When China joined the World Trade Organization (WTO) a decade ago,
foreign insurance companies were full of hope. A liberalizing economy,
along with the country's large population and low level of insurance
coverage, offered hugely enticing growth potential. But despite their
early optimism, foreign life insurers have struggled in China. Their
combined market share peaked at 9% in 2005, and has been dropping
steadily since, to around what it was before China's WTO membership,
hitting 3.7% in the first nine months of last year.
Given their lackluster progress, these companies are now rethinking
their ambitious plans for China. “Everybody is evaluating what their
next move should be, whether it is just a question of being patient or
whether they should make a more radical change in direction,” says Chris
Kaye, a partner and insurance specialist at Boston Consulting Group
(BCG) in Hong Kong. For foreign companies, “the key question is whether
to go broader with a local distribution partner -- and sacrifice control
-- or create a more focused and differentiated strategy.”
With good reason, international insurers still find China worth the
challenge. Over the past decade, China has led the world in insurance
premium growth, with a compound annual growth rate of 26.5%. In 2010,
the value of total premiums increased 32% year on year, to RMB 1.45
trillion (US$214.6 billion), making it the sixth-largest insurance
market in the world. According to reinsurance company Swiss Re, China
will become the second-largest life and non-life insurance market by
2021, behind the U.S.
A Foot in the Door
Large life insurance firms have long known how difficult cracking China
would be. Just ask U.S. life insurer American International Assurance
(AIA), a subsidiary of AIG), which started using door-to-door agents to
sell policies to individuals in Shanghai in 1993. It was a novel sales
strategy at the time and helped AIA win a 20% market share in Shanghai
within a couple of years. But then the going got tougher as local insurance companies pushed back, copying the agent system and poaching AIA sales staff.
It wasn't an isolated case. Across the country, new local insurers
began to emerge in 2005, catching many foreign life insurance companies
by surprise. “Foreign players did not think the newcomers would become
their competitors,” recalls Shu-Yen Liu, partner and Asia insurance and
actuarial practice leader at PricewaterhouseCoopers (PwC) in Beijing.
In 2004, China had nine life insurance companies, compared with 19
foreign life insurance joint ventures. By 2007, there were 29 local life
insurers competing with 24 foreign ones. The market is even more
crowded now. China today has 36 home-grown and 26 foreign life insurance
firms. Critically, the top three domestic state-owned insurers China
Life Insurance, Ping An Life Insurance and China Pacific Life Insurance
-- command around 60% of the market.
For foreign non-life insurers, prospects aren't much rosier. As with
life insurance, three firms out of the 37 domestic non-life insurers --
PICC Property & Casualty, Ping An Property & Casualty and China
Pacific Property & Casualty -- have a hold on the industry, with 66%
of the market share. In contrast, the foreign non-life insurers
operating in China -- which total 20 today -- have been scratching away
since the 1990s with a market share of only around 1% to show for it.
One big reason why? They're not allowed to sell third-party auto
liability insurance, which accounts for 30% of the overall non-life
business in the country.
Life or non-life, what's arguably toughest for foreign insurers to come
to terms with in China isn't their low market share. Rather is their
struggle for profits. In a report published late November last year,
Sally Yim, senior credit officer at Moody’s Investors Service in Hong
Kong, wrote that only 11 of the 46foreign insurance companies in China
managed to eke out a profit in 2010, but hardly large enough to make
much of an impact on the bottom lines of their global parent companies.
Back to the Drawing Board
Where do they go from here? “Foreign insurance companies may exit or
reduce their shareholdings in China," observes Lillian Zhu, a senior
insurance and pension analyst at Z-Ben Advisors in Shanghai. "They will
find themselves in a dilemma because most of them are not making a
profit.”
A exodus, albeit a slow one, has indeed begun. In 2010, New York Life
left China, while AXA and Canadian Sun Life cut their stakes in local
joint ventures. Standard Life of the U.K. has tried to sell its 50%
stake to partner Bank of China, but announced in late 2010 that the two
sides failed to reach an agreement. “There will be more moves by foreign
life insurers in coming years to exit or reduce their stakes in their
China joint ventures,” predicts Nobuya Amabe, director of Japan’s
biggest life insurer, Nippon Life Insurance, and president of Nissay
Great Wall Life Insurance, a 50:50 joint venture with China’s Great Wall
Asset Management.
In the meantime, domestic competition is intensifying. According to Zhu
of Z-Ben Advisors, at least 10 new domestic life insurance companies
are getting ready to open for business, most of them funded by local
governments or government-related companies. “They will be very
competitive in their local regions,” she asserts. That's a big reason
why she expects the market share of foreign life insurers to fall to 2%
or 3% in the next five to 10 years just under 4% currently.
Foreign companies in other service sectors would do well to take note,
particularly if they're in businesses such as banking that are betting
on their global know-how to win customers in China. Unlike in
manufacturing and high-tech sectors, leveraging such expertise no longer
gives foreign firms in sectors like insurance much of a competitive
advantage over local rivals. “One of the biggest obstacles [for foreign
insurers] is the rapid development of the capabilities and
infrastructure for local players,” observes Kaye of BCG.
That's a big change from just 10 years ago when the gap in service
levels and product offerings between local and multinationals insurers
was significant. Since then, domestic companies like Ping An, China
Pacific and PICC have transformed themselves. “They have brought
international expertise into their management teams and invested heavily
in their operating infrastructures and national footprint,” Kaye says,
by increasing the number of branch offices, improving IT systems and
back-office processes and ramping up staff training.
Entangled in Red Tape
Meanwhile, foreign insurers often take aim at China's onerous
regulatory environment -- a perennial complaint in trade talks between
China and other countries. Up until 2005, foreign insurers had been
limited to operating in only two cities -- Shanghai and Guangzhou.
Although that restriction has been lifted, there's still plenty of red
tape to contend with, such as the time-consuming license-application
process, which foreign insurers must undergo for every branch they want
to open. “We applied for two branch licenses at the same time, but we
were told that the [regulators] would examine the second one only after
they had approved the first one. So there is no point of applying for
two at the same time,” says a senior executive of a major foreign life
insurance company, who asked not to be named.
Kaye says regulators allow one new branch per year for foreign life and
non-life companies, with a waiting period of up to two years for
processing. In contrast, local insurers can expand as rapidly as they
like. Citi-Prudential Life, a joint venture between the U.K.'s
Prudential and Chinese conglomerate CITIC Group has 12 branches, the
most among foreign-local life insurance joint ventures in the country.
Compare that with China Life, which has more than 5,000 branches and
50,000 sales outlets nationwide.
That has put the brakes on a number of growth strategies. As Yim of
Moody’s in her November report noted, “The pace of expansion [has been]
highly constrained by the speed at which regulators grant licenses for
opening branches.”
Another potential reason for a loss of momentum is the joint-venture
requirement for foreign life insurers to agree to with domestic firms,
for no more than a 50% stake in each. (Nonlife insurers can set up
wholly owned ventures.) Kaye says he often sees a "natural tension"
between partners not least because "a lot of local joint venture
partners are not even in financial services, let alone insurance. There
is a lack of understanding about the financial and economic profile of
what it takes to build up a life insurance business.”
As a case in point, Brian Metcalfe, a professor at Canada’s Brock
University, who conducts annual surveys of foreign insurance companies
in China for PwC, cites the joint venture set up in 2002 between
cautious NY Life and fast-growing appliance maker Haier. “You got a
mismatch in terms of what the thinking for either of the companies would
be," he said. "One is thinking that things just go upward and grow very
rapidly and] makes a lot of money. The other thinks, ‘We are an
insurance company and it is a long-term story.'” In 2011, New York Life
sold half of its 50% stake in the China venture to Haier and the other
half to Japanese insurer Meiji Yasuda Life.
Scaling Up
Given the bureaucratic realities, “foreign insurers do not have the
scale to compete with domestic insurers," maintained Yim. "Without
scale, you do not get brand recognition. It is more difficult for
[foreign firms] to make money and get higher market share.”
That's particularly worrisome for new life insurance ventures that take
off rapidly, says Kaye. “The more successful you are, the more capital
you need in the insurance business. This can be hard for non-insurance
partners to appreciate.” In the early days of high growth, the costs of
customer acquisition require large capital injections to support
negative cash flows. "As the business matures, older policies generate
enough cash to cover those expenses. The problem is especially acute in
China, where growth has been particularly rapid," he adds.
Distribution channels have also become an important consideration. In
late 2010, the China Banking Regulatory Commission (CBRC) put
restrictions on how and where insurers sell their products. First, it
capped the number of insurers that a bank can allow to sell from their
premises to three, a big blow consider that about half of all insurance
sales in the country take place at banks.
With numbers restricted, banks are unlikely to choose foreign insurers
to be among the three because they tend to have relatively weaker brand
recognition, wrote Yim. According to her, banks in China "prefer large
domestic players with a long history and strong brand recognition.”
While some foreign life insurers have joint venture with banks, they
generally have to pay high commissions and fees to banks to be chosen to
sell their products.
It's a vicious circle. “We will lose more money if we sell our products
at the banks. But we face a shortage of sales agents in China,” laments
the foreign life insurance executive. China has about 2.5 million sales
agents serving the current 200 million insured.
Indeed, just like other foreign companies, recruiting and retaining
sa
les agents is a chief complaint of foreign insurers. “Insurance is a
talent business, and the ability to attract and recruit and train and
retain the right talent is getting much harder for multinationals
because their attractiveness relative to local businesses is declining,”
says Kaye. The relatively low salaries sales agents earn at both
foreign and local insurance companies -- at around RMB 2,000 a month on
average -- is less than what they could be earning in other sectors.
domestic workers are
paid .
The Untapped Potential
Yet China is so alluring. About 160 foreign insurance
companies have set up representative offices in China, a preliminary
requirement for obtaining an operating license. Prudential Financial of
the U.S. announced in September a life insurance joint venture with
Shanghai-based Fosun Group, the largest privately owned investment group
inmainland China, making it the first new foreign life joint venture
since 2008. Asked why it is jumping into the fray when others are
returning home, the company cited China’s rapid growth and low insurance
coverage. “We are very confident about the future prospects of China's
life insurance industry, and we are confident that we have found the
right partner,” statedLaura Kavanagh, Prudential Financial’s vice
president of global communications.
Mainland China’s insurance penetration, calculated by premiums as a
percentage of GDP, is 3.8%, compared with 8% in the U.S., 11.4% in Hong
Kong and 18.4% in Taiwan. With potentially 1.1 billion people buying
insurance in China in 10 years, “the size of pie and the increase of the
pie are so big. It may give you small percentage (of market share) but
in terms of absolute dollars it is much bigger,” says Liu of PwC.
As with other parts of the financial sector, Beijing wants to ensure
its domestic companies are well established. But Kaye of BCG expects at
least some loosening of restrictions on branch openings, and a possible
easing of the ban on foreign sales of auto insurance. One thing is
clear: The market opening in China will continue to be slow. “The
Chinese government is under no pressure to open up the insurance market
rapidly and completely," he states. "It will be a slow and gradual
evolution.”
