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It seemed to us at KPMG, however, that it would be helpful to the international community to produce briefing papers which give a snapshot of where things are in various areas of the financial services sector in China. Working with Reuters, we have chosen to do this by bringing together the experiences of senior executives with our own perceptions based on our experiences working with domestic players and foreign entrants into China. We chose to start with the insurance sector which has until now seen the most frantic activity amongst foreign insurers whilst perhaps not getting quite the attention of the banking sector in the media. I would like to thank those executives who were prepared to give their time to share their thoughts with us and I hope that this document is of value to those who have an interest in the insurance sector in China. Steve Roder Partner in Charge Financial Services practice KPMG in China and Hong Kong SAR © 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved. 2 Foreign insurers in China: Opportunity and risk The insurance industry in China today has got to be one of the biggest financial services sector growth industries in the world. Any business which is essentially about risk and opportunity is going to have a best selling seat in the front row of the biggest industrialisation show in human history in a hundred years. We need to be clear about what is happening in China. The country’s speed and size of economic growth is not just another modern miracle Asian tiger economy. China’s scale almost certainly makes it the newest industrialising major economy in a process which started with Britain in the eighteenth century and continued through Germany, the United States, and Japan. But at this level and juncture of historical change, there are also immense political and economic risks involved for the country, the corporation, and the individual. This historical process is also characterised by an exponential growth in what is commonly understood as the middle class, which in economic terms usually means people with enough wealth to take a longer-term view extending at least to the end of their lives, and into the wage earning years of their children’s lives. I will not begin to deal with the details of how and why this precise phenomenon is happening in China right now and why that offers one of the biggest areas of financial sector opportunity and growth for foreign companies. This report does that clearly and admirably and I hope you will enjoy it, and benefit from it. Reuters business is also about defining and reporting risk in human political and economic affairs, and it has certainly been a large part of my working life. It gives me great pleasure therefore to recommend this first financial sector report from KPMG and Reuters. Eric Hall Reuters Editor for China, Hong Kong and Taiwan © 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved. Foreign insurers in China: Opportunity and risk 3 Opportunity and risk This report from KPMG and Reuters surveys the risks and opportunities for foreign companies in China’s insurance industry, and what it will take to be successful. The days when foreign companies typically saw China as an almost limitless market which they simply had to step into and tap are long gone. To do successful insurance business in China requires hard work in understanding the market, the rules, the competition, and looking at new and innovative ways of doing business. The life market in particular is already somewhat crowded. But relative to its growing global economic importance and wealth, China is assuredly under-insured, both in the life and non-life sectors. That is the real opportunity for those who have the insight and the foresight. KPMG and Reuters have collaborated to produce this briefing paper. This is based upon interviews with a number of CEOs responsible for their companies’ insurance operations in China. These interviews have been supplemented by desktop research. The interviews were carried out on the basis of strict confidentiality and the briefing paper therefore does not disclose information specific to any company gained during the interview proccess. © 2005 KPMG, the Hong Kong member firm of KPMG International, a Swiss cooperative. All rights reserved. 4 Foreign insurers in China: Opportunity and risk Life insurance – Life in the fast lane China’s burgeoning middle class represents one of the world’s greatest pools of human drive and ambition, but it also harbours a terrible fear for its own future. The average urban Chinese worker with a skilled or professional job sees no concrete evidence of their country’s ability to provide the right level of financial security for themselves or their family, if the worst should happen. That simple human fear is the force that help ensure the continued rapid increase of the life insurance industry in China. Annual economic growth of well over eight percent 1, an individual savings rate which more than matches Japan’s at its height, and the entry each year of millions more people into the target bracket of earnings for consumers of life insurance cover is driving an enormous growth rate 2. The potential for future growth is immense, as less than four percent of China’s 1.3 billion people have insurance 3. Life insurance premium 1993-2005 350 300 250 RMB 200 Bn 150 100 50 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Primary source: China Financial Landscape, December 2, 2002, CSFB; Update: China Money Vol.10; No.19 and CIRC Web site Profitability is a moving target in China’s insurance market, as nearly every player is in expansion mode.