Summary

After the open policy confirmed by Deng Shao-Ping in 1992, China has taken some impressive strides to completely overhaul their insurance market industy. Before 2001 China forced herself to accelerate reform speed in order to enter the WTO and thus China’s local insurance industry competes against foreign insurance industry on the same scales. Foreign insurers will keep seeking inroads into China, and push all their resources such as skills, capital, sales channels, talent, and service to earn their share of the Chinese market.

19 See , United Evening News, 17 December 2008,

http://udn.com/NEWS/STOCK/STO1/4647992.shtml.

During the past nearing three decades, 1980 to 2008, China’s total premiums grew 2,127 times. The Insurance market began its limited competition starting from Ping-An Insurance Company and Pacific Insurance Company of China established in 1988 and 1991. The State Council published “Provisional Management Acts of Insurance Industry” in 1985, and followed it with “Insurance Law of the People’s Republic of China” implemented in 1995. Soon after the China Insurance Regulatory Commission was set up in 1998, which proclaimed that supervision of China’s insurance market had entered into a professional period. Starting September 1992, after American International Assurance became the first foreign insurance enterprise established in Shanghai, foreign insurers surged into the market.

Access into the WTO is no doubt a force to drive China’s insurance market to move forward; the Chinese government started a series of system reforms, in which the factor that made the reform successful was property rights arrangement. 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 best arrangement for property right is to enhance one’s personal income as far as possible to make the amount close to social income, thus, economy has sufficient incentive to keep growing. In contrast, if property right arrangement can not make personal income close to social income, one will lose his motivation of skill reform, capital accumulation, and innovation, and those are important and advantageous for economic growth. North’s theory did not just explain the western world rise, but also interpreted China’s high-speed development.

Nowadays China’s insurance market reaches a certain scale: insurance business types tend to be diversified; the number of insurers is increasing; broker and reinsurance market are beginning to form. We can expect that the high growth rate will continue, and the potential of China’s insurance market is indeed promising.

HAPTER 3

The Market Environment and Status of China’s Life Insurance Industry

In the western countries, the insurance market is part of the financial market.

No matter its total assets or economical importance, the function of the insurance industry is always only just a part of the banking industry. If the Chinese government plans to have an international financial market, the insurance market would be directly affected and show positive steps forward as well (Wei et al., 1999). Opening the insurance market has improved the development of financial market. Statistics indicated that in 1993 the United States’ money market was USD 780.5 billion, in which the life insurance industry was USD 143.7 billion, equaling 18.4% of the total money market supply; which proves how important insurance industry is in the financial system.

This chapter not only demonstrates the current situation of China’s insurance market, but also explores the motivation of life insurance product needs, and the factors that affect life insurance needs.

3.1 The Function of China’s Insurance Market

After 1982, the resurrection of the in urance industry, China’s life insurance industry experienced amazing development. According to statistics, in the ten years from 1990 to 2000, the premium of the life insuranc industry grew at an average of 31.15% each year. The market still maintained a steady and rapid growth in 2008.

According to the table below, the total premium reached RMB 978.41 billion, in which life insurance premium was RMB 744.74 billion, 76.12% of total premiums, up

47.82% from the same period of the last year. Since the life insurance premium exceeded the property insurance premium in 1997, the life insurance industry has dominated more than half of market shares. From Table 3-1, we can easily see the trend of People’s need and also the market change in China.

Table 3-1: Total Premium of China –––– 1992 2008

Year Total Premium

therefore, insurance has these two original and basic functions, but following social improvement and enhancement of products, there are increasingly more and more

functions of insurance. Nowadays insurance does not just mean products and services, but a kind of system arrangement which is advantageous to economic development and social stability. It participates in many aspects of social life: reducing economic disputes among social members, participating in social risk management, perfecting social protection system, and maintaining social stability. Modern insurance has at least three functions in finance, risk management, and social governance (Liou, 2008).

Firstly, the original function of insurance was risk management, which is a concept of diversification. People face a lot of unavoidable risks, and no one knows when and where; therefore insurance is an effective mechanism for risk shift. Insurers collect premiums to build an insurance fund. When policy holders suffer from loss no matter property or life, the insurance fund can be used to compensate the individual.

This form of compensation stabilizes societies, improves economic development, and protects people’s lives.

Secondly, insurance has financial attributions. The Financial function means accumulation, circulation and the allocation process of bankrolls. These attributes are all functions of insurance. The insurers attract, collect, and accumulate society’s idle money to mobilize social capital from savings to investments. This is done through the sale of product. It becomes a channel to diversify centralized bank savings and minimize financial risks. For long-term operation, insurers have to enhance investment return from insurance capital, for the reason, insurers become key investors of capital market.

Thirdly, insurance has another derivative function, social governance. Insurance realized social reallocation through economic compensation to provide strong economic protection for people’s daily lives. It can decrease unstable factors of social development. Not only does it passively support the protection system, but insurance

also participates in risk governance in a positive manner. For example, some insurers provide a basic physical examination every two years if customers buy cancer products ( ).¹ That is a positive action for risk management. From the table below we can find that the premium of pension, accident, and health insurance increase generally and make steady progress.

Table 3-2: Premium Income of Each Product Type in China –––– 2001 2008

Unit: RMB million

Year Total Premium

Life Insurance Accident Insurance Health Insurance Endowment

Premium

Insurance can strengthen or aid the government in areas of social concern when there are not enough resources all ready allocated to do so. Understanding the social function of insurance, the Chinese government formulated and implemented Methods on Endowment Insurance Business Management for Insurance Companies. This involved strengthening cooperation among relevant ministries to research pension insurance tax preferential policy. Then choose a method to promote personal

1 See Shin-Kong Life Insurance Company, http://www.skl.com.tw/general/product_com_DV.asp.

tax-deferred endowment insurance. The Chinese government also encourages insurers to undertake corporate pension business.² So far we know the role that insurance plays in a society.

3.2 Customers and Their Life Insurance Demand

Customer purchase behavior is one of important parts of marketing research, which is why the key link within the whole process is consumer behavior (Luo, 2000).

Consumer behavior is a reflection to his/her purchasing demand and purchasing motive. Different demands and motives will result in different purchasing behaviors.

A consumer’s purchasing process is very complex and susceptible to many factors. Due to beneficiaries receiving compensation only when the insured has some form of injury, consumers will use diligent consideration when he/she purchases life insurance. For this reason, analyzing consumer’s purchase behavior is necessary.

The International community has a lot of deep progress in research regarding consumer’s life insurance purchase behaviors. Laurence (1995) pointed out the influence of public welfare system in regards to insurance purchase and also analyzed the influence of risk factors to consumer’s life insurance purchasing behavior. They also analyzed and the turnover volume of health insurance. The motives of people buy insurance products are research topic of many scholars, also the influence of personal income, education level, gender, and occupation to consumer’s transaction rate are factors which affect people’s purchasing behaviors. The research of insurance demand is theory based on an economic analysis framework of expecting advantageous maximization under uncertain conditions. Many scholars do the research for insurance demand, especially for life insurance demand, base on the structure of expected utility theory (Neumann and Morgensterm, 1965). Lewis has expanded this kind of research

2 See China Insurance Regulatory Commission (2008), Almanac of China’s Insurance Industry 2008.

viewpoint - from a beneficiary’s viewpoint to look into life insurance demand. He raised a point that buying a policy is not only because of insured’s demand, but also to satisfy his/her beneficiary’s (wife, husband, parents, and kids) protection demand. In his research, he indicated that insurance demand will be affected by risk withstanding the insured’s family members. Some factors will affect people’s policy purchase inclination: firstly, expected lifetime, policy price, foster care maintenance rate (

),³ income, social protection, assumed inflation rate, and educational level.

According to Zhang et al. (2008), customer cognition of life insurance has the biggest affect on his/her decision to buy an insurance policy. Gender, age, and level of education will not affect one’s purchase decision, but it is obviously susceptible to economic situation (including personal income, family income, and personal social position). Therefore, building up consumer cognition of life insurance, enhances the consumer’s ability to deal with risks and further properly manage risks through insurance.

Foreign countries have carried on a lot of theories and empirical studies to life insurance demandand won rich achievements (Neumann and Morgensterm, 1965), but in China, the research for life insurance demands is in the infancy stages.

Although overseas research results may become references, each country exists on different political, cultural, and consumption habits. Overseas results can’t be 100%

accurately applied to China. Following the high-speed development of the insurance market, we need to begin a thorough analysis of life insurance demand based on China’s proximities. Only when we have an overall understanding for China’s demand, insurance companies can output products which the society needs.

3 The ratio can reflect working age population’s burden situation to the supported. The formula is:

support rate = (the numbers under 14 years old plus the numbers above 65 years old) / populations between 15 years old to 65 years old.

3.3 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 The Insurance industry improved economic development in three aspects:

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.