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Changes in the Chinese insurance industry.

While most Americans remember the political upheaval of Tiananmen Square, the economy in mainland China today is booming, according to John Williams, chief executive, Sedgwick Group in Beijing. "There are currently huge increases m international investment in China; the whole Chinese economy is in a boom stage now," he said, predicting that "the open door policy of reform will continue."

While risk management is a wholly new concept in China, now is an opportune time to introduce the discipline to Chinese insurance practitioners. "The Chinese insurance market is undergoing tremendous growth. Companies that have long-term involvement are beginning to see benefits and can participate more actively in the industry," he said.

The recent history of the Chinese insurance market begins and ends with the government's People's Insurance Company of China (PICC). With premium income of US$4 billion and claims of US$2.1 billion in 1991, the PICC has a presence in every town and also has strong agencies throughout China and in London, Tokyo, Singapore and Hong Kong. In 1978, the PICC was underwriting all risks in the country; today the PICC has grown tremendously with more than 110,000 employees. In 1988, two more companies were approved by the Communist party: the Shanghai-based China Pacific Insurance Co., with a staff of 1,000; and in Southern China, with a staff of 350, the Ping An Insurance Co. Most recently, the American International Group Inc., that began in Shanghai in 19 19, was granted a license to operate an insurance company not as a partner in a joint venture but wholly on its own accord. The establishment of new companies is a test bed in the Chinese market, which, Mr. Williams believes, may take up to three years.

Nevertheless, as a whole, Mr. Williams noted, the Chinese insurance industry is underdeveloped by international standards in terms of training and computer systems support. Strict regulations on the use of wordings 'are thoroughly analyzed before being used in China. The broker has been an illegal entity - no brokers are allowed to do business in China. Chinese companies, however, use brokers for their reinsurance agreements in the international market. In terms of domestic reinsurance, the new companies must cede 30 percent to PICC. If the business is not accepted, then the new companies cannot underwrite the business at all.

Mr. Williams said that the People's Bank of China (PBC) is charged with the regulation of insurance and is currently looking at a new insurance law that has the potential to change the way the industry is structured. The PBC would bring the Chinese more in line with the international markets.

How to Achieve Success: 10 Rules for Risk Management in China

1 Need for a long-term commitment.

2 Weigh the pros and cons of locating in the coastal cities vs. the interior. Coastal cities generally have better infrastructure, transportation, communication services and availability of skilled labor. Inland areas have cheaper labor and production costs, as well as proximity to raw materials.

3 Know the local government's position and policies on reform.

4 Choose the right partner for a joint venture.

5 Managerial Risk -- Ownership Control.

6 Managerial Risk -- to ensure a competent local staff, retain the ability to select and train supervisory personnel.

7 Operating risk. Whether the goods meet market standards and expenses can be controlled so that goods are sold at a profit. Can the company take steps to reduce delays, minimize faulty goods and avoid cost overruns?

8 Financial risk. The chance that the business will not earn the hard currency needed to pay debts and provide a profit for the foreign partner. Limit financial risk and hard currency investments by not rushing in with dollars, yen or deutsche marks.

9 Legal risk includes contract disputes and contract enforcement.

10 Insurable risk involves losses arising from a source outside the venture's business operations or financial position, including a fire that destroys a factory or a vessel that sinks in a storm. Problem: business interruption, physical losses of equipment made outside of China. Since equipment may not be easy to replace, there may be long periods of business interruption. To reduce the adverse impact of insurable risks, the joint venture should obtain some of its insurance outside China.

Source: Professor Kailin Tuan, professor of risk management, School of Business and Management,

Temple University, Philadelphia.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
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Title Annotation:Third Asia-Pacific Risk Management Conference
Author:Oshins, Alice H.
Publication:Risk Management
Date:Dec 1, 1992
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