, an increase of 7.08% (Postdoctoral Scientific Research Work Station of China Insurance Regulatory Commission, 2009).
After the resumption of the insurance business in 1980, the insurance industry has developed continuously. In 1997, the total premium of life insurance started to surpass the total premium of property insurance. From then on, the development of China’s life insurance industry has been vital and has progressed forward far better than the property insurance industry.
The status of China’s insurance market is as follows:
1. The scale of premium income is quickly expanding and continuously increasing. From 1980 to 2008, the total premium increased from RMB 0.46 billion to RMB 978.41 billion. The average growth rate is much higher than each year of GDP.
2. The structure of product types changed remarkable. The proportion of property insurance of the total premiums decreased to 23.88 % in 2008 from 94.29%
in 1992. The product types became diversified during these years; universal life insurance, investment-linked insurance, participating insurance were acceptable and popular in the market.
3. 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 in 2007,11 compared to the insurance density of world average at USD 358.1 and insurance penetration of 7.5%, China’s room for growth is still extensive.
4. 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
11 See China Insurance Regulatory Commission, Almanac of China’s Insurance, 2008.
market.12 The situation explains that China’s insurance market is still a monopoly market though a sound market system was basically formed.
Table 3-5: Numbers of Insurance Institutes in China –––– 2008
Item
Numbers
total Sino-capital Foreign-capital
Insurance company 120 72 48
Insurance group and holding
company 8 8 0
Property insurance company 47 31 16
Life insurance company 56 30 26
Reinsurance company 9 3 6
Asset management company 10 10 0
Professional intermediary 2445
Insurance agent 1822
Insurance broker 350
Insurance surveyor 273
Source: China Insurance Regulatory Commission, China Insurance Market Development Report 2009.
5. Insurance agents ( ), brokers ( ), and surveyors ( ) play a more important role in the insurance market. There were no professional insurance intermediaries in the early phases; until the end of 1999. The CIRC approved the establishment of 13 insurance agencies (Qiou, 2002). The growth of insurance intermediaries is remarkable; the numbers of insurance agencies reached 350, insurance brokers reached 1,822, and insurance surveyors reached 273 by the end of 2008 (Table 3-5).
12 See China Insurance Regulatory Commission, 2008 Life Insurance Company’s Premium Income Report, http://www.circ.gov.cn/web/site0/tab3060/i92060.htm.
6. Insurance regulations and supervision systems are generally established.
After the Chinese government enacted Insurance Law of PRC in 1995, and set up the China Insurance Regulatory Commission in 1998, the other related laws were legislated progressively.
7. The open market and reform footsteps are accelerating. Almost 8 years after China entered the WTO, the Chinese government sped up the integration of the insurance industry and other financial service industries; They began building up insurance systems which connect with international practice; and built up a market environment which corresponds with international practice (Wang, 2006).
3.7 Summary
China’s life insurance premium against GDP is 1.7%, compared to 4.1% in India, 8.3% in Japan, 13.1% in the United Kingdom, and 4% in the United States.13 The situation means that China still has a very low level of insurance penetration and the potential of its insurance market is immense.
China is now facing more social and economic challenges, but the government only needs to look at the recent past to realize how to move forward. In the beginning of the reform era, the central government authorized local governments to do something to attract Foreign Direct Investment (FDI), and they did a tremendous job.
Now the central government knows that they have to do more to continue this development.
Although, China labels the reform with Chinese characteristics, China is still progressing towards capitalism. Privatization has worsened the income gap between the coastal area (the rich) and inland area (the poor). Contrary to what President Hu pointed out, the objective of the 11th five-year plan is to build up a harmonious society.
13 See PricewaterhouseCoopers, Foreign Insurance Companies in China, September 2008.
The Chinese government recognized it needs a sound support system to back up this strategy, and the insurance industry can play that role.
Nowadays the global economic environment is complex and unstable. The business structure of China’s insurance industry was gradually optimized, but still has many areas available for improvement. It is predicable that the Chinese government will enhance its supervision of the insurance industry and meanwhile continuously create an environment that is advantageous to the development of insurance industry.
HAPTER 4
The Distribution Channel and Its Management Strategies
Within the two decades, the development of Bancassurance channel of China’s life insurance market was rapidly. A report from PricewaterhouseCoopers mentioned that foreign insurers believe the bancassurance channel will enjoy further market expansion, and Telemarketing will receive increased attention.1 According to the report, the participation of Bancassurance channel to bring continuous growth of China’s life insurance market is predicable; therefore, pay much attention to the development of Bancassurance channel is necessary and significant to China’s life insurance market.
In this chapter, we will only focus on Bancassurance channel, including the operation model of Bancassurance, historical development of Bancassurance, and the comparison of Taiwan and China’s Bancassurance operation status. This chapter will also explore if the successful experiences on Bancassurance in the western countries will also happen in China, and how large the potential it is.
4.1 The Development History of Bancassurance Channel
In the past three decades after the implementation of open policy, China’s life insurance market was affected by foreign insurance companies, especially entered into the WTO of December 11th, 2001.
China’s life insurance industries can further develop innovative products to adapt to its social status, and find the way out to solve present problems based on the
1 See PricewaterhouseCoopers, Foreign Insurance Companies in China, September 2008.
Bancassurance experiences of Europe, North America, and Taiwan; therefore, to understand the history and status of advanced countries’ Bancassurance channel is important.
4.1.1 The Origin of Bancassurance
In the Europe, because of the recognition to Universal Bank ( ), the development of Bancassurance works well. And in Japan and the United States, the governments approved enactments sequentially in 1998 and 1999 to allow insurance products sold in banks.
In brief, Bancassurance means that customers buy insurance products through financial institutes such as banks, credit car companies, etc. Huizinga (1993), Executive Director of ING Group, raised a practical definition: Bancassurance is a channel. The word “Bancassurance” is a combination of Bunque (Bank) in French and Assurance (insurance); in Germany, they use Allfinanz ( ) to represent the concept of Bancassurance.
The development of Bancassurance stemmed from France in 1970, and generally the sales model expanded to the Europe. The main idea of Bancassurance comes out from the following three considerations:
Banks’ business footholds deeply distributed over towns and villages;
The employees in banks have professional background on wealth management;
and
Bankers want to deal with the problem of profit reduce.
4.1.2 Product Types in Bancassurance Channel
Because of easily understandable insurance products and simple insure process for customers, this kind of sales model quickly accepted in the Europe. Nowadays in France, the total premium comes from Bancassurance channel reaches 65%, and
France has become the largest and most mature Bancassurance market in the world.2 The product development in Bank could be divided into three phases (Figure 4-1).
1980 1990
extension of bank’s business savings product diversified products Source: Daniel (1995).
Figure 4-1: Three Phases of Product Types in Bancassurance Channel of France
Before 1980, selling insurance products was only an extension of banks’
businesses. Banks as an agent accessed into insurance field through collecting surcharge. In this period, banks sold credit-loan insurance to reduce itselves risks, and that was why Daniel considered that Bancassurance was an extension of banks’ businesses.
Starting in 1980, banks began to develop different types of financial products.
During this period, banks lunched endowment policy ( ),3 which included savings and protection concepts simultaneously.
After 1990, banks began to design products to meet customers’ needs, and in the Britain and Spain, banks began to provide life insurance products.
1990 was a breakthrough for Bancassurance development in Europe. Banks cooperated with and relied on insurance companies’ professional on complex
2 In most of the western countries, ex. Belgium, Italy, Norway, Netherlands, Germany, Britain, Switzerland, Finland, and Ireland, the proportion of Bancassurance in total premiums is about 20% to 35%, but in France, Spain, and Portugal, Sweden, and Austria, the proportion reaching as high as 60%.
3 The definition is from Wikipedia, http://en.wikipedia.org/wiki/Endowment_policy. An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on earlier death. Endowment policy (http://endowmentpolicy.comuf.com/) typical maturities are ten, fiftenn, or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. Policies are typically traditional with-profits or unit-linked (including those with unitised with-profits funds). Endowments can be cashed in early (or ‘surrendered’) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it.
actuarial knowledge to develop other non-life insurance products such as equity-linked ( ) and investment-linked products (
), not just took eyes on a single product as before.4
4.2 The Historic Development of Taiwan’s Bancassurance Channel and the Implication to China
Taiwan’s developing insurance market is worth comparing to that of China, especially considering geographic location and past history. From Taiwan’s development in each field such as supervisory system, regulations, actuary, claim and underwriting, products, human resources, risk management, we expect to understand China’s insufficiencies.
Taiwan is the tenth largest life insurance market and its penetration rate ranked 1st in the world in 2007.5 Based on the statistics, its insurance market continues to show the growth of premium, even though the growth line has tended to be flat. In recent years, Taiwan has become a mature insurance market.
Table 4-1 shows the ten-year changes of Taiwan’s insurance density, insurance penetration, and ratio of life insurance and annuity. According to the figures, in ten years, Taiwan’s insurance density increased 3.3 times to NTD 83,294; insurance penetration reached 15.52% which was 2.68 times that of 1999. The ratio of having insurance coverage in 2008 reaches 203.27% which means each person owns more than two insurance policies, and ratio of prevalence reaches 333.38% which means each person has more than 3 times protection comparing to one’s income. The figures show that Taiwanese people have a high insurance concept. Compared to China’s status, the potential of China’s insurance market is evidently.
4 Equity-linked products and investment-linked products were launched by insurance industries in the Britain in 1960.
5 See Life Insurance Association of the Republic of China, The Life Insurance Industry in Taiwan 2008.
Table 4-1: Taiwan’s Insurance Density, Insurance Penetration,
Notes: 1. Insurance Density: average insurance expenditure per capita.
2. Insurance Penetration: the ratio of insurance premium to GDP.
3. Ratio of having insurance coverage of life insurance and annuity: the ratio of life insurance and annuity policies in force to population.
4. Ratio of prevalence of life insurance and annuity: the ratio of life insurance and annuity policies in force to national income.
Source: Taiwan Insurance Institute ( ), Insurance Density, Insurance Penetration, and Ratio of Life Insurance and Annuity,
http://www.tii.org.tw/images_P2/3.xls.
Taiwan’s life insurance market consisted of 30 insurers at the end of June 2009, in which there were 21 insurers operating agency channels, 27 insurers operating Bancassurance channel, 16 insurers operating Telemarketing/Direct Marketing channel, 17 insurers operating Bancassurance channel and Telemarketing/Direct Marketing channel, and 12 insurers simultaneously operating three kinds of distribution channels. The insurance industry had reached an 18.6% proportion in the
finance industry in 2005; the percentage in Japan is 8.7% in 2005 (Hong, 2006). The percentage exposes that Taiwan’s insurance industry plays an important role of the whole finance industry.
The operation environment for Taiwan’s insurance industry is very rigid and challenging starting in 2000. Banks did not easy to gain from traditional business on deposit and grant loans due to the Central Bank decreased required reserve ratio more
The operation environment for Taiwan’s insurance industry is very rigid and challenging starting in 2000. Banks did not easy to gain from traditional business on deposit and grant loans due to the Central Bank decreased required reserve ratio more