China's Insurance Market: Lessons from Taiwan

 
The countdown to the moment when China's economy surpasses that of the U.S. seems a long way off. China's insurance market is poised to overtake the U.S.'s a lot sooner, possibly as early as 2020. The mainland life market almost doubled in size from 2006 to 2008, to over $80 billion, or roughly one-fifth the size of the U.S. life market. There's no reason to think growth will slow significantly. A look at the insurance industry's experience in Taiwan provides a good way to understand the Chinese insurance customers' buying behavior as the industry matures on the mainland.
Those who have worked in the Chinese insurance industry know all too well that a lot of talent and know-how has been borrowed from Taiwan. Daniel Tsai, chairman of Taiwan's Fubon Financial (2881:TT)—the island's second-largest financial holding company with over $80 billion in assets—says China's industry is modeled after Taiwan's. "If you ask the CIRC [Chinese Insurance Regulatory Commission] they would admit that the whole insurance law in China was borrowed from Taiwan," says Tsai in an interview at Fubon Financial's headquarters in Taipei.
Taiwan's influence is not limited merely to regulation. Consider China's Ping An Insurance (2318:HK), a Shenzhen-based company that is the industry's benchmark for service and customer-value creation. Ping An got its start in 1988, when it was founded to sell car insurance by current Chief Executive Officer Peter Ma and a handful of employees. When Ma expanded into life insurance 17 years ago, the company grew to be the second-largest player on the mainland, behind only China Life (2628:HK). Analysts and industry experts have primarilty attributed Ping An's success to its ability to learn and apply best practices from the Taiwan market, as well as from other foreign players. Initially all of Ping An's marketing and sales talent came from Taiwan, for instance; they helped develop the company's underwriting and claims systems.
The impetus for borrowing Taiwanese insurance talent and regulation goes beyond common language to the fact that customer buying behavior is similar in both markets. "We are culturally Chinese]; we are just 10 to 15 years away" in market maturity, says Tsai of Fubon, "You can think of it like being able to ride back on a time machine and fix the problems that you know you will have."
Fubon, as well as other Taiwanese insurers, is eager to leverage its know-how when it expands in the Chinese market under the more favorable regulatory terms anticipated via the Economic Cooperation Framework Agreement (ECFA), a deal that Beijing and Taipei officials are expected to sign soon. The two sides have reached "basic agreement" on a tariff-reduction agreement, Tang Wei, China's head of Taiwan, Hong Kong, and Macau affairs said on June 13, after the latest round of talks in Beijing with Huang Chih-peng, head of Taiwan's Bureau of Foreign Trade.

A Chinese culture of household saving

With the Taiwanese customer serving as an indicator of what the Chinese market will look like in the future, China may be well on its way to becoming the world's largest insurance market over the next 10 to 15 years.
The key driver of growth will be life insurance. Both Taiwan and the mainland have some of the highest household savings rates in the world—roughly a quarter of the average household's disposable income. While several factors account for China's high rate—such as limited availability of credit and less reliance on government social programs for health care and social security—there is no denying that the culture of saving is strong.
Still, a wide gap persists in terms of life insurance penetration, given the markets' differing stages of maturity.
Taiwan has the world's highest penetration, at roughly 13 percent of insurance revenue as a proportion of gross domestic product, while the mainland is at roughly 2 percent.) Another point of reference for Chinese customers is Hong Kong, at 10 percent. (Compare this to the U.S., at just 4 percent.) Such high penetration is not limited to insurance-savvy Chinese customers. Larger markets in Asia, such as Japan and South Korea, have strong savings cultures and feature many popular insurance products with long-term guaranteed rates of return. Japan and South Korea, too, have insurance penetration rates almost double that of the U.S.

Given the track record, it is a matter of time before the mainland begins closing the gap with its Asian neighbors and surpasses the U.S. life insurance penetration rate.
Several factors will contribute to close the gap between Taiwan and China. First, life insurance is by nature a complex product that is sold, not bought; mainland customers are starting to learn more about the value of life insurance and over time, will catch up with their Taiwanese neighbors' comfort with the product. Second, as insurers expand beyond agency distribution and get better at exploiting China's vast bank branch networks, they will find, as the Taiwanese did, a natural venue to address customers' savings needs. Finally, as life expectancy increases, so will the mainland's need for life products.

auto insurance still a necessary evil

Property and casualty growth will be driven by auto insurance; China last year passed the U.S. to become the world's biggest market for automobile sales. The potential is vast, with the average number of vehicles per capita well below that of developed nations. Chinese customers currently tend to view the product as a necessary evil, leaving insurers to deal with pricing wars, high attrition, high fraud costs, and subpar profits. "The Chinese auto insurance market is plagued with fraudulent claims," says Tsai. "Fifteen years ago it was also the biggest problem in Taiwan and we found a way to work together with other insurers and crack down on the fraud. But more important, the reason fraud subsided is because the society had progressed. Another example is the constant agent and customer switching [from insurer to insurer]. We have also seen and dealt with that."
Chinese auto insurers are currently relying on growing the top line by adding new customers. The next stage of revenue growth will come from increasing revenue per customer by expanding from selling mandatory coverage to adding optional coverage. For example, it took Taiwanese insurers almost a decade to make optional personal liability coverage a key part of their customers' policies and it may take the same amount of time in China.
Both life insurance and property and casualty insurance face challenges in generating solid returns for all this growth. Getting the property and casualty sector on a solid footing will require more than efforts by individual companies. The CIRC, as well as collaboration across the sector, will play a major role in addressing the more structural issues. Life insurers, too, have a lot to learn from the Taiwan market in terms of providing long-term guaranteed rates of return in a changing interest rate environment. Most Taiwanese life insurers are suffering from negative spreads: Their legacy books of business provide guaranteed rates at 6 percent or higher, even though interest rates today are at historic lows.
The challenge for the industry is not to generate growth, but to build a healthy, profitable book of business. Learning from the Taiwan experience should help focus on addressing this issue. Taiwanese financial holding companies have returned 6 percent on equity, explains Matthew Smith, an analyst at Macquarie Securities, "which is very low by global standards." China has size on its side, but the challenges of differentiation and profitable growth remain the same.
Sam Radwan is partner and co-founder of ENHANCE International, a management consultancy headquartered in Chicago and with offices in New York, Shanghai, and Taipei.