Going for the gold: China appears poised to lead South and East Asia's push as the fastest-growing insurance market in the world. (Globalization: Cover Story).

Insurers are finding it tough to expand and turn a profit in most markets as 2003 gets under way. Investment losses from weak stock markets, regulatory uncertainty and prior-year losses such as asbestos continue to hamper growth in Europe, the United Kingdom and the United States. In Japan, a moribund economy with a sick banking sector at its core has created some uncertainty as to the health of some of the country's insurers.

Swiss Re Group, in its annual survey of the global insurance industry (Sigma No. 6, 2002), said a general downturn in the global economy has dampened demand for insurance products in many markets. "Adversely affected by developments in capital markets, results for both life and non-life insurance remain under pressure, and the available equity capital is shrinking," Swiss Re said.

There is one bright spot for the industry: China, which appears poised to lead South and East Asia's push as the fastest-growing insurance market in the world. Life insurance premiums in China grew by 47.4%, while nonlife premiums rose 8.7%, in 2001, according to Swiss Re. Worldwide, life premiums shrank by 1.8%, while nonlife premiums rose 5.4% in the same period. Insurance penetration is likely to continue at a rapid pace in China, as foreign insurers push for a chance to do business in the world's most populous market, Swiss Re said.

The only apparent obstacle to even more dramatic growth appears to be the slowness with which the regulatory regime has adjusted to market forces since China's accession to the World Trade Organization in December 2001. Daniel Riordan, executive vice president for emerging markets, Zurich North America, said foreign insurers see China as a challenging, but worthwhile environment. "There's been an opening up to foreign insurers that's been slow in coming. It has been one of the more closed markets for foreign companies, but there is the suspicion that it will expand, after China's entry into the WTO," he said.

China's much-heralded change in leadership at the top of the Communist Party, which took place in November, may have some impact on the country's tilt toward capitalism, but for many overseas insurers looking to do business there, the opportunities seem to be outrunning the government. In the overall economy," China is in some respects more capitalistic than the U.S.," said Riordan. "It's an amazing capitalist event to go into Beijing and see the development there--the construction and business being transacted."

Clarence Wong, Swiss Re Group's chief economist for the Asia-Pacific region, said the change in China's political leadership will not likely have an impact on the development of the insurance market. "We believe that these changes will not affect the course that China is already set upon, which is to undertake a progressive, step-by-step opening of the market, as per their WTO obligations and in line with China's own plans to build up its capital markets structure," he said.

But the government is still the most significant power, Riordan added. "And being so, if there's any change in the leadership, that is very significant. There is a lot of talk of the younger reformers coming to power, which I think will cause a further opening of government to business. In economics, they're jumping by leaps and bounds. Politically, there is not much progress."

All those changes--political and economic--are moving in a "healthy" direction toward market liberalization, which will result in greater market access for foreign insurers, said Marc Sterling, senior vice president of regional operations in Asia for Manulife Financial Corp. "Overall, this is very positive for the foreign insurance sector," he said.

Political and Investment Risk

Since the Chinese political system consists of a single-party system, there is some perceived market instability, said Riordan. "That's why many are seeking political risk insurance. They're concerned about the government changing, and about the potential of a new government seeking to expropriate or putting controls on the currency, making it nonviable for a company to pay debt or meet obligations."

China does not have a well-developed commercial code, which means there is not a lot of transparency for investors. Also, companies have a difficult time with changing rules and regulations, Riordan said. "It makes it tough to have a profitable business if you're a foreign enterprise," he said. "But China is so significant, with such a large population, and attracts so much foreign capital, it's a market you can't afford to exclude from your investment portfolio. It's the No. 1 attractor of foreign capital of any emerging market."

One interesting issue in China is the variations on legal and regulatory structures among the country's provinces, said Riordan. "There is a lot more attraction by the individual regions or provinces of foreign investment," he said. "Where that's a challenge, from our point of view as a political risk underwriter, is that without a guarantee of the national government or a center government, some of the sub-sovereign risks or local risks will be difficult to underwrite."

While the provinces are part of a centralized government, without an actual legal guarantee from the center, "there's not a lot of credence paid to the agreements that the regions have entered with private investors," Riordan said. "That has not been worked out yet. It's a problem for companies that get into disputes and have to go to arbitration. It's a problem for the regions when monitoring their guarantees, and for the national government in honoring the regions' guarantees."

Without a specific national guarantee of a regional operation, a company can have a difficult time if it runs into a dispute. "For us, it's important to have information from the local areas," said Riordan. "We have local resources and online services that provide us with real-time data from the local regions. We also have experienced underwriters who have been involved in financing and investment with companies operating in emerging markets.

"As underwriters, we talk to our customers quite a bit, and we partner with a lot of multilateral agencies and export credit agencies, and build on each others' experiences," Riordan said.

Low Penetration, Large Premium

With all its rapid growth as an insurance market, China is still a small market in terms of insurance penetration--premiums as a percentage of gross domestic product. In 2001, insurance penetration for China was 2.2%, ranking it 56th among the world's insurance markets, according to Swiss Re data.

But in terms of premium volume, China is already the third-largest property/casualty market in Asia--behind Japan and South Korea--and the fourth-largest life market--behind Japan, South Korea and Taiwan, said Swiss Re's Wong. "Insurance penetration and density still trail those of many emerging markets," said Wong. "There is enormous potential for companies that have the financial strength needed to invest in growing this market, and can commit to it over the long term."

The life insurance market has grown significantly, by 37% per year in real terms since 1995, and was valued in 2001 at about 142 billion Chinese yuan (about $17 billion). Life insurance penetration is at only about 1.5% and life insurance density is $13.50 per capita, said Wong. Health and pension products are already skyrocketing as the government implements new health-care and pension reforms. "These factors help drive the life insurance market in China, which is expected to grow at a real annual rate of around 20% between 2002 and 2010, to a total of $118 billion," Wong said.

The nonlife side has seen fierce rate competition, and has still experienced an average annual real growth rate of 10% over the past 10 years, reaching a market volume of 69 billion Chinese yuan (about $8 billion) in 2001, Wong said. Nonlife penetration was at about 0.7% in 2001, and insurance density was $6.50. Motor and fire businesses account for more than 80% of the market, while personal lines are still relatively underdeveloped, he said.

"Despite this, nonlife business is expected to grow at a real annual rate of 10.4% between 2002 and 2010 to a total of $23 billion," Wong said.

Virtually all lines of business are equally accessible to both foreign and domestic insurers, with one exception. "In the life insurance sector, foreign companies are permitted to conduct only individual, but not group business," said Wong. "This will be relaxed three years after China's WTO accession."

Life is the most attractive market in China for Manulife, said Sterling. "Currently, foreign-invested insurers cannot write employee benefits, but this area is supposed to open up in two years," he said. "Manulife plans to take full advantage of that opportunity."

Becoming a Winner

In Sterling's view, the domestic market is "very challenged for good resources," and too many domestic licenses have been given out. "In general, the optimism is over-enthusiastic," he said. "Most companies do not have the experience, market knowledge or the resources to be successful in China. There is no short-cut to building a successful operation in this country."

Future success will likely go to foreign companies with a significant presence in Asia, a strong management team in China and a solid commitment to growing their China business, added Sterling.

Swiss Re's Wong agreed that companies who are in it for the "long haul," and who possess significant financial strength and depth, will ultimately succeed in China. He also believes foreign insurers are justified in their optimism about China.

Total annual direct premiums (life and nonlife) in China already amounted to $25.5 billion (2001), and are expected to grow to more than $140 billion by 2010. "At the same time, most foreign insurers are looking at China as a long-term investment, and companies will need financial strength and depth to succeed," he said. "Challenges and opportunities include low individual risk awareness and understanding of insurance concepts, a corporate risk management culture still in its infancy, low personal disposable income and regional disparity."

The current market is dominated by indigenous players, added Wong. In property/casualty, the top three players--PICC, China Pacific and Ping An--accounted for 96.3% of premiums in 2001, while foreign companies collectively accounted for only 0.5%. "In particular, PICC is a heavyweight in the China market, itself claiming some 74% of total premiums," said Wong.

The life/health market is also dominated by domestic companies: foreign players had a market share of only 2% in 2001, said Wong. "The market is highly concentrated, with the top three companies accounting for 95% of business," he said. "The largest player is China Life, with a market share of 57% in 2001. However, it should be noted that foreign companies have been expanding rapidly in the past years and their shares in the coastal cities, which are highly urbanized, are significantly higher."

The larger domestic insurers have been preparing for market liberalization through knowledge transfer and cooperation with foreign reinsurers, Wong said. They still maintain a strong edge against new entrants since they can conduct business on a nationwide base, as against foreign companies whose operations are restricted to one city per branch license. They also own huge distribution networks that can reach even remote inland regions.

The regional limitations apply only to foreign direct insurers, added Wong. Licenses granted to foreign reinsurers are valid nationwide.

More Opportunities

China is also receptive to nonprimary insurance practices, such as reinsurance, alternative risk (captives) and securitization Wong said. "China has already opened its door to entry by foreign reinsurers, and is in the process of creating regulations specifically for the China operations of foreign, wholly-owned reinsurers," he said. "Currently, those regulations allow reinsurers to offer traditional life and nonlife reinsurance only.

"But China is extremely interested in other nonprimary practices such as alternative risk transfer and securitization. We believe this is not only because of the opening of its insurance markets but is also an important part of enhancing China's position in the global economy," Wong said. "Regulations are still being promulgated and capital markets are being further expanded. We believe China is not only receptive to these products, but also highly knowledgeable about them, and we have been actively studying them for application at the appropriate time."

As an example, Wong said the China National Offshore Oil Corp. has set up a captive insurer in Hong Kong.

Good News for Business

China is at a crossroads in its transition to a more developed market economy following its accession to the WTO in 2001, said Riordan. The overarching message from the recent 16th Party Congress was the announcement to quadruple gross domestic product by 2020 through an expansion of the middle class, lawful protection of private property, and the gradual sell-off of state assets, thereby reducing the party's influence over the economy. "For the first time, bosses of private enterprises were invited to the congress and one capitalist entrepreneur won a seat on the party's central committee," he said. "These are significant, positive developments that do not go unnoticed by foreign insurers and other investors.

"These recent events at the 16th Party Congress are especially important when you consider that China's economic expansion is fueled in large part by foreign investment, providing 20% of tax revenues, 50% of exports and the creation of 23 million jobs," Riordan added. "However, a long and challenging road lies ahead for private sector development and the nascent insurance industry."

"We believe most insurers are satisfied with the environment to date, and look forward to a broader opening of the market, such as the eventual availability of national licenses for direct insurers, thus removing the need to obtain individual local area licenses, and more flexibility from capital markets positions," said Wong. "In the life area, insurers should also look to examples from nearby markets, such as Thailand and Taiwan, where the healthy development of a life industry was negatively affected when too many new players crowded into the market in too short a period of time."

China's Expanding Insurance Industry

China's insurance market is steadily growing and with market penetration
at 0.7% for property/ casualty and 1.5% for life coverage, there is a
robust future for the industry.

Property/Casualty Market

                                       1997    1998     1999     2000

Premiums, $ Billions                 $5.872  $6.035   $6.295   $7.228
Real Premium Growth Rate               0.7%    3.4%     5.8%    14.4%
Insurance Penetration (premiums per    0.7%    0.6%     0.6%     0.7%
GDP)
Insurance Density (premiums per        $4.8    $4.9     $5.0     $5.7
capita US$)

                                        2001      2010

Premiums, $ Billions                  $8.315   $20.572
Real Premium Growth Rate               14.2%     10.5% *
Insurance Penetration (premiums per     0.7%      0.9%
GDP)
Insurance Density (premiums per         $6.5     $15.1
capita US$)

Life/Health Market

                                       1997    1998     1999     2000

Premiums, $ Billions                 $7.607  $9.031  $10.535  $12.049
Real Premium Growth Rate              85.9%   19.5%    18.3%    14.0%
Insurance Penetration (premiums        0.8%    1.0%     1.1%     1.1%
per GDP)
Insurance Density (premiums per        $6.2    $7.3     $8.4     $9.5
capita $)

                                        2001      2010

Premiums, $ Billions                 $17.205  $102.760
Real Premium Growth Rate               41.8%     21.9% *
Insurance Penetration (premiums         1.5%      4.5%
per GDP)
Insurance Density (premiums per        $13.5     $75.3
capita $)

* Average per annum growth rate between 2001 and 2010.

Source: Swiss Re. Figures for 2010 are forecasts by Swiss Re Economic
Research & Consulting (Asia).

China's Insurance Market

Auto and life insurance products dominate the Chinese insurance market.

China's P/C Insurance Premium by Product, 2001


Guarantee                        1%
Household Property               3%
Liability                        4%
Cargo                            6%
Enterprise Property             18%
Auto and third party liability  60%
Others                           8%

Note: Table made from pie chart

China's Life Insurance Premium by Product, 2001


Group Health          2%
Group Accident        5%
Group Life           12%
Individual Health     5%
Individual Accident   1%
Individual Life      75%

Note: Table made from pie chart

* President: Jiang Zemin

* Premier: Zhu Rongji

* Currency: Chinese yuan ($1 = 8.28 yuan)

* Gross Domestic Product: 8.9 billion Chinese yuan in 2000

* Population: About 1.3 billion in 2000

* Population Composition: 51.63% male; 48.37% female

* Urban Population: 36.09%

* Rural Population: 63.91%

* 2001 Property/Casualty Market: 96.3% written by domestic insurers; foreign companies wrote only 0.5%

* 2001 Life Insurance Market: 95% written by domestic insurers; foreign insurers wrote 2%

Sources: Swiss Re: China Internet Information Center

Plenty of Opportunities and Plenty of Risks

Underwriting foreign-investment business in China's 23 provinces can be difficult because of the variations in each area's regulatory and legal structures. Lack of specific national guarantees of a regional operations can leave a foreign company in legal and business limbo.

Map source: China National Tourism Administration

The Outsiders

The following are some of the foreign insurers that are applying, applied or received licenses to sell insurance in China and/or invested in or entered into joint ventures with domestic companies.

* Swiss Reinsurance Co.

* Employers Reinsurance Corp.

* Munich Reinsurance Co.

* Ace Ltd.

* American International Group

* Aegon L.V.

* ING Group

* Sun Life Financial Services of Canada Inc.

* MetLife Inc.

* New York Life Insurance Co.

* CNP Assurances

* HSBC Insurance Holdings Inc.

* Manulife Financial Corp.

* Liberty Mutual

* Cigna Corp.