| Random Character |
|---|
|
| Fighting for China's life (insurance) |
|
|
|
|
Competition is increasing in China's life insurance market. While the three dominant domestic insurers, led by China Life, still dominate the market, a host of foreign carriers and new firms are battling for market share. As a result, the competitive landscape is changing quickly. A wave of large IPOs (Initial Public Offerings) over the past year has injected billions of new capital into domestic insurance firms, WTO (World Trade Organization) requirements have recently opened all of China to foreign competitors, and several large carriers are seeking foreign partners. China's life insurance market is still relatively small but growing at phenomenal rates. With approximately $40 billion in annual life insurance premium in 2004, China ranked eighth in the world. Premium growth has averaged over 30% since 1996, although this growth slowed to 8% last year as insurers emphasized profitable growth. Among emerging markets, China has the second-largest life insurance industry, and the fastest growing. With 1.3 billion people and a strong economy, China's market for life insurance products could exceed $100 billion by 2008 and become one of the largest life insurance markets in the world by 2020. Chinese spend about $35 per capita on life insurance every year, and life insurance accounts for three quarters of all insurance sold in China. What's driving that rapid growth? China's vast domestic market, fledgling financial services industry, and the transition away from state-provided social security are the major drivers. More specifically, China's savings rates are approximately 40%, some of the highest in the world. Also, insurance penetration is low at about 2.3% premium to GDP. That ranks China eighth in Asia, with Japan spending nearly four times as much (8.6% of GDP) on insurance. More broadly, economic reforms are reducing the government's role in providing social safety nets and retirement benefits for its citizens. Many Chinese are turning to insurance to meet the risks of a market economy. Demographics are an additional factor. With the "one-child policy" enacted in the early 1980s, China's birth rate has slowed. Over the next ten years, the average age in China will rise from 29 to 39 years old. Finally, Chinese have limited choices for investing and saving money. The majority of savings are in low-interest bank deposits, and few Chinese invest in the highly volatile stock market. The recent increase in competition is part of a larger program by the Chinese government to transform the state-run insurance industry into a vibrant, competitive market that is capable of serving the needs of its citizens. The modern insurance industry in China is of quite recent origin: it was effectively reborn in 1984 after being dismantled by Chairman Mao in 1952. The government-owned China Life Insurance Company controlled all life insurance operations in the country for many years. Then, in the early 1990s, domestic competitors were founded and foreign insurers began opening representative offices. Foreign competition was tightly restricted until China signed its World Trade Organization agreements in 2001. The accession agreement required China to gradually open its financial services sector to foreign competition over a five year period. State-owned China Life launched a $3.5 billion overseas IPO in late 2003 to accelerate change. Despite increased competition, the government's recently-privatized China Life still controls approximately half of the life market. Led by China Life, domestic carriers dominate the market. The incumbent China Life holds 43% of the market, down slightly from last year. Ping An and Pacific Life are the next two largest firms with 17% and 11% of the market. Several startups have been successful. New China Life is making strides and Hezhong Life, launched one year ago, has seen sizzling growth. Several of these firms are considering overseas IPOs. Troubled by eroding capital reserves, Pacific Life is poised to sell nearly one quarter of its equity to the Carlyle Group, an international private equity firm. New China Life was planning for an overseas IPO, but may now be seeking a private placement. In January of 2005, foreign life insurers became free to do business anywhere in the country. Previously, foreign carriers were confined to a few urban markets like Beijing and Shanghai and to selling individual policies. 20 foreign life insurers (19 joint ventures and 1 wholly owned subsidiary - AIG's American International Assurance) operate in China, and more are on the way. Foreign carriers have vaulted from 2.6% market share to 12.7%, with Italy's Generali China Life landing a massive $2.4 billion pension plan contract. While this single deal may exaggerate the true national presence of foreign firms, international carriers have gained significant share in the cities in which they have been able to compete (Shanghai 14% and Guangzhou 16%). Free of government restrictions, foreign carriers are moving quickly to expand their distribution networks into key markets across the country by opening new branches and partnering with local companies. Most life insurance in China is sold through captive agent networks, with the top four carriers employing more than one million agents. In addition, bancassurance is a significant distribution channel with between one tenth and one quarter of all individual life premium income sold through low-cost bank channels. Independent brokers and direct distribution are small but growing channels. The life insurance sector's successful transition toward a competitive market faces a number of challenges. To start, many carriers such as Pacific Life are hobbled by negative interest spread policies. These policies, sold in the high-interest rate period of the mid-1990s, guarantee 10% returns to policy holders. Subsequent interest rate reductions have left carriers facing persistent and significant investment losses. Next, Chinese insurers are required to invest the majority of their assets in bank deposits. This keeps investment income at a minimal level. The government has recently loosened investment guidelines, and insurers can now invest a limited amount of their assets in domestic stock funds and corporate bonds. Third, mutual funds and other investment products are starting to vie for China's vast savings. In 2004, mutual fund investments grew dramatically while life insurance premiums slowed. The China Insurance Regulatory Commission (CIRC) has been cautious in increasing competition, and it could decide to slow growth in this sector and/or protect domestic carriers through policy actions. Finally, the prospects for China's life insurance industry remain intimately linked with China's economic development. Overall, with more foreign competitors and more market forces steering the domestic carriers, China's life insurance industry is entering a stage of unprecedented competition. That in turn could help China's life insurance market to grow at 15-20% annually until 2020. Under pressure from foreign competitors, China's domestic insurers should become increasingly professional and market oriented. In particular, risk management, product sophistication, and corporate governance structures are likely to improve. Foreign life insurers will almost certainly capture a significant portion of the market over the next several years. China's insurance regulator, the CIRC, has cautiously increased competition in the market but could be prepared to slow growth if the market becomes volatile or consumer interests are hurt. In addition, independent insurance brokers and direct channels should capture a significant portion of China's rapidly growing market. Direct marketing to consumers is expected to increase as competition rises nationwide. Source: www.atimes.com Oct 26, 05 |
| < Prev | Next > |
|---|