Services in China

China Insurance Industry

Insurance

Evolution	Growth of Premiums
Major Markets and Major Players	Foreign Insurers in China

Evolution

Since its reform, China has begun to gradually decrease direct social security protection and insurance has become necessary to many citizens who find themselves without the government’s social security coverage. On January 1, 1984, People’s Insurance Company of China (PICC) was re-established and supervised by the People’s Bank of China as an independent insurance company.

The establishment of Shenzhen Ping, an insurance company in Shenzhen, ended the PICC’s monopoly in 1988. With the establishment of China Pacific Insurance Co. Ltd. in Shanghai in 1991, a competitive insurance market began to take form. In 1992, AIA became the first foreign insurer to conduct insurance business in China . Following the establishment of AIA’s Shanghai branch in 1992, distribution through individual agents emerged for the first time in the China’s life insurance market, and shortly after, in the property and casualty insurance market. Since then, the number of individual agents has grown rapidly.

In response to rapid developments in the insurance market, the National People’s Congress (NPC) promulgated the PRC Insurance Law in 1995, which set forth the framework for restructuring and rationalizing the PRC insurance industry. One of the most important clauses of the 1995 PRC Insurance Law was to classify insurance into property and casualty insurance (including property, casualty, liability and credit insurance) and life insurance (including life, accident and health insurance). A single entity was only allowed to provide one of the two services but the 2002 amendment of Insurance Law allowed one group to have both life insurance and property and casualty insurance subsidiaries.

Following the enactment of the PRC Insurance Law, PICC was restructured into the PICC

(Group) Company, with its businesses being transferred to three subsidiaries: PICC Life Insurance Company with a focus on life insurance, PICC Property Insurance Company with focus on property and casualty insurance, and PICC Reinsurance Company with a focus on reinsurance.

PICC was once again restructured in October 1999 when the PICC Group was split up. The three subsidiaries were re-organized into three independent companies: PICC Property Insurance Company became known as PICC; PICC Life Insurance Company became China Life Insurance Company; and PICC Reinsurance Company was changed into China Reinsurance Company.

Besides the structural changes occurring in the insurance industry, the regulatory system has also been strengthened. In 1998, China Insurance Regulatory Commission was established and assumed the power and responsibility of supervising the insurance industry previously under the control of the PBOC. The formation of the CIRC underscored a policy objective of fostering the orderly development of the Chinese insurance market.

Currently, the only major restriction is on life insurance company ownership as foreign insurers are required to set up a JV with a local partner, and may only hold up to 50% equity interest in the JV.

Following China’s entry into the WTO in late 2001, China’s insurance industry has become the industry that opened up the most in the financial sector. According to the WTO timetable, most restrictions on ownership, business scope and geography were abolished by the end of 2004. Currently, the only major restriction is on life insurance company ownership as foreign insurers are required to set up a JV with a local partner, and may only hold up to 50% equity interest in the JV. While it provides a great opportunity for foreign insurers, it poses a big challenge to China’s domestic insurers. To cope with the threat of foreign counterparts, China’s domestic insurers have accelerated their pace of restructuring. In July 2003, PICC was restructured into three companies: PICC Holding Company, PICC Property & Casualty Insurance Company, and PICC Asset Management Company Limited, and in August 2003, China Life Insurance Company was restructured into China Life Insurance (Group) Company and China Life Co., Ltd.

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Growth of Premiums

Although China’s economy is expanding at one of the fastest rates in the world, it pales in comparison to the growth of its insurance industry. With the continuing implementation of economic reforms that started in the late 1970s, there has been a surging demand for insurance policies. This is partly due to the rising income and higher quality of life demands, and partly due to the implementation of a more market-oriented social security system.

In 2007, the gross premiums written in China reached RMB 703.6 billion, 24.7% higher than in 2006. The average annual growth from 2000 to 2007 of gross premiums was 23.5%. In the same year, insurance depth and insurance density amounted to 2.9% and RMB 535 respectively.

Insurance depth and insurance density

These are two parameters used to measure expenses on insurance and are employed as an indicator to estimate the market potential.

Insurance depth is measured by total gross premiums written as a percentage of GDP.

Insurance density is measured by total gross premiums written per capita.

Out of the RMB 703.6 billion worth of gross premiums in 2007, RMB 199.8 billion, or 28.4% total came from non-life insurance business. Simultaneously, life insurance premiums reached RMB 503.8 billion, accounting for 71.6% of the total. From 2000 to 2007, the average growth of non-life insurance premiums was 20.0% and the life insurance premiums growth rate reached 30.9%.

For non-life insurance businesses, auto insurance constituted the biggest segment, which accounted for about 70% of total non-life premiums. For life insurance businesses, life, heath and accident insurance accounted for 88.6%, 7.6% and 3.8% respectively.

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Major Markets and Major Players

At a provincial level, Guangdong, Jiangsu, Shandong, Beijing and Shanghai are the five biggest insurance markets. In 2007, Guangdong ranked first with RMB 80.9 billion worth of premiums, accounting for 11.5% of China’s total.

At a company level, China Life Insurance Co., Ltd. is the biggest life insurer. In 2007, it accounted for 39.7% of the life insurance market. Together with life insurance retained by China Life Insurance Group, China Life Insurance accounted for a 43.9% market share in China’s life insurance businesses. Ping An Life Insurance is the second largest life insurer in China. In 2007, it accounted for 16.0% of total gross premiums written, while China Pacific Life Insurance ranked third with a market share of 10.2%.

At a company level, China Life Insurance Co., Ltd. is the biggest life insurer.

Where non-life insurance businesses are concerned, PICC Property & Casualty Insurance is the biggest player, which accounted for 42.5% of market share in 2007. China Pacific Property Insurance and Ping An Property & Casualty Insurance ranked second and third with a market share of 11.2% and 10.3% in 2007 respectively.

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Foreign Insurers in China

As one of the most liberated industries in the service sector, foreign insurers have been playing an increasingly important role in China’s insurance market but there is still a long way to go for them.

Currently, foreign life insurers score better than their non-life counterparts. In March 2005, Generali China Life, the first Sino-foreign joint venture insurance company established after China’s entry to WTO, caught the world’s attention by securing a RMB 20 billion deal with China National Petroleum Corporation (CNPC) to provide group life insurance to CNPC’s 390,000 retirees. This single deal increased the market share of foreign life insurers from 2.7% at the end of February 2005 to 20% by the end of March 2005.

Currently, foreign life insurers score better than their non-life counterparts.

However, the RMB 20 billion deal was just a one-off event and CNPC, being its Chinese partner in a joint venture life insurance company, could be a possible reason why Generali China Life Insurance was able to secure the deal.

In contrast, AIA, the life insurance arm of AIG in China, is a better benchmark of foreign life insurers’ influence in the industry. In 2007, it raked in RMB 8.9 billion worth of premiums, ranking eighth among all life insurers and first among foreign life insurers. AIA was the only foreign life insurer among the top 10 life insurers. See Table 3.4.2.

AIA’s relative success in China is due to its long presence in the country. It started life insurance operations in Shanghai in 1992 and had entered other cities prior to that. As such, the pace of AIA’s expansion in China is a much more valid benchmark to gauge the growth of foreign insurers.

The performance of foreign non-life insurance businesses on the other hand, was rather disappointing. In 2007, AIU, the non-life insurance arm of AIG, ranked first among all foreign non-life insurers with a premium of RMB 0.83 billion. However, it only ranked 19th among all non-life insurers in China with a market share of 0.4%.

Foreign life insurers accounted for 8.0% of China’s life insurance market in 2007 as compared to only 2.6% in 2004, while foreign non-life insurers only accounted for 1.2% of China’s non-life market share in 2007 - a figure that remains unchanged when compared to 2004.

With a lower possibility of competing with Chinese companies in terms of networks, many foreign life insurance companies are adopting a geography-focused strategy.

With a lower possibility of competing with Chinese companies in terms of networks, many foreign life insurance companies are adopting a geography-focused strategy. Currently, Shanghai, Guangdong and Beijing are the three most important markets for foreign insurance companies. In 2007, the three markets accounted for 78.7% of total foreign life insurance premiums written and 93.4% of total foreign non-life insurance businesses. Their strategy has provided them with a much stronger presence in these key markets. For example, in 2007, the market shares of foreign life insurers and foreign non-life insurers were 29.8% and 12.0% respectively in Shanghai - 3.7 times and 10 times that of the national average respectively.

As the three regional markets are seen to be saturated, some newcomers have begun to venture into China’s vast hinterland. Groupama, the second largest insurance company in France, has chosen Chengdu, the capital city of Sichuan, as its headquarters in China. Chengdu is the largest insurance market in Central and Western China as measured by its 2006 gross premiums.

Chengdu has also been chosen as the first expansion site of Haier New York Life, a joint venture between New York Life Insurance Company, the largest mutual life insurance company in the United States, and China’s Haier Group. It launched operations in Shanghai in late 2002.

In June 2006, Great Eastern, a Singaporean life insurance company, set up a joint venture life insurance company in China with its headquarters in Chongqing, the second largest insurance market in Central and Western China.

China’s insurance sector is still in its development stage. In 2006, while China accounted for 20% of the world’s population and 5.4% of the world’s economy, it only accounted for 1.9% of the world’s insurance market. The future is certainly promising and the low market share of foreign players indicates room for late–comers to the industry. Of course, their success is very much dependent on whether they have done their homework.

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