The China Insurance Regulatory Commission (CIRC) issued an announcement in late September giving a green light to both domestic and foreign car manufacturers in the country to set up their own auto insurance brokerages.

The move aims at consolidating the auto insurance broker industry, making it more "standardized, specialized and scalable," the watchdog said in the statement.

It is also expected that such a consolidation would make it easier to regulate brokers as well as allow them to provide better services to their customers, according to the statement.

There are nearly 30,000 insurance brokers in China, many of which have loose relations with insurance companies. While there have been problems regarding brokers violating regulations and service complaints, it has been difficult to oversee these workers because they are too numerous, CIRC said in a press release on September 24.

Some major automakers have over 1,000 dealerships, and it would be possible for them to supervise the auto dealers/insurance brokers systematically if the auto companies are allowed to establish their own insurance brokerage firms, CIRC said.

Having the automakers set up brokerages has three major benefits for the industry. First, because automakers can buy larger amounts of insurance policies from insurers, prices will be lower. Second, automakers can customize insurance policies based on a more comprehensive database of customers' driving records, Parker Shi, a Shanghai-based partner leading the US consulting firm McKinsey & Co's insurance practice in China, told the Global Times on Monday.

Thirdly, auto manufacturers are more motivated to control insurance fraud than some smaller brokers, which is good for the overall profitability of the industry, Shi said.

The bottom line

Despite rapid growth of car sales in China, auto insurance carriers haven't made much profit.

Insurance carriers currently make 5 to 6 percent profits from underwriting auto insurance in China, Shi said. However, he said that the carriers' profitability has improved over the last three to four years, thanks to tighter regulations on discounts and a shift of focus to profits.

According to a survey of 1,600 consumers and interviews with important industry stakeholders published by McKinsey Quarterly in 2007, many firms were operating at a loss in car insurance sales because they were poor at risk management and cut prices against each other to grab market shares.

The smaller players fare less well than industry giants. The top five players, namely PICC Property & Casualty Co, Ping An Insurance (Group) Co, China Pacific Insurance (Group) Co, China United Insurance and China Continent Property & Casualty Insurance Co, account for around 70 percent of the market share, and they are taking in much more than their smaller competitors, Shi noted.

The pressure on insurance carriers' profitability also comes from insurance distributors, such as auto dealerships and repair shops.

An insurer generally pays a 15 percent commission to a dealership, but, in order to win over customers, the dealership may require an additional 5 percent cut on the price, Shi said.

Widespread insurance claim frauds are also hurting the insurers' bottom lines in China. Police in Changzhou, Jiangsu Province detained 130 suspects in September who had allegedly been involved in making over 100 fraudulent claims totaling over 13 million yuan ($2.1 million) since 2011, popular news portal website chinanews.com reported.

A suspect surnamed Zhang, who was a partner at a local Jiangnan auto repair shop, drove a client's Honda Odyssey into a tree on May 12 in order to create an accident scene, and then tried to claim 58,000 yuan from the insurer, the news report said.

In addition to forging accidents, some repair shops have taken advantage of inexperienced claims adjusters by installing a broken part on a damaged car to claim higher compensations, while others would simply exaggerate repair costs by purchasing fake receipts, the report said.

"This is part of the reason why CIRC has been looking at the distribution side of auto insurance, and trying to consolidate the industry so that you have bigger players who conform to regulations," Shi said.

Choice is good

However, having automakers streamline insurance distribution channels would not at once bring all insurance brokers in line with standard practice, because the Chinese auto market itself is too big and too decentralized.

Even major automakers such as Mercedes-Benz could not fully control their dealerships in China, as evidenced by a high-profile conflict earlier this year between the company and Lei Shing Hong Auto, its largest distributor on the Chinese mainland, over a plan to consolidate its sales force in Beijing.

In addition, "some (consumers) may want to buy (insurance) from auto manufacturers, and some of them may prefer to shop on their own," Shi said.

The different distribution channels, including car dealers, auto clubs, repair shops and independent brokers, will always compete to offer consumers better choices, according to experts.

"Price wars will force innovation," and the latest innovation in China will be the sale of car insurance and offering related services online and on mobile devices, Alan Bauer, a former senior executive with Progressive Insurance who pioneered the world's first car insurance website in the US, told the Global Times on September 27.

Once the method of payment and retailers' capabilities are ready, consumers will develop a habit of buying their car insurance online, "because it's cheaper and consumers can more quickly see their options," Bauer said.

"In the UK I can get 40 different insurance prices in 15 minutes online. You can't do that any way with humans," Bauer said.

However, the penetration of online insurance sales in China is still fairly low. Shi said that for a couple of major insurers he knows, online distribution currently accounts for 3 to 5 percent of sales, up from 2 percent in 2006.

In the US, 32 percent of 16,100 respondents who shopped for a new policy in 2011 said they "got their quotes entirely online," according to a JD Power survey in January and February.

Unsophisticated system

For online insurance sales to prosper in China, Shi believes that it will take a deregulation of pricing, which should be based on risks, because the key success factor for Progressive and GEICO in the US and Direct Line in the UK is lower prices compared with the regular channels.

"The Chinese pricing method is much simpler compared with the UK and the US," and Chinese insurers will need a better understanding of cost management, said Bauer, now a senior advisor to Shanghai-based consulting firm Enhance International.

Because Chinese car insurance products are not diversified enough, sometimes an insurance carrier in China charges too much compared with prices in the US, and sometimes too little, Bauer noted.

"It's important to be clear on your objective - why are we in business? Is it to grow or is it profit? And sometimes, in September it's growth, October it's profit. That doesn't work well," he said.