Insurer rushes for subsidiary
By Xiao Huo (China Business Weekly)
Updated: 2004-07-19 13:49

Boston-based insurance giant Liberty Mutual is planning to transform a newly built branch in Southwest China's Chongqing into a wholly owned subsidiary to pave the way for a national expansion.

The move of the non-life insurance branch made the firm one of the first foreign insurance companies to commit themselves to subsidiary-establishment plans.

Prior to the move, German firm Allianz and a number of other rivals voiced interest in pursuing similar courses of action.

"Our plan is to apply (for a subsidiary) shortly after the one-year anniversary (of our Chongqing branch),"said Edmand Kelly, chairman, president and chief executive officer of Liberty Mutual, the fifth-largest property and casualty insurer in the United States.

He made the comments in a recent interview before travelling to Chongqing, where he was appointed to serve as a city government economic adviser on a think-tank providing consultation on development issues.

The president is also scheduled to discuss business plans for the Chinese market with his company's senior local staff while in Chongqing.

Under the branch structure, anon-life foreign insurer has to apply licences on a city-to-city basis, and the capital requirement for each branch is approximately US$ 24-25 million, with the application for a new branch going through a very strict review process by the regulators.

While under a subsidiary structure, the establishment of a wholly owned subsidiary in China needs the same amount of funds, and once a branch has operated for one year, it can apply to be reshaped into a subsidiary.

Once established as a subsidiary, it will be able to apply for licences to operate in other cities with a much smaller capital requirement.

Liberty Mutual became the first foreign property and casualty insurance company in Chongqing of western China in January, six years after opening its first China office in the city in early 1998.

Initially, Liberty Mutual will only provide property and casualty insurance to businesses in the city. But Liberty Mutual said it hopes to provide private passenger automobile insurance over the next several years as the Chinese market opens up more.

"Opening this office in Chongqing marked a significant milestone in the growth of our international operations," said Kelly, at the opening ceremony of the branch.

"We will take a look at the cities that look most attractive to us immediately," said the chairman when asked which city is its first target for a national expansion.

"We are very interested in going to Beijing," said Kelly. "That is very attractive for us."

But he said the firm will not go to another city in Northwest China, nor into any direct investment with the Chinese peers.

He said: "We see ourselves more an operator than an investor."

Talking about the growth of its business in Chongqing, a city that hosts nine non-life insurers, the chairman said: "We are pleased with the operation here...The business (in Chongqing) is following our plan."

Kelly declined to disclose the premium revenues the branch generated in the first half of the year.

Liberty Mutual Group however reported a net income of US$284 million for the three months that ended March 31, 2004, a US$270-million increase over the same period last year globally. Also, its revenues for the three months that ended March 31, 2004 were US$4.704 billion, a US$1.074-billion or 29.6-per-cent increase over the same period in 2003.

Liberty Mutual offers a wide range of insurance products and services, including personal automobile, homeowners, workers compensation, commercial multiple peril, commercial automobile, general liability, global specialty, group disability, assumed reinsurance, fire and surety insurances. But the company's largest line of business is personal auto insurance, based on 2003 net written premium.

The chairman said the firm does not have immediate plans to introduce its automobile insurance services into China.

There is one significant obstacle (for foreign companies to enter the auto insurance business in China), which is China retains its rights to keep the mandatory third party liabilities, the core of automobile insurance, to the Chinese companies according to the WTO commitment.said Kelly.

Auto insurance consists of about 60-70 per cent of domestic non-life insurers' premium portfolios. With the skyrocketing growth of China's auto consumption, the market is expected to see further robust growth.

Liberty Mutual has had a presence in China since 1996 when it opened a safety representative office in Shanghai. In 1998, the company opened its first representative office in Chongqing and in 2000 opened another office in Beijing.

Over the past five years, Liberty Mutual has expanded its presence in China by developing important safety and health research partnerships and safework forums with the government and prominent universities throughout the country.

"We do not provide services of workers compensation in China currently. One of the challenges for our management team here is to provide commercial workers compensation insurance competitively. ...Obviously, it is an area that we are willing to consider (in the future)," said Kelly.

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