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october2002 the newsletter of the Society of Actuaries vol. 36, no. 8 theactuary Rapid growth in the Chinese insurance market by Thomas P. Laine efore the early 1980s, when China Following the establishment of the began implementing its economic People’s Republic of China, all insurance B reforms and developing its social- operations were nationalized in 1949 and ist market economy, the average citizen replaced by the state-owned People’s had little need for insurance. The risks of Insurance Company of China (PICC). In becoming sick or disabled, of dying with- 1958, the domestic insurance business out adequate resources for survivors, of was suspended, as it was felt to be unnec- outliving one’s assets, of property damage essary because of the government’s and so on were all taken care of by the monopoly of economic activity and government. With the development of the provision of universal welfare benefits. socialist market economy, however, all of For the next 20 years, PICC’s activities this changed and people were increasingly were confined to China’s international made responsible for their economic business, principally marine and aviation. security. In recognition of this fact, the In 1982, PICC resumed its domestic Chinese government has put great insurance business. PICC’s monopoly emphasis on developing the insurance ended in 1986 when a regional agricul- industry. tural insurance company was formed. In A brief history of 1988, another company, Ping An, was insurance in China granted a license in Shenzhen, and in Historians believe that a rudimentary 1991, China Pacific Insurance Company form of insurance may have existed in was established in Shanghai; both are now inside China as early as 5000 B.C. At that time, major competitors of the PICC. Other boat operators found it advantageous to domestic companies have since been Editorial redistribute their cargoes to several boats licensed, including Taikang Life, New by Charles C. McLeod ..................2 as they approached treacherous rapids on China Life (Xinhua Life), Taiping Life, The liberalization of the Indian life their rivers. If one boat was lost, all the HuaTai (a P&C company) and Tai Ping insurance industry by Nick Taket ................................6 boat owners shared the loss and no one General Insurance Company. was wiped out. The Chinese insurance market PICC underwent a restructuring in 1996 by Johnny Wong..........................10 SOA election results ....................12 In more modern forms, foreign business after composite companies were required USAMO awards held in people first introduced insurance to to separate their life and non-life opera- Washington ..........................13 China in the early 1800s. In 1805, the tions. This resulted in the establishment CE corner ....................................13 Canton Insurance Company was estab- of a state-owned holding company, PICC Life is more than “Actuaria” for this lished in Guangzhou and in 1865 the first Group, with three wholly owned songwriter Chinese insurance company, the Yi He subsidiaries: PICC Property, PICC Life by Megan Potter..........................14 What you want from the SOA Insurance Company, was formed in and PICC Re. The company was restruc- by Meredith Lego ........................16 Shanghai. By the turn of the century, tured again in 1999 when the holding Is “conventional wisdom” an China had a very advanced insurance company structure was dissolved and oxymoron? industry, albeit one dominated by foreign by Robert D. Shapiro ...................18 continued on page 3 insurance companies. Actucrossword............................20 theactuary editorial the newsletter of the Society of Actuaries Vol. 36, No. 8 • October 2002 China and India— New markets for life insurance Charles C. McLeod by Charles C. McLeod Editor responsible for this issue Editor ife insurance has generally not growth—Canada, the Netherlands and Jay A. Novik, FSA been a successful export industry Switzerland are examples of this. [email protected] for the United States. With the Associate Editors L This situation now appears to be changing Morris Fishman, FSA notable exception of American [email protected] as many U.S. companies are developing an Craig S. Kalman, FSA International, until 10 years ago very few [email protected] international presence, particularly in American companies did significant Charles C. McLeod Mexico (see The Actuary, November 2000) [email protected] amounts of business outside the United Alan N. Parikh, FSA and Asia. Two common features of these [email protected] States. Further, since then there has been Godfrey Perrott, FSA new markets are large populations and a [email protected] contraction and withdrawal from Canada W. Steven Prince, FSA relatively undeveloped insurance market. and parts of Europe, so that today there [email protected] This issue of The Actuary focuses on two Assistant Editor are very few American life insurance Loretta J. Jacobs, FSA of the largest potential new markets for [email protected] companies doing business in Canada or life insurers—China and India. They have Contributing Editors Europe. In contrast, a number of the Anna M. Rappaport, FSA many features in common—very large [email protected] larger Canadian and European life compa- Robert D. Shapiro, FSA populations, a growing middle class [email protected] nies have significant operations in the 2002 (particularly in India) and the very recent Puzzle Editors United States. Louise Thiessen, FSA opening of their insurance market to [email protected] Stephen Kinsky, FSA It is interesting to speculate on the reasons foreign life insurance companies. Over the [email protected] Gregory Dreher for this. One reason may be that, due to last five years, many of the largest october [email protected] different legal and regulatory systems, tax American, Canadian and European Society Staff Contacts: 847/706-3500 regimes, the role of governments in companies have invested much time and Clay Baznik, Publishing Director pensions and health insurance, and many resources in studying these markets, [email protected] actuary Megan Potter, Associate Editor culture, it is rarely possible to sell the same looking for joint venture partners and [email protected] product, using the same administrative applying for licenses—as described in this the The Actuary welcomes articles and letters. systems and the same distribution issue. Finally, some of these companies are Send correspondence to: systems, in different countries. This able to start doing business in China and contrasts with manufacturing industries India, fully recognizing that it may be where a product sold in one country may many years before they start to recover The Actuary be almost identical to that sold in another. their investment. 475 North Martingale Road, Suite 800 Another reason may be that the large U.S. Schaumburg, IL 60173-2226 American companies have been world Web site: www.soa.org life market, combined with the fact that leaders in many export industries such as The Actuary is published monthly few companies had more than a small (except July and August). aerospace and computers. Will life insur- W. James MacGinnitie, FSA, President share of this market, meant that U.S. Robert M. Beuerlein, FSA, Director of Publications ance become another? Nonmember subscriptions: students, $15; others, $30. companies had significant opportunities for growth at home without the need to Charles C. McLeod, FSA, MAAA, FCIA, Copyright © 2002, Society of Actuaries. expand internationally. It is interesting to The Society of Actuaries is not responsible for statements is senior vice president with RGA made or opinions expressed herein. note that many of the foreign companies International Ltd. in Toronto. He can All contributions are subject to editing. Submissions must that have expanded into the United States be signed. be reached at [email protected]. are based in countries with relatively small Printed on recycled paper in the U.S.A. populations where there are limits to their 2 insurance market Rapid growth in the Chinese insurance market continued from page 1 PICC Life was renamed China Life, PICC according to Swiss Re’s SIGMA) of 7.8 • The introduction of the agency distribu- Property became just PICC, and PICC Re percent or compared to Taiwan’s 7.4 tion system and an increase in the was renamed China Re. percent and Hong Kong’s 4.9 percent. number of insurance companies and Insurance premiums per capita in China agents. The first foreign license was granted to are only $20. AIG’s subsidiary, American International • Parents using endowments as a way of Assurance (AIA), in 1992 for wholly China’s insurance market has, however, building up funds for their child’s univer- owned life and P&C branches in been growing very rapidly, much more sity education or wedding. Shanghai. Sixteen other foreign life insur- quickly than even its fast-growing econ- • Guaranteed interest rates on savings ance companies have since been granted omy. Life premium growth has been policies, which in the past have exceeded permission to set up joint ventures with especially fast. Over the period bank interest rates. Chinese companies. As of this writing, 1993–2001, life premiums grew at an nine have begun joint venture operations: average annual compound real rate of 26 • China’s high savings rate of around 40 ManuLife, Aetna/ING, Allianz, AXA, percent, about three times faster than percent GDP and a shortage of other Colonial Mutual Group, Prudential (UK), GDP. After relatively modest growth rates investment options. China’s non-life (P&C) market, in Life insurance growth has been fueled contrast, has been growing much more by the rising incomes of China’s slowly, by an average annual real rate of people, especially in urban areas. six percent over 1983–2001. The slower the growth is due largely to a low level of risk awareness among China’s state-owned actuary John Hancock, Generali and Sun Life.