Industry attractiveness
China is considered to be a global hotbed for insurance. It was the world’s sixth largest life insurance market and the second-largest in Asia Pacific in 2011, second only to Japan, in terms of net written premium. With gross written premium reaching RMB1.5 trillion (US$227 billion), the Chinese insurance market is huge, and is one of the fastest improving in the world. The country’s insurance market growth has outpaced that of the economy, and registered a tenfold increase in premium income between 2000 and 2010.
China’s rapid economic advances, regulatory changes and the rising disposable incomes of the middle class were major factors for phenomenal growth in the insurance market. China overtook Japan to become the world’s second largest economy in 2010 and established itself as a key player in the global financial system. Regulatory reforms also acted as a major driving force behind the rapid improvements in China’s insurance markets. The reform efforts, which started in the 1980s, experienced a significant acceleration following its accession to the World Trade Organization (WTO) in 2001.
The Chinese insurance industry accounted for around 4.0% of the global premiums for life, personal accident and health care insurance in 2010. The market shares of foreign insurers in 2011 were below 5% in the life segment and around 1% in the non-life segment, indicating a comparatively low presence of foreign insurers in the Chinese insurance industry.
This is mainly due to tough regulations and competition from larger domestic operators. Whereas, in Japan, foreign companies hold around 20% share in life segment and nearly 6% to 7% share in the non-life segment.
The growth of the Chinese insurance industry in recent years was mainly led by personal insurance products such as life, personal accident and health insurance, which accounted for around three-quarters of the total gross written premium. The non-life segment, which is predominantly concentrated into motor and property insurance, also registered rapid increases. Motor insurance was the largest category, with a share of more than 70% of the gross written premium in the non-life segment. Products such as liability, credit and marine insurance have emerged in the non-life segment, which are projected to provide long-term opportunities.
Recently, uncertain economic conditions, tightened regulations and depressed capital markets took some sheen off the Chinese insurance industry’s development. The CIRC strengthened regulations concerning solvency ratios and market conduct, which put pressure on growth as companies struggled to raise capital. Also, changes in bancassurance regulations and less attractive returns on investment type life insurance products have put the insurance industry to the test.
Many foreign and domestic insurers are reviewing their business models in order to succeed in the tight regulatory and competitive environment, especially from bank-owned insurers. Insurers are focusing on a specific sector and are developing products specifically for that market, and selecting partners with an appropriate customer mix to sustain growth. Customer segmentation is expected to create opportunities for insurers, as this will allow tailored product development and targeted marketing campaigns. Flexibility between channels is also considered to be important, and insurers are continuing to build their agency sales forces and developing alternative distribution capabilities to reduce their dependence on banks.
Despite the present challenging operating environment, the long-term growth potential of the Chinese insurance market remains intact, and it is expected to become one of the largest insurance markets in the world, and the third largest by 2015. This enhancement will be driven by relatively strong economic expansion, low insurance penetration, rising income, aging population and improving awareness of insurance. The government is also showing keen interest in promoting long-term products and retirement solutions, with a recent pilot scheme permitting the sale of variable annuity products.
Reform and investment in the health insurance market in recent years and government initiatives to increase the role of private insurers are likely to drive expansion in the health insurance category. The CIRC’s admission of foreign insurers into the motor third-party liability insurance category in May 2011 is likely to provide a further opportunity for the growth of motor insurance. Legislative reform and market reforms are therefore predicted to create significant momentum.
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Segment Outlook
Gross written premiums in China’s life insurance industry grew at a CAGR of around 22%, from 2006 to 2010. It was supported by growth in the Chinese economy, rising per capita income and increased awareness of the needs and benefits of life insurance products.
Life insurance is the largest segment in the Chinese insurance industry, accounting for around 62% of the total gross premium in 2011. Domestic life insurers accounted for 96% of the total life premium received in 2011. The environment for foreign operators continues to be challenging due to intense competition from domestic insurers and the strict regulatory environment.
However, after remarkable premium growth during 2006-2010, the Chinese life segment’s fortunes declined in 2011 amid uncertain economic and market conditions. Also contributing to the decline, apart from the changes in reporting basis to Chinese GAAP in 2011 (which excludes most premiums from variable universal life investment-linked products), were restricting life insurance products sales activities at bank branches. Life insurance gross written premiums declined around 9% from RMB1.00 trillion (US$148.4 billion) in 2010 to RMB910.6 billion (US$141.1 billion) in 2011.
Meanwhile, volatile financial markets rising interest rates in recent years have cut into insurance companies’ profitability. Chinese life insurers are still reliant on savings-oriented and investment-linked products, and although higher bank deposit rates have benefited insurers’ investment performance, they have made life insurance products less attractive than bank deposits and high-yield wealth management products offered by banks, given the maximum guaranteed rate on life insurance products of 2.5%. In addition, weak share market performance has affected the sales of investment-linked products. All these challenges not only affected new business sales but also resulted in a rise in surrender rates.
Chinese life insurers are also facing capital adequacy challenges amid tightening regulations and volatile market condition conditions. With rapid business expansion and increased competition, many companies, including the largest ones, needed to raise capital through various means, including issuing of subordinated debt. A range of companies issued subordinated debt that in aggregate exceeded RMB50 billion in 2011 alone, amid new regulations issued by the CIRC to tighten the eligibility criteria for issuing such debt. This amount is significantly larger than in 2009 and 2010, where the total subordinated debt issuance in the industry was around RMB5 billion and RMB10 billion respectively. With companies continuing to issue subordinated debt, life insurance companies may face significant repayment pressures when these instruments mature.
Foreign life insurance companies may record a continuing decline in their market shares. Foreign companies have a significant disadvantage in terms of their number of sales units, tied agents, distribution channels and brand recognition compared with Chinese competitors. Furthermore, foreign life insurance companies have not been successful in differentiating themselves through their product and marketing strategies, despite years of operation in China.
The long-term potential remains encouraging, given China’s low insurance density and penetration, rising income, aging population and improving awareness, despite the challenging operating environment for life insurance in the short run. Also, the CIRC guideline that encourages insurers to increase the protection coverage of life insurance policies and enhanced product innovation will help differentiate insurers from banks, driving long-term growth.
The market shares of private life insurance companies are expected to expand as a result of stronger capital bases and greater penetration in rural areas over the coming years. As a large proportion of the Chinese population resides in rural areas, private life insurance companies are forced to target these regions and offer low-premium microinsurance products. The Chinese government’s legislation to promote microinsurance by providing subsidies to low-income groups is also predicted to support the Chinese life insurance segment.
Distribution channels
China has a multi-channel distribution platform for life insurance products. An insurance company may offer its products via branch offices, intermediaries or through ‘direct writing’ – direct contact between client and company. The advances in the Chinese life insurance segment between 2007 and 2011 was partly attributable to insurers expanding their business and establishing distribution channels with the ability to service small towns and villages. Direct distribution was the leading channel, of those used by the Chinese insurers to market life insurance products, claiming a 40% share of total business commission earned in 2011. The growing use of new information technology and the rise of other channels have altered the playing field for insurance distributors, meaning direct marking channel’s share has gradually declined from around 51.0% in 2007.
The agencies channel was the second-largest distribution channel in the segment. Its share in total gross commission rose from 32% in 2007 to 37% in 2011.
Insurance companies are facilitating the transition of intermediaries from agents to advisors. Agencies drove the life insurance segment due to their first-hand knowledge of customer requirements, despite the highly developed banking channel providing access to banks and internet banking facilities.
Bancassurance was the next most popular distribution channel, accounting for around 17.0% of the overall commission earned during 2011. The new bancassurance regulations imposed by the CBRC in November 2010 allows only bank staff with an insurance agency licence to sell insurance at bank branches. It has significantly affected bancassurance sales at bank branches, but also made insurers compete more fiercely for banks’ sales channels by paying higher commission rates. Insurers are now increasing their focus on building exclusive agent teams, and proactively developing new distribution approaches in response to the changes in bancassurance regulations.
Online distribution is becoming popular while telemarketing is also expected to gain popularity. More companies are anticipated to adopt new business models such as online insurance sales and online servicing. Although mobile technology is not very popular, it has the potential to dominate the insurance industry in applications such as issuing policies, servicing and assessing claims.
Agencies and direct marketing are expected to remain the major channels of distribution for life insurance products in China in the next four years. The gross written premiums for new business through these channels are forecasted to register CAGRs of 14.0% and 7.1% respectively between 2012 and 2016. Their combined share of total commission earned is projected to climb to around 68% by 2016.
With rising competition, evolving regulation and variations in market dynamics between different regions, insurance companies need to respond by offering a range of products to meet changing customer needs. The distribution channel landscape is, therefore, likely to change significantly over the next four years.
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