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 the largest 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 agricultural 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.