Insurance industry makes strides in reforms
By Chuan Yu (China Daily)
Updated: 2004-10-07 09:48

Development of China's insurance industry has been accompanied by incessant reforms and opening-up to the outside world.

The industry would not have accomplished so many achievements without these measures.

The reforms of the insurance sector involve: the separation of property insurance, life insurance and reinsurance; reforms of export credit insurance service; shareholding reorganization of the State-owned underwriters and reforms of the regulatory system.

Sector separation

China's insurance companies were once allowed to work in property insurance and life insurance at the same time. The Insurance Law promulgated in 1995 follows international practice and stipulates property and life insurance should be separated. The reforms to split the two sectors lasted six years.

In 1996, the old People's Insurance Company of China was reorganized into the PICC (Group) Corp, which groups three subsidiaries specializing in property, life insurance and reinsurance respectively. In 1998, the three became totally independent companies and were officially named People's Insurance Co, China Life, and China Reinsurance Co.

Other insurance companies such as China Pacific and China Ping An followed suit and separated their operations of property and life insurance.

This segmented approach has proved to be conducive to specialized operations of the industry and risk control. In particular, the reform greatly promoted the life insurance sector's development. In 1997, the premium income of life insurance exceeded that of property insurance for the first time. In 2003, premium income of life insurance accounted for 77.6 per cent of the insurance industry's total.

Policy insurance

Export credit insurance is an important means used by many countries to support foreign trade and overseas investment. The old PICC and the Export-Import Bank of China both used to provide the service.

In 1997, financial authorities decided to establish a specialized export credit insurance provider. In 2001, the China Export Credit Insurance Co was officially established on the base of the related functions of PICC and the Export-Import Bank of China.

Regulatory regime

With the deepening of reform of the country's financial system, authorities decided to adopt a segmented approach in the operation and regulation of the sectors of the financial industry.

In November 1998, the insurance department of the central People's Bank of China was spun off to form the China Insurance Regulatory Commission (CIRC). This indicated that the segmented regulatory system was officially established. Before the setting up of CIRC, the China Securities Regulatory Commission already existed.

Reforms in 2003

State-owned insurance companies account for 70 per cent of market share and play a vital role in the development of the industry. But the State-owned companies have been plagued by problems such as inadequate capital, obsolete operating mechanisms and low asset quality.

In 2002, financial authorities decided to allow State-owned insurance companies to conduct shareholding restructuring and prepare for stock listings. The aim was to absorb foreign capital and other funds in the country, to introduce advanced management techniques and improve competitiveness.

In 2003, PICC, China Life and China Re all conducted their joint-stock reorganization.

In November, the new PICC Property & Casualty was listed in Hong Kong and became the first mainland State-owned financial firm to go public overseas.

In December, the new China Life Insurance Co Ltd was listed in Hong Kong and New York. The company's initial public offering was the biggest in the world in 2003. Its stocks were oversubscribed 16 times globally and 168 times in Hong Kong.

It is remarkable that PICC Property & Casualty introduced American company AIG as its strategic investor. AIG now holds 9.9 per cent of its shares.

Both the two listed companies offered roughly 28 per cent of their total shares for their IPOs.

China Re was reformed into the China Reinsurance (Group) Corp, which served as founder for the China Continent Property & Casualty Insurance Co Ltd, China Property Reinsurance Co Ltd, and China Life Reinsurance Co Ltd.

Foreign and domestic private capital account for 20 per cent, 26.3 per cent and 44.9 per cent respectively of the shares of the three subsidiaries of China Re Group. The International Finance Corp, the private sector arm of the World Bank Group, bought 7.5 per cent of China Life Re.

In the process of restructuring, PICC, China Life and China Re all hired international consulting companies to redesign their structure. PICC and China Life established their insurance asset management companies and began to explore new ways of managing their assets.

Opening up

The preparation period for opening up spanned from 1980 to 1992, when China started to allow foreign insurance companies to set up representative offices.

Such representative offices served as a bridge between their parent companies and the Chinese insurance industry, introduced foreign experience to local counterparts through such channels as seminars and training programmes, and supported Chinese insurance education by providing scholarships.

The second period - or the period of trial operations - started in 1992, when the State Council chose Shanghai as the first pilot city for opening up the insurance industry and allowed American International Assurance to set up a branch there, and ended right before China's accession into the World Trade Organization (WTO)at the end of 2001.

By the end of 2001, foreign insurers had set up 29 foreign insurance companies in China, including 13 branches and 16 Sino-foreign joint ventures. And foreign insurers witnessed rapid growth during the 10 years ending 2001, with their premiums soaring to 3.28 billion yuan (US$395 million) from 295,000 yuan (US$35,542).

The People's Bank of China promulgated provisional regulations on foreign insurance companies in Shanghai, which became an important reference for the regulation of foreign insurers.

The third period, an on-going phase of full-scale opening up, started upon the WTO accession.

The insurance industry was a key issue during China's WTO accession negotiations, and the level of opening up in the insurance sector is relatively higher than other sectors.

The State Council enacted administrative rules on foreign insurance companies in December, 2001, providing a legal reference for deepening the opening up and strengthening the supervision of foreign insurance companies.

Opening up has helped promote the development of the insurance market in the regions concerned. The insurance penetration and density in Shanghai grew from 1.63 per cent and 138 yuan (US$15.6) respectively in 1992 to 4.64 per cent and 2,160 yuan (US$260) last year, which was equivalent to 1.39 times and 7.52 times the national average.

The arrival of foreign insurance firms has also brought in advanced marketing and managerial expertise. The concept of individual insurance agents has been widely accepted by domestic life insurers, which greatly propelled the growth of the sector.

Individual insurance agents numbered 1.4 million in 2003, and collected 58 per cent of the nation's life insurance premiums for the year, compared to a mere 5 per cent in 1993 when the system was not around.

The opening-up drive has also presented challenges to China's insurance industry. Regulators will have to do their jobs in accordance with international practices, while local insurers will likely lose some of their business, as well as talent, to the foreign competitors.

So far, China has allowed non-life foreign insurance companies to set up wholly-owned subsidiaries in the domestic market and conduct all non-life insurance business except for mandatory business.

Fifteen cities have been opened to foreign insurers.

A total of 128 foreign insurance companies, from 19 countries and regions, had set up 192 representative offices here by the end of last year.

By the end of 2003, 37 foreign insurers, including 19 joint ventures and 18 branches, had set up 62 operational entities here. Twenty of them are property insurance providers, 14 are life insurance operators while three are reinsurers.

Six Chinese insurance companies had ushered in foreign investors by the end of last year.

Foreign insurers accounted for 1.73 per cent in terms of premiums in 2003. Their property insurance premiums totalled 900 million yuan (US$108 million), or 1.04 per cent of the nation's total, while life premiums came in at 5.83 billion yuan (US$702 million), representing a 1.94 market share.

Foreign property and life insurance companies grabbed an 8.87 per cent and 14.08 per cent share respectively in the Shanghai market last year. They accounted for 2.55 per cent and 16.07 per cent in Guangzhou, South China's Guangdong Province.

Close