Foreign Insurers in China – Risk or Opportunity?

July 28, 2005

With only four percent of its 1.3 billion people holding insurance policies, China represents the world’s largest but also perhaps most challenging opportunity for foreign insurers, according to a study published by Reuters and KPMG.

The report identifies the unprecedented growth in the number of Chinese people who aspire to middle class status and are turning to personal insurance as a way to protect their future security. Despite this, today only four percent of its 1.3 billion people have any insurance at all.

Chinese firms still dominate this new market, but demand is driving a growing need for foreign insurance capital and expertise. As China dismantles its old state-funded pension system and more of its citizens become car and property owners, insurance premiums have soared and led to a steady influx of foreign competition.

Foreign insurers, mostly limited to joint ventures, have been operating in the market for over a decade. More than three dozen now have mainland footholds and have made steady progress in major cities such as Shanghai and Beijing.

Company executives interviewed for the report said that those institutions with the right expertise, experience, and patience need to be in China. Many also felt that insurance is perhaps the one financial services area where the Chinese government itself is keen to see fast progress as it looks to reduce its future health and pension liabilities to its population.

However, the report does identify significant challenges in this market which loom as large as its potential. Regulatory restrictions are gradually easing but remain onerous, and talented managers and agents, particularly those with experience working in a Sino-foreign joint venture, can work at a premium.

Many insurers are also at a cross roads when it comes to expansion, as Beijing awards licenses on a city-by-city basis. Some have decided to branch out in “second-tier” cities where insurance penetration is lower than a more crowded market like Shanghai. The cost of expansion is steep and insurers realize any missteps could be crucial.

Foreign insurers are competing against entrenched local providers such as Ping An and PICC Property & Casualty, which dominate the market through their massive sales forces.

Despite these challenges, the world’s biggest insurers are moving quickly to expand in China’s market, which has too much potential to ignore. Armed with support and capital from their home offices, insurers are taking a long-term view, which most executives agree is the greatest opportunity of their lifetime.

Eric Hall, Reuters editor for China, Hong Kong and Taiwan, said, “The insurance industry in China today has got to be one of the biggest financial services sector growth industries in the world. Any business which is essentially about risk and opportunity is well placed to play in this marketplace.”

The report was researched and written by Reuters Asia Financial Correspondent Brian Kelleher, and by KPMG’s Asia Head of Actuarial Services Raymond Li. A copy of the report is available at http://customers.reuters.com/d/foreign_insurers_in_china.pdf .

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