BY ANY reasonable measure, China is an insurer's dream. With premium income topping 1.5 trillion yuan ($220 billion), the market is enormous. It is also growing fast, with the life-insurance sector alone doubling between 2007 and 2010. And insurance penetration (premiums as a share of GDP), remains extremely low (see chart). So why is it that both domestic and foreign insurers seem to be struggling?

Chinese firms are now experiencing serious growing pains. To get an idea of the problems, take a look at the prospectus offered by New China Life, a big local insurer, for its dual share placement, which will take place shortly on the Hong Kong and Shanghai stockmarkets. By its own admission, the company needs to raise equity because of a capital shortfall.

This shortfall is caused by rapid growth: when you sign up vast numbers of new clients, your potential liabilities shoot up instantly, while the extra premiums roll in only gradually. (Another reason for the capital shortfall is that New China's investments in domestic Chinese shares have done badly.)

Many other local insurers also face a shortage of capital. China's insurance regulator is scrutinising the capital adequacy of insurers much more closely of late. For example, it wants firms to cut back on the amount of subordinated debt they issue. In the case of New China Life, the company's solvency margin (the cushion of capital that regulators require insurers to hold in case times turn rough) fell below 87% of total liabilities during the third quarter of this year. Firms with ratios below 100% now run the risk that regulators will limit which products they can offer and where they can invest.

These are not the only agonies that insurers face. Standard & Poor's, a credit-rating agency, believes that risk-management practices at Chinese firms have not kept pace with expansion. It also worries about a mismatch between the industry's long-term liabilities and the typically short-term nature of its investments.

The boom has also attracted dozens of new firms and hordes of unsophisticated investors. Stephan Binder of McKinsey & Co, a consultancy, argues that many people who have bought shares in new insurers do not understand the industry. He thinks they were dazzled by the public placement of Ping An, an innovative Chinese insurer that is also one of the world's largest, only to be “surprised to find that you don't get any cash out of these businesses quickly and instead must keep putting in cash for years”.

Foreign insurers in China know that sinking feeling all too well. A report published on November 30th by another credit-rating agency, Moody's, calculates that of the 47 foreign insurance outfits in China in 2010, only 11 made a profit (and even that was generally a meagre sum). The aggregate market share of firms with substantial foreign ownership is still below 5%. And recent months have seen New York Life leave the market, AXA and Sun Life reduce their ownership stakes in joint ventures and Standard Life attempt—in vain—to find a buyer for its local operation.

Could this “mark the beginning of a broader retreat”? asks Sally Yim, the report's author. Perhaps; but retreating could be unwise. Though regulations are skewed against foreign insurers, Mr Binder believes they can still succeed in China if they correct some of their own mistakes.

For example, they could do a better job of nurturing local talent and adapting foreign business models to local conditions—two areas where they have conspicuously failed in the past. He points to South Korea, where foreign insurers lost money on a queered pitch for over a decade, but are now raking in handsome profits.

Taiwan also offers a ray of hope. Sam Radwan of Enhance International, an insurance consultancy, observes that while China and Taiwan both have extremely high rates of household savings, the former spends less than 4% of GDP on insurance while the latter spends a juicy 17%. In insurance, as in much else in China, it may pay to persevere.

 (http://www.economist.com/node/21541056)