Chapter 4 The Development of Property Insurance Market in China
4.6 The Competitiveness and Potentiality in China’s Property Insurance Market
4.6.3 The Prospect of China’s Property Insurance Market
國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
growth in a broad variety of consumer oriented factors. Currently, there are around 200 million internet users in China. Middle class Chinese citizens, who have cars and other personal property, get used to e-commerce. This represents a strong and rapidly increasing niche market for an online insurance company (Benzinga, 2010).
Looking ahead, it would encourage insurers to develop telesales and Internet sales. Improving business processing systems, data warehouses, business intelligence and customer relationship management will be the focal point of future IT investments. China’s domestic insurance companies should strengthen their investment in improving their business processing systems. With the huge population and numerous enterprises, the access of Internet and telesales will benefit the property insurance business. Also, for foreign investment, this is another way to show their advanced management skill and backup services through the design of website and telesales besides the focus more on broadening sales channels o rapidly expand their market share (Celent, 2008)
4.6.3 The Prospect of China’s Property Insurance Market
China property insurance industry has entered rapid development period, and operation model of property insurance industry is developing toward diversification.
The future prospect of China insurance industry development will be very good. All in all, looking forward to the future development of the Chinese insurance industry, the following aspects can be expected.
1. The Continuing Rapid Development of Property Insurance
Sound economic development will push continued insurance development. And more potential insurance markets could grow into real opportunities with increasing insurance demand, especially in the large western regions. The disparity of insurance market is due to the disproportion in Chinese economical system and also related with system and technology. The fact requires us to choose different developing strategies according to individual market’s characteristic. With the western development, the government improves lots of infrastructure and construction in those areas, and therefore the construction and related property insurance products will be promoted.
Besides, with the increasing expatriates, the trend will let the number of foreign insurance organizations in China continue to rise, giving expatriates in the country the assurance that they will be able to deal with insurers offering products with which
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
they are already familiar. More players are coming into the market and that represents a more balanced market structure will take place, and the market share of the top three will surely decrease. Although it is hard to take place of the position, it will push the market competitiveness.
Moreover, more products and new services are expected to come out in the market. Competition and more players will let many insurance companies take up more of a niche market and supply suitable products and services for that special market, such as the microinsurance products in western or rural areas. Different insurance products will appear with Chinese characteristic
Meanwhile, domestic insurance companies have to make serious efforts at adopting international business and prudential practices so that they can adjust to the international competition.
2. The Growth and Refine of Different Marketing Channels
It is believed that market will get refined. Individual agents, banks, and group direct marketing should stay the main positions in the future, but more transformations and refining will occur. Companies should manage individual agents more severely and classify into dissimilar levels for different products and different market fractions, for example, special agents for rural markets. Property insurance companies will carry on trying to create tighter relationships with enterprises or banks in order to reduce commissions and promote bank insurance products. More direct marketing methods will be implemented by more insurance companies as well. Also, professional agency companies or brokers will rise up in order to meet the difference of property insurance products.
Online insurance is likely to grow as more and more people get used to this way of insurance buying. Technologically, there are many changes taking place in the insurance industry. Online insurance is on the rise, as IT is becoming gradually important and outsourcing is being viewed as a reasonable choice to handle the challenges of the market in the future.
Recently, new channels have begun to emerge in China. Quite a few Chinese property insurance companies were selling simple products on the Internet and more direct marketing demands will appear in the near future. Mobile phones and related technologies will enable fast-paced growth and penetration of microinsurance products and help the insurers to promote their new property insurance policies. Better
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
technology and management information systems are also possible to cause improved data quality as required for efficient pricing and risk evaluation of insurance products.
3. Improvement of Regulations
Insufficient progress on business volume, profitability, insurance coverage and products, risk, management, policies and technology are hampering global competitiveness of the domestic firms. The Chinese insurance market is joining the international market and this will intensify competition and improve insurance companies’ competence. The CIRC has strengthened solvency regulation and market conduct regulation, coming down on misleading, and promoted insurance innovation.
These should lay a more solid foundation for future development. Also, with the improvement of regulations, the transparency will be better and more information will be offered for the public before decide to buy the property insurance products.
Besides, investment management is becoming more professional. The CIRC has improved the investment regulations increasingly and is likely to have more expertise to enhance investment management of property insurance business.
More investment channels had been opened to insurance, so insurance companies will pay more attention to asset-liability matching and the improving investment management. Investment tactic will become more rational, focusing not only on new money range, but also on long-term return and matching liability (Lin and Xu, 2007).
4.7 Summary
All in all, China’s economy is going up at one of the fastest speed in the world, but it has troubles in comparison to the growth of its property insurance industry. With the low insurance penetration and density, China stands far behind than the global average of insurance industry scale.
Next, the whole property insurance market is still controlled by the state and motor insurance accounts for most of the premium written in property insurance part.
The development of family or enterprise property insurance products is not as good as the predicted volume. The announcement of new Tort Law represented that most insurers consider liability business to be a strong opportunity for growth, and possibly a profit producer as well. Microinsurance may develop in China due to the huge population with low income and the insurance density and penetration is still below the world average.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Along with the stable development of businesses, profitability of professional intermediaries was improved continuously. With the intermediaries’ support in assisting this rapid growing, developing market will increase its sophisticated risk management solutions for a complex range of risks.
Moreover, reinsurance companies need to spread the business in the international market and it is important to let China Re enjoy much less government protection in the future. The limitation on overseas property insurers is the fact they still can’t write legally required business, as well as the compulsory third-party liability auto coverage.
Foreign companies have to set up long-term relations with Chinese local governments and potential consumers and need to build up business strategies that make their companies operate for a long-term way.
Finally, bancassurance has become a major distribution channel for many insurers in the last several years and these new bank-owned bancassurers will introduce new dynamics in the market. Also, China's property insurers need to expand the business by offering new insurance products and make market premium rates totally be liberalized. The competition among property insurance companies will become more intense, it is important for property insurers to develop telesales and Internet sales. China property insurance industry has entered rapid development period, and operation model of property insurance industry is developing toward diversification. The future prospect of China insurance industry development will be very good.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Chapter 5 Insurance Regulations in ChinaThe crisis of 2007-2009 took the global economy to the edge of a repeat of the Great Depression. There is wide concern that careless regulators and insufficient regulations contributed to the crisis. Also, the financial crisis has also spurred the CIRC to rethink insurance supervision. Although their assets have not suffered serious loss in the global crisis, China’s insurance investment officers still have some concerns. Many of the steps are taken to strengthen the industry by improving transparency.
The main purpose of insurance regulation is to protect policyholders from financial loss. In other words, insurance regulation is to protect the policyholder by ensuring that the insurers will be able to compensate the loss occurred in the event that the policyholder files a claim. It is about solvency and aims in the sufficient capitals to meet obligations. The need for regulatory control arises because insurance services are merely generate and delivered after being purchased and paid for by policyholders. The insurant are normally short of the skills and information required to monitor the financial soundness of the insurance companies. Also, insurance regulation is able to ensure fair treatment of insurance customers, to promote efficiency and competition, and to level the playing field between the different financial factors and between domestic and foreign-based insurers.40
In this chapter, firstly, China’s insurance investment will be clarified and subsequently since the insurance law was revised and reissued in 2009, the new regulatory developments will be assessed in order to under the new trend.
5.1 The Regulation of Insurance Investment in China
Nowadays, “China” seems to become nearly synonymous with “growth”. Since 2000, China’s insurance has grown at an average rate of 27% a year. The scale of its investment is huge. In 2010, insurance investment funds totaled RMB4.6 trillion, making China the second-largest Asian insurance asset holder.
At first, the government limited the investment channels to bank deposits, treasury bonds, financial debt, and other channels allowed by the government. The strict regulation aimed at avoiding asset risk for insurance companies before the
40 Swiss Re, Regulatory Issues in Insurance, Sigma No 3/2010, http://www.swissre.com/sigma/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
insurance industry had matured enough to manage high risk. But it also dispassionately limited the room for asset-liability matching (ALM) at the same time.
From 2004 to 2005, the CIRC permitted Chinese insurance companies to invest foreign currency in overseas markets, under strict regulation and permitted insurance companies to invest in stocks directly, whereas in the past, insurance companies could enter the stock market only indirectly through mutual funds. Since 2006, insurance companies could invest infrastructure construction and commercial bank.
In 2010, the CIRC released temporary administrative rules on insurance funds’
equity investments in unlisted companies and private equity funds. Also, it allows insurance companies to invest a maximum of 10 % of their total assets in real estate projects and 5% in private equity. However, due to risk concerns, it prohibits insurance companies from investing in venture capital funds.41
The CIRC has issued modified rules to give insurance companies more investment options. The regulation increases the maximum percentage of investment in overseas capital markets and the regulator also issued new rules regarding insurers’
investment in corporate bonds. With these wider investment channels, insurance funds might become a major force in the Chinese private equity investment market bedsides the social security funds.
Anyway, this environment is particularly challenging for insurers that are highly dependent on investment income, such as non-life companies with low or unstable underwriting profits. Bond yields have been low since the late 1990s, resulting in a negative widen issue for insurers that underwrote product guarantees years ago. The low-rate environment has also decreased the attractiveness of insurance products relative to bank and securities products.
Another difficulty Chinese insurers face is that the nation’s capital markets offer few assets classes for practicing asset-liability matching (ALM). Matching investment portfolios with long-term liabilities remains complicated, restraining insurers’ ability to develop long-term products. Long-term government and corporate bonds are in limited supply and uncommonly traded. To a few risk takers, it may be appealing to invest for short-term benefit, in the hope of setting up a reserve against long-term
41 The China Insurance Market newsletter from Towers Watson, Asia-Pacific, July to September 2010, http://www.towerswatson.com/.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
duties, particularly because some stock markets have appreciated strongly.42
For Chinese insurance companies, how to improve their ALM ability is becoming more and more significant, once the policy barrier to limiting investment is removed. To help insurers, the government has broadened the range of investments they can undertake to include real estate and offshore investments, although these investments require case-by-case regulatory approval. This should improve insurers’
ability to practice ALM and risk management. Besides, China’s holding or group companies can establish their own asset management companies, and until now there are 9 professional insurance asset management companies and manage 80% of the total asset and over 70% insurers set up individual asset management departments The CIRC is trying to push more professional asset management institutions to improve the investment and satisfy the need of insurers’ developing new business.
5.2 The Regulatory Development Specific to China
There are several major regulatory in China, such development of a risk-based solvency regime, the implementation of a new accounting standard, and increasing cross-ownership between banks and insurers. Besides, the CIRC requires insurers o check their underlying operating conditions for any sign of problems in order to avoid systematic risks. Further regulatory changes continued to impact the industry. The CIRC has recently published rules to lessen insurance groups’ comprehensive operating risks. The rules have outlined different regulations for insurance group companies, covering entry conditions, corporate governance, and capital management.
The Insurance Law was revised and reissued in 2009. The amendment highlights a shift from the previous single risk-sector, which is relied on business scale, to a multiple risk factor-based supervision regime. Although the details of execution are still pending, the CIRC is pushing insurers to enhance their solvency margins to level their future transition to a stricter regime. Therefore, some insurance firms have started to seek capital relief.
The Chinese Ministry of Finance and CIRC jointly issued a regulation in 2009 specifying new accounting standards for insurance firms. China’s insurers may report higher assets and profits owing to the reduction of their risk provisions under the new regulation. While this may decrease demand for reinsurance as solvency relief, the
42 Swiss Re, Regulatory Issues in Insurance, Sigma No3/2010, http://www.swissre.com/sigma/
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
new treatment of premium income will induce insurers to adjust their product portfolio and concentrate more risk protection products..
Chinese banks used to be forbidden from having insurance operations, but the government has now permitted banks to get stakes in insurance companies.
Bancassurance has gradually become a major distribution channel of insurance in China. It can line up commercial interests into banks while banks are allowed to operate their own insurance units. On the positive aspect, this will motivate banks to seek insurance risk expertise for their potential acquisition.43
Finally, although China weathered the financial crisis without major insurance insolvencies, the CIRC is aware of the need to shore up prudential supervision of insurance companies, especially in regard to solvency standards. The CIRC has issued a draft regulation requiring property insurance conduct “dynamic solvency tests”.44 Property insurers have been required by the CIRC to report the result of dynamic solvency tests in their solvency report from 2010, and should over both in-force business and new business. Companies are needed to make dynamic solvency tests on a yearly basis and should cover both normal scenarios and adverse scenarios. Normal scenarios are expected by the insurer, in line with the company’s business plan, while adverse scenarios are unexpected scenarios that may produce extraordinary impacts on the company’s solvency capability
5.3 Summary
All in all, the growth of China’s insurance has been impressive but its insurers face regulatory and capital market obstacles when trying to invest. A paucity of long-term bonds confines the supply of some insurance products. The government is liberalizing limitations on insurance investment.
Besides, the revision of Insurance Law results in a RBC regime and tighter capital requirements. And the new accounting standards may lead to adjustments in insurers’ product portfolios. Also, allowing cross-ownership between banks and insurers has caused the increased importance of bancassurance.
43 Swiss Re, Regulatory Issues in Insurance, Sigma No 2/2010, http://www.swissre.com/sigma/
44 Dynamic solvency testing examines the effect of various plausible adverse scenarios on the insurer’s forecasted capital adequacy. It is the actuary’s primary tool for investigation of an insurer’s financial condition. Dynamic solvency testing is defensive: it addresses threats to financial condition rather than the exploitation of opportunity.
‧ 國
立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Chapter 6 ConclusionsOver the past ten years, the development of world insurance industry has showed the constantly strengthened situation of internationalization trend. As a great potential and opening up market, China attracts international insurance capital extremely, and numerous famous international insurance companies have arranged the businesses developed in China as an essential strategy. For China property insurance enterprises, it indicates that if they long to survive and expand in the competition, they have to adjust to the international development trend and execute the international operation.
This chapter will summarize the results from the research and then according to these findings some suggestions will be offered to China property insurers, foreign investors and Chinese government.
6.1 Research Conclusions
Chinese property insurance companies have made steps in the direction of comprehensive and diversified international insurance and the developments prove that Chinese property insurance companies are trying to join the world market system.
After doing this research, we can summarize the findings as follows:
1. The Entry of WTO Promote the Development 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.
2. The Property Insurance Market Scale Is under the Global Average
China’s economy is going up at the fastest speed in the world, but it has troubles in comparison to the growth of its property insurance industry. The development of property insurance products is not as good as the predicted volume. With the low insurance penetration and density, China stands far behind than the global average of insurance industry scale.
3. The Property Insurance Market Develops with Disparity
Most of the insurance market is still controlled by the Chinese government, 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