The Transition of China’s Insurance System

China’s economic open policy started in 1978, and began to undergo great changes in 1992 after President Deng Shao-ping delivered a speech to confirm and encourage economic development. The Chinese insurance market has been developing rapidly since 1993, and has continued this trend to present day (Neftci, and Yuan, 2007). China’s insurance market was under a long-term oligopoly; price, products, business scope, and entry restrictions were under strict supervision.

Following the reforms footsteps, China entered the WTO in 2001. More and more Sino-foreign joint ventures and foreign insurance companies entered the market. As of April 30^th, 2009, there are 29 Chinese insurance companies and 27 foreign insurance companies in the market;¹ this is a reduction of 27 companies since 2005’s year end (47 Chinese insurance companies and 46 fo eign insurance companies).

The Chinese government restricted foreign insurance companies and began to merge Chinese private insurance companies from 1949 to 1970; therefore, the insurance market was forced to stop its business development. Furthermore, there was only one national insurance company in the market, the People’s Insurance Company of China (PICC). Starting in 1978, the Chinese government began its reform and began to carry out an open policy. This was the beginning for the insurance industries recovery. Following the enactment and issue of the Insurance Law in 1995,² the Chinese government issued step by step structured related regulations (Qiou, 2005) such as 2005 Regulations on Administration of Foreign-founded Insurance Companies of the People’s Republic of China

, Regulations on Administration of Foreign-founded Insurance Representative

1 See China Insurance Regulatory Commission ( ), http://www.circ.gov.cn/web/site0/tab61/i101803.htm.

2 See China Insurance Regulatory Commission ( ),

http://www.circ.gov.cn/web/site0/tab68/i94860.htm. China’s Insurance Law was enacted on 30 June 1995, and the latest revise was on 28 February 2009.

Organizations , Regulations on Administration of Insurance Companies , Provisional Management Measures for Information Disclosure of the New-Type Products

, Regulations on Administration of Insurance Companies’ Solvency Margin and Supervision Index

.

The prospe ous business activity, property insurance and later life insurance has been developing at high speed. The four developing periods will be described below.

2.2 Pre-1949

Similar to world insurance development, marine insurance appeared earlier than other types of insurance because of prosperous shipping businesses. The first two companies to introduce insurance concepts to Chinese people were British companies.

Canton Insurance Society, which was the first meaningful insurance company, was founded by British businessmen at Guangzhou port in 1805. By the end of 1838, there were 15 foreign companies operating in Guangzhou, the original insurance hub because it was the only port for trading before the Opium War (Liou, 2008).

After the Opium War (1840-1842), the foreign merchandisers swarmed China to set up insurance companies; nevertheless, life insurance still did not appear until 30 to 40 years later than marine insurance.³ Yong Fu ( ) and Da Dong Fang (

) assurance companies were set up in Shanghai in 1846 to offer life insurance business in Southern cities. Following the demand for shipping and marine insurance, a domestic insurance company named Ren Ji He was formed in 1887. In 1991 a second domestic insurance company named Hua An He Quan began operations, which was the irst domestic Chinese life insurance company. All the

3 See Insurance Institute of China (2005), 200 Years of China’s Insurance Industry.

pioneer nsurance companies choose Shanghai as a base of operation because of economic, historic, and geographic reasons. Shanghai was the insurance center at that time. The first insurance association called Shanghai Insurance Association, and the first academic organization, China Insurance Society, were founded in Shanghai in 1928 and in 1935.

From 1846 to 1949, domestic insurance companies did not play an important role because the market had been divvied around by 60 foreign insurance companies 75% market share (Neftci and Yuan, 2007). The first Chinese insurer under Sino-capital ownership was a property insurer, founded in Shanghai, named De-Sheng Co. ( ). Before the middle period of the 20^th century, foreign insurers monopolized China’s insurance market. From 1865 to 1911 before the forming of Republic of China, the number of insurance companies increased to 45 in China, 37 in Shanghai, 8 in Guangzhou and Tianjin. According to the statistics of China Insurance Yearbook 1937, there were 40 insurance companies in China, in which 37 were private and 3 were national. During the War of Resistance against Japan (1937-1945), China’s insurance market swelled in Shanghai and Chongqing. At the end of 1945, there were 59 insurance companies.

Some important accomplishments in this period were: the first China Insurance Yearbook was issued, the first insurance research institute -China’s Insurance Association- was established, moreover, the government enacted Postal Life Insurance Law , Postal Life Insurance

Articles , and Insurance Industry Law .

2.3 The Insurance Market of Socialist Period –––– 1949 1978

The People’s Republic of China was founded in 1949, in the meanwhile on October 20^th, the State Council approved a suggestion from People’s Bank of China to

set up a national insurance company named People’s Insurance Company of China ( , PICC), the first state-owned insurance company (Xu, 2005).

Because of the exceptional historic atmosphere, the principle market was narrow and depressed. The People’s Insurance Company of China, that is to say, monopolized the insurance market and there was only one sales mode, direct marketing by staff. In this period, due to restricted market development, there were less product types and simple policy designs. Initially, there was travel accident and injury compulsory insurance, group insurance, life insurance, occupational group life insurance ( ), and accident insurance in the market. These were later followed by comprehensive welfare insurance ( ) and the development of health insurance (Wu, 1997).

The Chinese government started to trim and organize the insurance market after the foundation of the People’s Republic of China. Three years later (1952) all the foreign insurance companies gave up on the Chinese insurance market and left China.

Even the domestic private insurance companies were forced to close their doors. This left PICC, as a monopoly, to run all kinds of insurance business including property insurance and life insurance. With local insurance business wiped out in 1959, PICC’s accumulated reserve was RMB 0.4 billion, but only left RMB 50 million for dealing with foreign insurance businesses, and the remaining 350 million was handed over to the Treasury. The PICC maintained its title for overseas, nevertheless, it had become an insurance division under the foreign business administration bureau of the People’s Bank of China (Zhu, 2005). The Chinese government dominated all the business activities, local insurance companies were completely nationalized.

In this period of time, some important events happened:

1. The first insurance institute named Xin-Hua Insurance Company conducted by the Communist Party and the government was founded in Harbin in 1949.

2. In Shanghai, 15 private insurance companies merged and the national insurance company participated in setting up a joint venture named Tai Ping Insurance

Company ( ) in 1951.

3. Agricultural insurance was halted in 1953.

4. Local insurance business ceased in 1958 but resumed in Guangzhou ( ), Tianjin ( ) in 1963.

2.4 The Insurance Market after Reform –––– 1979 1991

The economic reform started late 1970, so did the relevant business activities.

In April 1979, The State Council made a significant decision, which was to approve to re-establish insurance institutions and meanwhile generally resume local insurance business (He, 2008). At the beginning of this revival, enterprises’ property insurance, cargo insurance, and family property insurance were first to reappear in the market, but until 1982 did life insurance resume.⁴

In this revival period, People’s Insurance Company of China (PICC) was still the giant insurance company taking almost all the insurance business including agricultural insurance, marine insurance, export credit insurance, and reinsurance.

PICC also re-established itself in the life insurance field in 1982.

In addition to the PICC resuming its life insurance business; the Chinese government permitted new players to enter the insurance market but the places they chose were not only Shanghai. She Kou Industrial Zone of the Shenzhen Special Economic Zone ( ) was also included. In 1987, the People’s Bank of China approved that the Bank of Communications and its branches would set up an Insurance Department, furthermore, agreeing to form China Pacific

4 Life insurance resumed in 1982 includes simple life insurance, group accident insurance, and annuity.

Insurance Company. Ping An Insurance Company was approved in May 1988, and later renamed as China Ping An Insurance Company in 1992 (Neftci and Yuan, 2007).

In 1991, People’s Bank of China set up many local insurance companies in Guangzhou ( ), Taiyuan ( ), Tianjing ( ), Fuzhou ( ), Harbin ( ), Nanjing ( ), and Kunming ( ). But until 1982, only one insurance company set up in Xingjian, the monopolistic position of PICC had been smashed. There was a breakthrough in March 1988, Ping-An insurance company set up in Shenzhen Special Economic Zone ( ), which was the first stocked-limited ( ) insurance company in Chinese history (He, 2008).

Along with the step of open policy, foreign insurance companies returned to the market,⁵ but the three pillars in the insurance market were still domestic insurance companies: PICC, China Pacific, and China Ping An. During this period, the Chinese government completed and enacted “The Insurance Law of the People’s Republic of China” in 1995, and the content included basic requirements to the insurance industry;

insurance regulation, and government policies were also elaborated in this basic law.

China Insurance Regulatory Commission (CIRC) was set up in 1998 to supervise the insurance industry, which was an announcement that the insurance industry would be an independent sector and would play a more and more important role in the financial system.

Some other significant events occurred during this period. In 1979, the State Council decided and approved the recovery of domestic insurance business. The People’s Insurance Company of China ( ) began to run local insurance businesses. In 1985, Nankai University ( ), Wuhan University (

), Liaoning University ( ), Southwestern University of Finance and

5 The Chinese government issued the first life insurance license to AIA, one life insurance company of AIG.

Economics ( ) were approved by Ministry of Education of PRC to set up insurance courses.⁶

2.5 All-Round Development of China’s Life Insurance –––– 1992 2008

During this period, life insurance experienced a great leap regardless of premium increase, products multiplicity, business operation, investment strategies, and numbers of insurance companies. Many important achievements happened during this period such as the development of diversified products and distribution channels, implementation of insurance law, a worked out Chinese first experience life table, the set up of China Insurance Regulatory Commission (CIRC), and the WTO acceptance.

China’s successful accession to the WTO paved the way for further connections to the world operating system.

According to Fugure 2-1, the opening of China’s insurance market can be traced back to 1992. Starting in 1992, agency channels appeared, in 1999 new product types were introduced, and in 2001 Bancassurance developed. Before 1992 property insurance was the main business in China’s insurance market. Group direct sales and part-time agents were the only two sales channels. Agency channel became the main sales channel for the development of life insurance market after 1996, and the total premium of life insurance exceeded property insurance in 1997 (Wu, 1997). In 2008 the total premium of life insurance came to RMB 744.74 billion, which accounted for 76.12% of the insurance market. The total premium came to RMB 978.41 billion in 2008, a year-by-year increase of 39.06%, of which, RMB 744.74 billion from life insurance, a growth of 47.82%, RMB 233.67 billion from property insurance, an increase of 16.97%. As of late 2008, the total assets of insurance companies were RMB 33418.44 billion, an increase of RMB 29,003.92 billion from 2007.

6 See The Insurance Institute of China (2005), 200 Years of China’s Insurance Industry.

49.96 60 68.3 80.07

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Year

Figure 2-1: Premium Histogram of China’ Insurance Market –––– 1992 2008

Through agent’s introduction and promotion of insurance concepts to people of cities and villages, the whole society’s insurance-awareness was rapidly enhanced.

1. Products in the market

Before 1999, insurance companies’ main products were traditional-style products, so the mortality, expense rate, and interest risk were undertaken by insurance companies, meanwhile the value of the insurance policy was guaranteed by insurers. 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% (Neftci,

and Yuan, 2007). 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. Secondly, it is hard to develop business once the assumed interest rate decreased because premiums will be increasing. High lapse rate is another issue for the traditional policies with low assumed interest rates. Thus, traditional products did not easily survive in the market and risk management became quite an urgent and significant issue for insurers.

Under the market pressure, insurance companies developed a series of new-type insurance policies which are participating policy ( ),⁷ investment-linked policy ( ),⁸ and universal life insurance ( ).⁹ A lot of new policies showed up in the market during this period as a result of the Chinese government’s positive support. China Ping An Insurance Company launched an investment-linked product on 25 October 1999 in Shanghai which marked the beginning of these new-type products. Thus other insurance companies enhanced their research for new products and launched them to match market need and competition.

7 Participating policy was launched by AIA Shanghai, China Life Insurance, and Zhong Hong Life Insurance companies in March 2000. Policy value will be including non-guaranteed dividend from insurers’ investment performance, which was the feature of this product.

8 Investment-linked product was launched by Ping An Insurance Company in October 1999.

Policyholder’s premium will be saved in separate account after deducting required fee. All the investment profits the assets of separate account belong to policyholders but meanwhile investment risks were also taken by policyholders.

9 Universal life insurance policy, also called unbundled life insurance policy, was launched by Pacific Insurance Company in August 2000. The features of this kind of product are: (1) premium is flexible;

(2) amount of insurance can be changed; and (3) insurer discloses cost and fee to policyholders.

Until 2004, almost all types of insurance products existed in the market because of two main factors. The economy developed rapidly which increased people’s demand for different types of insurance products and product innovation was stimulated due to open policy and day by day competitions.

2. Distribution channels

Not only products developed, but sales channels diversified. Before 1999, the scale of Bancassurance was very small and the insurance companies did not develop specific products for banks either. Not until China Ping An launched a product named Qian Xi Hong ( ) in 2000 (Chen et al., 2007), did Bancassurance begin to develop, and subsequently expand in 2001. The premium of Bancassurance exceeded group insurance in the third quarter of 2002, and the proportion of revenue from Bancassurance increased yearly.

After 10-years of being open, starting from 1992, there were 29 foreign insurance companies, including 16 Sino-foreign joint venture and 13 foreign insurance companies from 12 countries and areas in China as of the end of 2001. The speed of premium increase was amazing. RMB 295K in 1992 skyrocketed to RMB 3.28 billion in 2001. A stable global economic environment in 2001 provided an open atmosphere to the development of the insurance market. China’s GDP increase also speed up its domestic insurance market.

3. Insurance Law of PRC

On 19 October 1991, the People’s Bank of China founded a group that was responsible for drafting law insurance. This new group included 10 members (the members for drafting the Insurance Law of PRC are Qin, Dao-Fu ( ), Xia, Li-Ping ( ), Wang, En-Shao ( ), Li, Jia-Hua ( ), Liou, Fu-Shou (

), Fu, An-Ping ( ), Xing Wei ( ), Wang Jian ( ), Feng Zhi-Jun ( ), and Luo Peng ( )). On 30 June 1995, Insurance Law of PRC was approved

in the 14^th Session of the Standing Committee of the 8^th National People’s Congress of China ( ) and was promulgated on 1 October 1995. Because of the implementation of the Insurance Law of PRC, People’s Bank of China enacted a series of regulations, especially after the China Insurance Regulatory Commission (CIRC) was founded in November 1998.

4. Chinese First Experience Life Table

In 1992, People’s Insurance Company of China (PICC) was entrusted by the Insurance Division of the People’s Bank of China to work out Chinese first experience life table. The Actuarial Division of PICC took the responsibility and set up a specialized group. In July 1995, Chinese first experience life table was presented to the public and then all the calculations of premiums and reserves would follow the table from 1 April 1997. Henceforth it became the basis of actuarial development.

Further, there was a scientific basis for rate-making and reserve estimation.

5. China Insurance Regulatory Commission

The China Insurance Regulatory Commission was established in 1998, a proclamation that insurance would not be a tiny part of China’s financial system but a significant role and stable power for the market. There are 15 departments of the CIRC which are Administrative Office ( ), Accounting Department (

), Life Insurance Supervisory Department ( ), Broker Supervisory Department ( ), Property Insurance Supervisory Department (

), International Department ( ), Education Department ( ), Supervisory Bureau ( ), Development Reform Department ( ), Statistics Department ( ), Regulation Department ( ), Insurance Capital Management Department ( , Policy Research Office (

), Audit Bureau ( ), and Party Committee Propaganda Department (

).¹⁰

The progress of insurance supervision can be divided into four phases as follows. The first phase was from 1979 to 1985, the recovery, insurance supervision and insurance operation had no clarified separation. Phase II, the implementation of Provisional Management Acts of the Insurance Industry

was started in March 1985. This clarified the responsibility of People’s Bank of PRC and meanwhile separated insurance supervision and insurance operation. June 1995, the beginning of phase III, was an important breakthrough inasmuch as Insurance Law of PRC was enacted, insurance enterprises were now supervised in accordance with law. November 1999 China Insurance Regulatory Commission was founded, which inaugurated a new phase for insurance supervision. Nowadays supervision of solvency became the core issue for insurance supervision.

6. Domestic and foreign insurers

From 1980 to 1992 was the preparatory time frame for opening the insurance market. Some foreign insurers set up representative offices in advance expecting the market to open. AIA was the first foreign insurer established in October 1992 in Shanghai after the opening. 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. Manulife-Sinoche Insurance Company was the first Sino-Foreign life insurer founded on 26 November 1996 in Shanghai. Many foreign insurers use different strategies to enter the market.

One such strategy is cooperating with non-insurance enterprises to set up an insurance company with access to the Chinese insurance market.¹¹ In 2005, foreign insurance

10 See China Insurance Regulatory Commission ( ), http://www.circ.gov.cn/web/site0/tab59/.

11 See CNA, “Taiwan Insurers Want In On China Market,” China Post, 18 February 2008, http://www.chinapost.com.tw/print/143345.htm. Cathay Life partnered with China Eastern Airlines to establish a life insurance company in Shanghai. Shin Kong Life Insurance joined with Hainan

enterprises generally expanded their businesses to interior China. 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 2009.¹²

enterprises generally expanded their businesses to interior China. 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 2009.¹²