SHANGHAI - Foreign life insurers are rethinking strategy in China as difficulties with the joint venture model, economic conditions and regulatory changes make it more difficult to achieve a profitable return on their investments.                                             

Before the financial crisis, foreign market share in China was predicted to come close to 10%.However, some foreign insurers have reduced their stakes or withdrew from the market since 2009. Market share of foreign life joint ventures dropped to 5.6% in 2010 from 8% in 2007.    

In trying to make their joint ventures work, foreign insurers had to deal with difference in culture, objectives and regulation, according to Sam Radwan, managing partner and cofounder of consultancy Enhance International. He said he is "not bullish on their profits." The market share of foreign insurers is expected to continue falling.                                    

Foreign companies continue to find China a tough market in which to gain traction and increase their market share. "Established domestic insurers and aggressive geographic expansion of smaller insurers are giving foreign players a run for their money," said law firm Clyde & Co.  in a report. Together with the highly regulated nature of the market, this forces foreign insurers to review their business models and positions.                                       

Distribution "has always been a key challenge" for foreign players in China where larger domestic insurers "have both mature and deep agency networks and strong relationships with banks which are a critical channel," said Matthew Phillips, partner of transaction services at consultancy PricewaterhouseCoopers in Shanghai. Smaller local players generally "focus on niches, often by leveraging the connections of their shareholders," he added.                 

However, "there are opportunities for foreign insurers to leverage their product and distribution expertise," said Phillips. As China develops variable annuity products, the experience of global insurers will be a critical advantage, he said. Their skills in direct distribution, both online and direct sales, also present business potentials.                 

China's Premier Jiabao Wen had recently said pension insurance will be part of the government's 12th Five-Year Plan from 2011 to 2015. China's urban and rural senior citizens "will all enjoy pension insurance by 2015," according to a statement from the State Council, China's executive branch.                                                                     

The number of people older than 60 will grow from 178 million to 221 million between 2010 and 2015, an increase in the proportion of the total population to 16% from 13.3%. China's social insurance scheme saw a 16% rise in revenue to 1.71 trillion yuan (US$268 billion) in 2010,according to the State Council. At the same time, expenses jumped 21% to 1.33 trillion yuan.  

China introduced an individual tax-deferred pension scheme in Shanghai and a trial launch of variable annuity products in five locations including Beijing, Shanghai, Guangzhou, Shenzhen and Xiamen. Axa SA was the first foreign life insurer to introduce a trial variable annuity,through its local life venture Axa-Minmetals Assurance (Best's News Service, June 30, 2011).  

As variable annuity products require insurers to be equipped with high investment and risk management standards, most companies "are not in a hurry to launch trial products," said  consultancy Celent in a report. Foreign insurers' experiences in mature markets give them an edge in underwriting the products.                                                            

In China, Phillips said "foreign insurers have struggled to compete on the basis of scale and  the regulatory cards have been somewhat stacked against them." On top of this, he added that "building a deep local team that is in tune with the market is key and many foreign insurers  have struggled to do this."                                                                   

In the wake of global financial crisis, some foreign players' eyes were "off the Chinese ball"as they dealt with problems elsewhere. While local insurers are growing their business and cementing their positions in the interim, market share "may be hard for newcomers to win," according to Clyde & Co.                                                                      

"In markets where the foreign equity cap is rising, or seems likely to rise, foreign insurers will not consider this to be a major handicap," said Michael Cripps, a partner at Clyde & Co in Shanghai. In the case of China, where the restriction on foreign ownership is fixed at 20%  and is unlikely to change, it is a significant hurdle.                                        

"The whole notion of a strategic partnership gets thrown into question, which aside from financial considerations, impacts significant issues such as governance and controls," he said.                                                                                         

AIA was the first wholly owned foreign life insurer to receive an operating license in China. The company has a strong position and sees good business potential in China's growing economy,said Mark Tucker, AIA's group chief executive and president. AIA posted a net profit of US$16  million and premium income of US$609 million in China for the six months ended May 31, 2011.  

With 10% of market share in Shanghai, Radwan said AIA has proven to be a successful case, and  it would be interesting to see how this could evolve in other provinces or cities in China.   

Life insurance premiums accounted for 66% of the 1.45 trillion yuan in total 2010 premiums in  China, according to the China Insurance Regulatory Commission. The attractions of China's life market are well understood by foreign players. AIA, Generali China and Ace Ltd.'s 's life venture Huatai Life are the top three foreign life players, with combined premiums of 20.7 billion yuan in 2010, according to the CIRC. The top three local life insurers - China Life, Ping An Life and New China Life - recorded combined premiums of 585.7 billion yuan.           

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)BN-NJ-08-30-2011 0548 ET #

China's Auto Market, Potential Reforms Attract Foreign Insurers                               
Aug 23, 2011

SHANGHAI - China's robust car sales and the possible opening of the compulsory automobile insurance market are catching the eye of foreign insurers, despite current regulatory restrictions.                                                                                 

China's motor insurance market "is a long-term play," said Matthew Phillips, partner of transaction services at PricewaterhouseCoopers in Shanghai. "As regulatory restrictions on pricing and commissions and claims leakage issues start to get addressed, China represents a significant opportunity, but it will take time."                                              

Opportunities for China's nonlife market are driven by an expanding middle class with increasing wealth and assets and a growing need from corporations to manage their assets and operating risks, said Phillips. Especially in specialist or niche areas, there are profits to be made.                                                                                      

The challenge for foreign insurers is "whether to wait on the sidelines until they are able to participate directly or work with a domestic partner to secure a position in the market as it matures," said Phillips. However, acquiring market share or making acquisitions may be prohibitively expensive.                                                                      

Insurance Australia Group Ltd. recently agreed to pay 687.5 million yuan (US$108 million) to acquire 20% of Bohai Property Insurance Pty Ltd., a Tianjin-based motor insurer. IAG said entering China's nonlife market has been a priority for IAG for some year. China is thelargest market for new vehicles sales, exceeding the United States. New vehicles sales jumped 456% to 18 million units between 2002 and 2010. A pipeline of infrastructure projects and growth in government policy-driven gricultural and liability insurance are driving strong business potential, noted the Australian insurer (Best's News Service, Aug. 15, 2011).        

One area of optimism for foreign insurers is the fact China is considering opening its compulsory motor market. The regulator recognizes the level of motor losses can't be sustained and that opening the market to foreign insurers will bring the underwriting and claims management expertise required, said Michael Cripps, partner of law firm Clyde & Co. in Shanghai.                                                                                     

The opening of the compulsory motor insurance sector would evolve as the market develops, said Phillips.

Fraud is a major concern in China's motor market, and "there is some talk of moves towards what we would describe as tort reform," Cripps said.                                          

China's motor insurance sector posted an operating loss of 7.2 billion yuan in 2010. Of that, underwriting losses accounted to 9.7 billion yuan, offset by 2.5 billion yuan in investment income, according to the China Insurance Regulatory Commission (Best's News Service, Aug. 5, 2011).                                                                                        

In the compulsory motor classes, competition and claims leakage mean "margins are razor thin or nonexistent so it is a scale play." Many domestic and some foreign players "are wagering that this situation will not last forever. With the right partnership, they believe they can help the domestic players expand profitably," said Phillips.                                  

CIRC has to come up with something to turn around motor insurance profitability, said Sam Radwan, managing partner and cofounder of consultancy Enhance International. Its policies are pointing more towards agent management, adequate and better pricing and promotion of telemarketing distribution.                                                                   

Some Chinese insurers are seeking a second wave of IPOs after the listing of leading players in the past few years, according to Radwan, who noted the CIRC probably won't be opening the compulsory motor sector any time soon.                                                        

China's three biggest nonlife insurers, PICC Property & Casualty, Ping An Property and China Pacific Property, have a 66% market share with a combined premium of 267.6 billion yuan in 2010, according to CIRC. The top three foreign nonlife insurers, Chartis, Tokio Marine & Nichido China and Mitsui Sumitomo, recorded combined premium of 1.8 billion yuan.             

Foreign nonlife insurers' market share in China is only 1%- mainly because motor insurance accounts for 70% of total premium, according to consultancy Celent's report. As foreign players are still prohibited from the compulsory motor sector, which impacts their motor business development and overall market share.                                                

Nonlife foreign insurers have benefited from China's rapid economic development in marine, product liability, personal accident and health insurance, with growth in product sales and profits. In China, Celent said foreign insurers are more concerned with quality and profitability instead of simply pursuing market share.