China Insurance Sector

Market Information

Insurance in China is still a fledgling industry, accounting for only a small fraction of total output. But there have been signs for some time now that the insurance sector is likely to grow; indeed since the 1980s when the industry was revived the country has seen an emergence of agencies and other related bodies, and accession China’s accession to the WTO is likely to further boost China's insurance industry.

As of the end of 2005, there were 93 insurance corporations operating in China, six of which were insurance groups, with a further 82 insurance companies, including some foreign firms. Between them they were responsible for contributing some RMB 564bn to the economy. Growth in the insurance premium income has topped 25% annually between 2001 and 2006, a figure which can be largely attributed to China becoming a WTO member. The total assets of the insurance sector now total some RMB 1.97 trillion which has increased at a rate of 36% annually from 2001. China's Insurance companies now hold between them bonds, in various formats, of almost RMB 550 billion. Further, some 1.8 million people are employed in the insurance sector, which equates to 40% of all financial staff being engaged in the insurance sector. These figures combine to make the Chinese insurance sector one of the fastest growing in the world.

Still in its infancy

The main problem of the current system is the absence of a fully established insurance market system. In certain areas, such as the wealthier Shanghai and Guangdong regions, the existing markets are relatively advanced, with plentiful supply and demand of insurance products. However, the story is not repeated across the country with vast differences existing between East and West.

A further concern is the lack of matching demand with appropriate supply. With China’s continuing economic boom savings rates are high, incomes are rising and life expectancy is on the up. But when this is combined with an inadequate social security system people are looking to various kinds of insurance to cover themselves. Yet the existing supply is often not sufficient to match this demand.

Supply problems stem from market inadequacies that can only be developed as the sector becomes more competitive. Only recently have measures have been introduced to raise competition levels including the independence of firms’ decisions to raise capital and how to raise it. Other changes included the establishment of China's insurance sectors for agriculture, pensions and construction. But because such developments have only been implemented recently it will be sometime before the industry parallels its counterpart sectors in developed countries. What is needed are further product and service innovations, a reformed legal foundation, stronger management, and a general fostering of high levels of competition. Such change is likely to only accelerate with China’s WTO membership.

China's WTO entry and its effects

China’s insurance industry may still be in its infancy but the system is gradually moving with the times and updating its operations, largely due to WTO membership. With its accession to the WTO, China required to fulfil certain obligations in order to benefit from membership of the organisation. December 11, 2006 marked the five year anniversary of China joining the WTO, an important milestone because it signifies the end of the initiation period where changes to the existing system had to be made.

WTO entry accelerated changes to the insurance sector, with the opening up of the financial markets, security markets and the listing on the stock exchange of many of the state owned banks. There were now the foundations of competition in the insurance market. It is hoped, and expected, that full membership of the WTO will have some, if not all, of the following benefits on the insurance sectors. The benefits will come from the economy as a whole being more open fostering more competition in insurance and providing more opportunities to provide services.

•    The foundation for change lies in the inevitable increase in capital inflows into China. This will provide higher levels of human and technological capital that will serve to further develop the national economy and trade relations with the rest of the world. The sheer capacity and vigour of the Chinese economy will provide extensive possibilities for investment and expansion.
•    Although as previously described the insurance market in China is only a fledgling one but the effectively enforced competition as a result of accession, will most likely have a positive impact on existing firms and the development of the industry, Foreign firms will be permitted to operate in the Chinese market for the first time, which will compel Chinese firms to become more efficient by saving costs, upgrading products, improving services in order to survive.
•    The structure of many Chinese insurance companies is vastly different from their Western counterparts. Internally there needs to be restructuring of management systems, establishment of property rights, altering the legal structure and perhaps even being open to the possibility of a joint venture with a foreign firm or inviting foreign firms to become stakeholders. This will help to promote competition by raising additional capital, shift towards more effective and efficient management styles and lead developing services that are more in line with the needs of the market.
•    In accordance with WTO regulations the China Insurance Regulatory Commission must update its regulatory rules meaning an improvement in the transparency of management and increase work efficiency so that they are more in line with international standards.

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