The Geneva Papers on Risk and Insurance Vol. 25 No. 3 (July 2000) 335±355 China's Insurance Market: Opportunity, Competition and Market Trends by Yiming Shenà China represents the largest insurance market in the world that is both closed and under- served. With more than 20 per cent of the world's population and a high level of domestic savings, China is considered an ideal opportunity for foreign insurers: one quarter of the world's population accounting for less than 1% of its premium spending. For the past two decades, the highly centralized planned economic system and the state social insurance system has operated to prevent commercial insurance from ful®lling the role that it plays in countries where insurance is highly developed. This situation is now changing. While the insurance industry in China is still, in essence, a new and developing industry (having just under two decades of insurance experience as compared to more than a hundred years' experience for developed countries). Chinese regulatory authorities predict the market will double by 2004 to more than $30 billion. From 1992 until 1999 only nine foreign companies were granted licences and their operations were restricted to the city of Shanghai, with the exception of one American company permitted to operate in Guangzhou. In 1999, four more foreign companies were selected by the government for business in China.1 In November 1999 the U.S. Government completed bilateral talks on China's accession to the World Trade Organization (WTO). It is expected that China'sWTO accession will lead to an elimination of geographic restrictions, greater market access, and more lines of business permitted for foreign insurers over the next several years. Life insurers strongly praised the agreement, as American Council of Life Insurance President Carroll Campbell said, ``it gives insurers the opportunity to grow into a new and largely untapped market.''2 This article starts with a general introduction of the Chinese insurance market with statistic reports, that offer a basis for further analysis of market pro®les and prospects. The second part it provides an overview of the market competition status in China with special focus on the entry and operating issues for foreign insurers. The third part summarizes the insurance aspects of the U.S.±China WTO agreement and predicts its implementation. The article concludes with a general discussion of relevant legal and regulatory issues, followed by a projection of development trends and strategic recommendations to foreign insurers who want to tap this emerging market. à Dr Shen LL.B., LL.M. (Fudan University, China) JSD (Osgoode Hall Law School, Canada), is a Director and Associate Counsel at Manulife International based in Hong Kong. Prior to joining Manulife Financial, he interned with the People's Bank of China during 1995±1996. 1 In April 1999, licences were awarded to four companies ± the Chubb Group and John Hancock Mutual Life Insurance of the U.S., the U.K.'s Prudential and Canada's Sun Life Assurance Company. 2 See S. Brostoff, `Insurers Praise Pact For China To Enter WTO', National Underwriter (Life & Health/ Financial Services Edition), 22 November 1999. # 2000 The International Association for the Study of Insurance Economics. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK. 336 SHEN 1. Market pro®le3 The emergence of powerful local players and the arrival of foreign insurers are transforming China's insurance industry at a remarkable speed. The industry is gearing up to meet the unprecedented demand for insurance generated by continuing market reforms. It is estimated that the market could reach RMB 250 billion (US$ 30.1 billion) by the year 2004, and RMB 420 billion (US$ 50.6 billion) by the year 2010, with projected annual increases in the region of 20 to 30 per cent and possibly even more for life insurance. Even though the market share captured by foreign insurers is not expected to exceed 5 per cent by year 2000, this tiny slice of the Chinese insurance market could be worth RMB 10 billion (US$ 1.2 billion) to RMB 12.5 billion (US$1.5 billion) annually ± a highly attractive prospect for foreign insurers with saturated domestic markets. Table 1: Major China Economic Indicators (1995±1999) GDP growth GNP (US$) Per capita Year (%) (billion) GNP (US$) 1995 10.2 686 571.5 1996 9.7 812.6 667.4 1997 8.8 893.3 726.1 1998 8 981 785 1999 7.8 1100 871 Source: China Statistical Yearbook. The insurance industry has shown rapid growth within the past few years, particularly in the life insurance market, as Chinese citizens' average annual income grew an average of 23 per cent during the past four years. In addition, the increase in private businesses, coupled with the decline of job opportunities in the state sector as a direct result of China's state reforms, has sparked people's interest in buying all types of insurance ranging from property to life. In 1998, the total amount of life and property insured was RMB 124.73 billion (US$ 15.06 billion). China's insurance sector reported a premium income of RMB139.3 billion yuan (US$17.07 billion) in 1999, up 10 per cent from 1998.4 Among these premiums, 52.1 billion yuan was from property insurance, up nearly 3 per cent from 1998, and 87.2 billion yuan from life and health insurance, up 15 per cent. Insurers paid out 28 billion yuan in liabilities on property policies and 23 billion yuan for life and health policies. Ma Yongwei, chairman of the China Insurance Regulatory Commission (``CIRC''), attributed the stable growth of the insurance sector to the regulators' efforts to improve market order. China's insurance sector is expected to earn total annual premium of US$30 billion by the year 2004, as estimated by Wu Xiaoping, Vice-Chairman of CIRC.5 3 See P.Lim and E. Bai, `China ± Insurance Industry', National Trade Data Bank, Market Reports, 1 August 1998. 4 `China's Insurance Sector Reports Double Digit Premium Growth', Asia Pulse (26 January 2000). 5 `China Insurance Premium will reach $30 billion at 2004' (12 December 1999) on line: khttp:dailynews.- muzi.coml # 2000 The International Association for the Study of Insurance Economics. CHINA'S INSURANCE MARKET: OPPORTUNITY, COMPETITION AND MARKET TRENDS 337 Table 2: China's Insurance Premium (billion yuan) 1994±1999 The recent rapid growth in insurance premium is due in equal parts to growing competition within the industry, that has thereby resulted in better services, and a growing awareness of insurance, along with a growing need to protect against the reduction of bene®ts and the downsizing of state-owned ®rms, resulting in loss of employment for a large number of workers. Life insurance, in particular, is booming as state-owned enterprises cut back on coverage for their employees and lay off workers as part of the reform process. Chinese citizens, especially urban dwellers, have taken it upon themselves to purchase private life insurance, either to extend the minimal coverage offered by their employers or to provide coverage for themselves as private enterprises sprout up. Life insurance premiums in Beijing, China's second largest city, have jumped in 1997 to about RMB 9 billion (US$1 billion), about 5 per cent of Beijing'sGDP,an almost twofold jump over 1996. Although the Beijing market is still closed to foreigners, the rapid increase in the life market re¯ects the growing awareness among China's citizens of the importance of enhancing the limited coverage offered by their state-owned employers. Life policies emerged as most popular in Beijing, with life premiums comprising 75 per cent of the total insurance market. In Shanghai life insurance captured 65 per cent of the market. A recent study by the Gallup organization indicated that 15 per cent of Shanghai's local citizens currently hold life insurance policies, while another study showed that 80 per cent want to cover their own risks by themselves. The reinsurance business, in which insurance companies offset layers of risk to another insurance company in exchange for a portion of the premium, is an area where foreign insurance companies may participate without holding a licence. Since the last insurance law was passed in October 1995, fronting, the process whereby 100 per cent of the risk can be covered by a reinsurer, became illegal. Now a minimum of 40 per cent of the risk has to be covered by the underwriting company, so up to 60 per cent of the risk may be reinsured by another company. However, 20 per cent of the reinsurance business automatically goes to China Re, a subsidiary of state-owned People's Insurance Company of China (``PICC''). At least another 10 per cent of any reinsurance must be offered to other local reinsurers. Whatever part of the risk still remains may be covered by foreign reinsurers. This is likely to be a very small portion, as Chinese reinsurers traditionally take more than the minimum allocation. Domestic reinsurers only steer clear of commercial projects where the risk involved is regarded as too high or unquanti®able (such as satellite or nuclear power plant # 2000 The International Association for the Study of Insurance Economics. 338 SHEN projects). Foreign reinsurers face other ®nancial disincentives including a tax of 8.55 per cent on any business that goes offshore. China's non-life insurance market, on which reinsurers must subsist, only amounted to RMB 45 billion in 1998. In the absence of a sophisticated reinsurance infrastructure in China, a large number of domestic non-life insurance ®rms do not reinsure at all.