Chapter 2 The Overview of China’s Insurance Market
2.5 Summary
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the Standing Committee of the National People’s Congress. The new insurance law comes into force on October first, 2009. The law authorizes the CIRC to limit the capital operations of insurers that have fragile solvency ratios, control the wages of their executives, and force them to auction non-performance assets or put up insurance assets for sale.
Since the reform and open policy commenced, China insurance businesses have increased rapidly, service field has been extended, market system has been improved progressively, laws and regulations have been completed gradually, supervision level has been enhanced constantly, risks have been prevented effectively and the complete strength has been reinforced noticeably, which performed an energetic role in improving reform, shielding economy, stabilizing society and benefiting people.
Insurance industry is one of the greatest developing industries in national economy.12 All in all, the CIRC has presented the intention to execute structural development to the market following quick growth in the insurance industry so far in 2010. The domestic insurance segment desires more discipline and risk prevention, essentially in asset management risks, risks control from loose internal running control, and solvency risk. The CIRC also takes strict actions into consideration, such as taking control of, or restructuring, insurers that cannot get their operations better and cannot complete solvency requirements over a long period of time.
2.5 Summary
China’s insurance market was stopped from 1950s to 1978, and luckily with the economic reforms and open policy, the insurance industries have the opportunity of rebirth. The need for insurance in China is getting higher attributable to rapid economic growth and increased income. Reform systems have provided a wide base for the development of commercial insurance.
What’s more, the entries of WTO promote the development of insurance business speedily. It is a key essence for China’s insurance industries to change its structure and improve the competition. With the impact and cooperation from foreign insurance companies, local insurance companies can learn the professional insurance skills and improve their service.
12 See “Report on China Insurance Industry, 2010-2015,”China Investment Consulting, available at http://www.ocn.com.cn
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As for the market share, although the property insurance was earlier than life insurance, the premium volume of life insurance business has extremely over the premiums of property insurance business. Also, most of the insurance market is still controlled by the Chinese enterprises, particularly the top life or property insurance companies are still owned by the state. The unbalanced growth in insurance industries is like the economic developing model and mainly on the coastal regions.
Finally, the legal structure and official supervision have been established and the government tries to remove the limitations slowly but surely. However, it has some boundaries for the foreign coming investors and cannot fulfill the aim of free market and competition.
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Chapter 3International Property Insurance Market
In 2009, the global economy experienced its deepest recession since the 1930s as world gross domestic product (GDP) dropped and the industrialized countries were severely affected across the board. However, GDP growth slowed in the emerging market countries. As a whole, these countries dealt with the global financial crisis better than the industrialized countries, even though with weak regional disparities.
Emerging Asia performed well due to substantial GDP growth in China and Indian, the region’s two leading economies. Owing to the recession, commodity inflation fell considerably in 2009. Inflation is predictable to stay low until the rising supply in manufacturing and the labor market is decreased. The individuals or the governments reduce spending to narrow their budget deficits, and it led to the low and slow growth of the insurance market.13
Before discussing China’s property insurance market, at first it is very critical to look into the international property insurance market. Property insurance relies on the reinsurance to disperse risks and is related to the global very much. Therefore, in the first part of the chapter, the global property insurance market will be described, especially the premium volume, the insurance density and penetration. Next, the statistics from some developed countries, like the USA, UK, Japan and Taiwan, will be evaluated so as to predict the future development in China. Moreover, the study regarding the losses and profitability of the world property insurance will facilitate to see the outlook of the global property insurance. In the second part of this chapter, due to the similar developing model and historical background, Taiwan’s property insurance market will be introduced and particularly after the Economic Cooperation Framework Agreement (ECFA), it is important to understand Taiwan property insurance enterprises how to handle the huge market in China.
3.1 The World Property Insurance Market
A series of events, together with the global economic crisis and an above-average number of catastrophic and non-catastrophic losses in 2008, has speeded up a shift
13 See the report “World Insurance in 2009”, Swiss Reinsurance Company Ltd, available at http://www.swissre.com/sigma/
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away from the soft property insurance market of the past two years. The global insurance market is experiencing the hard time. Property and casualty markets are tightening or pulling down, while not necessary hardening considerably. Competition in the global property insurance marketplace keeps strong. Insurers are aggressively seeking both present and new business opportunities and are actively competing to achieve premium revenue. As a general rule, rate decreases at renewal were still being acquired in the global casualty market, although the percentage of the reduction was not as large as earlier in the financial crisis year. Insurers are starting to push back on reduction and many are seeking to remain rates flat (Marsh, 2009).
3.1.1 The Overview of the World Property Insurance Market
Non-life insurers’ solvency turned down sharply in 2008 because of declining financial asset prices and therefore caused the capital shortage in the insurance industry. Although these days that prices stops falling, insurers will find it difficult to raise prices in the existing economic environment, especially in the industrialized countries.14 Underwriting outcome in the US will carry on being affected by losses coming up from financial crisis. In most other markets, insurers are expected to progress profitability by concentrating on underwriting discipline and reducing expenses.
The economic slump will limit demand for non-life insurance mainly in the commercial lines of business. Demand for personal lines of insurance is probable to be less affected, in view of the fact that insurance spending is less discretionary and unrestricted, in particular in the industrialized markets. Nevertheless, the economic circumstances will also impact this sector and insurance demand will recovers after 2010.15
On an inflation-adjusted basis, global insurance premium contracted by 1% to USD4066 billion in 2009. This is an improvement over 2008, when global premiums shrank 3.6%. Life insurance accounted for 57.3% of total premiums in 2009 compared to 42.7% for non-life insurance. Life premium fells 2 % to USD2332 billion in 2009, while non-life premiums remained flat at USD1735 billion. In most countries,
14 The industrialized countries include North America, Western Europe (excluding Turkey), Japan, Hong Kong, Singapore, South Korea, Taiwan, Oceania, and Israel.
15 See the report “World Insurance in 2009”, Swiss Reinsurance Company Ltd, available at http://www.swissre.com/sigma/
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insurance grew more rapidly than GDP, which illustrates the strength of the industry.
As credit and stock markets recovered in 2009, the industry was able to re-establish its capital base. Investment consequences and overall productivity also improved. After the financial crisis, it is expected that overall premium growth in the industry will turn optimistic and profitability will keep on getting better.16
Table 3-1: Premium Volume by Region and Organization─2009 Premium Volume
Source: Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
During the financial tsunami, the insurance industry continued to afford cover and pay claim. There was no deficiency of capacity and premium rates did not go up.
Nothing like the banking area, insurers did not obtain government support in the forms of capital or guarantees, with the exception of in a few cases. Since the middle of 2009, the economies of the emerging market countries and many industrialized countries enhanced the prospect for premium volumes.17
In general, non-life insurance was not significantly impacted in the period of financial crisis. Notwithstanding losses on the investment part, insurers had more than
16 The Study is based on the direct premium volume of insurance companies, regardless of whether they are privately or state owned. Premiums paid to state social insurers are not included. Also, the study examines non-life and life premium volume in 159 countries. See the report “World Insurance in 2009”, Swiss Reinsurance Company Ltd, available at http://www.swissre.com/sigma/
17 The emerging countries include Latin America, Central and Eastern Europe, South and East Asia, the Middle East (excluding Israel) and Central Asia, Turkey, Africa.
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declining just 0.1%. While non-life premiums cut down in the US and Europe, they climbed in the other regions. Compared to the sharp decrease in GDP, this is a remarkable consequence.Global non-life premiums fell a little by 0.1% to USD1733bn in 2009. The result was mainly driven by falling premiums in the US and Western Europe. However, there were also some positive developments. Non-life insurance in the newly industrialized Asian economies also continued to grow up.
Premium income in the industrialized countries, which produced 87% of the world’s total volume, continued to bear the after effects of the financial crisis, falling 1.8% to USD3533 billion in 2009. However, the non-life insurance premiums of 2009 in the emerging market raised by only 2.9%, while premium volume raised to USD248 billion. In more than two thirds of the emerging countries, insurance premium grew more rapidly than GDP; as a result, penetration increased. Insurance related to international trade as well as motor was in charge of the slow developments.
However, non-life premiums should increase now while the economic recovery is processing in most markets.
Table 3-2: Premium Volume by Region and Organization in Non-life Business─2009 Premium Volume
Source: Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
From Table 3-2, non-life premiums in emerging Asia grew by 14% to USD257 billion in 2009. The region’s positive performance was held up by strong development
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in China. Throughout the region, aggressive government financial support has facilitated to generate a channel of infrastructure construction developments, which in turn has benefited the non-life insurance area. However, external trade has been weak, which has decreased demand for marine insurance. Natural catastrophe losses were not anticipated to be a key issue, even though a series of typhoons hit China and Southeast Asia in mid-2009. These events were not likely to drastically lower insurers’ underwriting incomes, which were further improved by enhancing investment results
All in all, from the 2007 – 2009 global economic downturn prompting some of the major insurers to reconsider their continual attendance in the country. Since the 2007 global financial crises happened, international insurers have been weighing up business operations and moving activities worldwide to exploit developing and emerging growth markets. (Thomas, 2010)
Recently, most markets that were in recession in 2009 are on track for a strong economic recovery, which will prop up non-life insurance business. The most important challenges are continuous price pressure and growing inflation in several regional markets. At the same time, regulators are planning tighter solvency standards, which could impact capital sufficiency, especially for those small domestic insurers.
3.1.2 The Market Scales in the USA, UK, Japan and Taiwan
In this part, some examples will be taken from the USA, UK, Japan and Taiwan to offer the reference for China’s property insurance market. The American property insurance market takes up the most share of world market and the UK market has the historical background in property insurance. Also, China’s GDP might be over Japan’s GDP in 2010, together with the cross-strait relation, so it is suitable to look into the market developments from the four countries.
In 2009, the ranking of American GDP is top one in the world, and also the ranking of non-life insurance premium volume is the number one. American non-life insurance market occupies around 37% share of world market and non-life insurance business is over 56% share of total business. Generally speaking, the non-life insurance market is a quite mature market and has no huge disparities compared to life insurance market. However, in the UK, Japan, and Taiwan, the non-life insurance market share is pretty low in the world insurance market and cannot compete with the
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Besides, China’s GDP is on the top 3 of the world and expected to be over Japan soon; however, the ranking by non-life premium volume is only 9 and we can find the experience from most of the other countries, the ranking of non-life insurance premiums is similar to that in GDP; that means China’s property insurance still needs promoting actively and has huge developing potentiality.
Table 3-3: Macroeconomic Indicators and Non-life Premium Volume by Region-2009 Country Population
Source: Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
Table 3-4: Insurance Penetration and Insurance Density by Region─2009 Insurance Penetration
Source: Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
From the aforementioned table 3-4, compared to the four countries, the insurance
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penetration and density of China’s non-life insurance is far away from the four countries and below the world average. In most of the four countries, the insurance penetration is above the world average and particularly the GDP ranking of Taiwan is 26 but the insurance penetration is number one. Insurance penetration can reflect the position of insurance industries in national economic development; with the rapid economic growth in China, it is likely to have a higher insurance penetration in the coming future.
Moreover, regarding the insurance density, the non-life insurance premium per capita is USD40. The world average is USD253.9 and the other four countries all exceed the world average considerably. It shows the coverage ratio of insurance is not enough, the insurance education still has to be promoted and the risk management needs improving significantly.
3.1.3 The Losses and Profitability of the World Property Insurance Market
Loss from natural disasters and man-made events in 2008 were more than the long-term average. Property insurers had losses of USD53 billion from natural catastrophes. Insured losses from man-made disasters amounted to USD7.7 billion.
The US was the most affected area with two main hurricanes, land led to insured losses of USD20 billion and USD4 billion respectively. In the USA, in company with the deepening of the global economic crisis 2008 was marked by a number of catastrophes, from a series of singular disasters to the extensive damage caused by hurricanes (Marsh, 2009).
In 2008, tornadoes and thunderstorms produced extra losses of USD2.4 billion.
Losses in Europe increased after storms and in China, snowstorms and freezing rain in early 2008 resulted in insured losses of USD1.3 billion. Insured losses from natural catastrophes in 2009 were below average at a roughly USD22 billion. Losses were highest in North American, where insurers paid out over USD 12.7billion in claims.
The two worst events of 2009 occurred in Europe when winter storm Klaus hit France and Spain in January, resulting in losses of over USD1.2 billion. The third costliest event took place in Australia, where the Victoria bush fires set off damages in excess of USD1billion.18
18 Swiss Re, World Insurance in 2009, Sigma No 2/2010, http://www.swissre.com/sigma/
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After some years of solid profitability, underwriting results came to a negative side in 2009. The profitability in European markets is not good mainly due to a rapid deterioration of motor insurance business. In Japan, declining motor liability premiums caused negative underwriting consequences, while in the US and Australian markets, underwriting results went better after the high natural catastrophe losses in 2008. Nevertheless, underwriting profitability in fact turned down if average natural catastrophe losses adopted. Profitability in 2009 was further held back by poor investment results produced by diminishing investment yields and significant reduction in the value of invested assets.
In addition, lower prices in non-life harm profitability in 2009. The overall profitability increased by reason of the improvement of credit and equity markets.
Shareholders’ capital also made a strong recovery. In many countries, capital had nearly returned to its pre-crisis levels. Non-life premium increase in the industrialized countries is steadily predictable to rise. The continued pressure on rates will impede profitability and hamper premium growth. As interest rates are still to stay low in 2010, investment returns are negatively affected. The general profitability and return on equity (ROE) is below average.19
3.1.4 The Outlook of the World Property Insurance Market
After the financial crisis, an improvement in prices and an increase in interest rates rely on the stability and pace of the universal economic recovery. Take the fragile nature of the economic recovery into consideration; premium growth in the industrialized countries will be slow to recommence. In the emerging markets, on the other hand, economic growth will move premium development back to the normal levels, although not in all areas.
Despite the fact that the financial catastrophe affects pricing, it has been less severe than might have been estimated. After a while, efficient risk and capital management practices have facilitated the industry to absorb the shocks of 2008.
Looking forward to the future, there are numerous unknowns that could negatively have an effect on rates, for example, another above-average catastrophe year or another financial shock. On the other hand, a resolution of the credit crisis could
19 ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity. See http://www.investopedia.com/terms/r/returnonequity.asp
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refurbish asset values and develop the financial conditions of insurers and reinsurance companies. In 2010 and 2011, the economies of the US, China and many emerging market countries are projected to grow up considerably.
3.2 The Property Insurance Market in Taiwan
The insurance industry of Taiwan is the one of the major insurance markets in the Asia pacific region. The industry has been rising mainly in virtue of liberalization policies of the government, increased consciousness, tendency of wealth accumulation plus the mounting economy and improved per capita income. Apart from this, the insurance industry has also benefited from the rolling demand for insurance products.
Taiwan is essentially known for the number one of insurance penetration in the world and having one of the highest insurance densities in the Asia Pacific region-second only to Japan. In terms of penetration rate, the industry has high penetration rate and there is great difference; life has very high penetration rate and non-life has very low penetration. The critical ground behind this disparity is due to the receptiveness of life insurance products, together with the decreasing investment by domestic consumers in automobiles, and natural disaster exposures have limited the growth of the non-life insurance business. In the coming years, although the life
Taiwan is essentially known for the number one of insurance penetration in the world and having one of the highest insurance densities in the Asia Pacific region-second only to Japan. In terms of penetration rate, the industry has high penetration rate and there is great difference; life has very high penetration rate and non-life has very low penetration. The critical ground behind this disparity is due to the receptiveness of life insurance products, together with the decreasing investment by domestic consumers in automobiles, and natural disaster exposures have limited the growth of the non-life insurance business. In the coming years, although the life