Foreign Insurers Reconsider Chinese Business Models on Cost-Effectiveness

Since China opened up its insurance market after joining the World Trade Organization in 2001, several foreign players have modified their original capital-burning business models by trading off some equity interests for more local resources in their domestic joint ventures, hoping to secure long-term investment returns.

The 50-50 joint venture business model is a typical approach that foreign insurers have adopted to jointly set up an insurance company with local partners when they were allowed to tap the Chinese market. But some foreign or joint venture insurers, such as Sun Life Everbright Life, have recently restructured and reduced their shareholdings in the joint entities by introducing more Chinese investors.

This strategy change is partly because "the operational result of China JVs did not meet some foreign insurers' expectations," said Wenli Yuan, Hong Kong-based senior analyst at consultancy Celent.

Strategy Change

As some foreign insurers reduced their shares in joint ventures to around 20%, the joint venture can change from a foreign JV to a local company, and could then expect "faster expansion and growth," noted Yuan.

"I don't think foreign companies are trying to leave the China market. I'd rather say it is a strategic change in their China operation," she said.

With an increasing cost-effectiveness concern among foreign players in China, the analyst said the 50-50 joint venture business model needs to be changed as it "could cause difficulty in management decision-making, and finally hamper the stable growth of the company."

For example, Sun Life Everbright Life was formerly a 50-50 joint venture between China Everbright Group and Canada's Sun Life Assurance. In August 2010, the life JV introduced two new strategic Chinese shareholders -- China North Industries Group Corp. and Anshan Iron and Steel Group Corp. -- each of which will hold a 12.5% stake in the life insurer (BestWire, Aug. 17, 2010).

Following the equity structural change, China Everbright Group will continue to hold a 50% stake in the life joint venture, while Sun Life Assurance will hold a 24.99% stake and become the second-largest major shareholder of Sun Life Everbright Life. The life JV will also increase its registered capital from 1.4994 billion yuan to 3 billion yuan and become a Chinese domestic life insurer.

In addition to providing capital support, the new Chinese shareholders will provide access to more than 1 million customers for the life joint venture.

Government Policy

Although the consumer-intensive feature of life insurance can help foreign players gain investment funding and a customer base through the introduction of new investors and equity stake adjustments, capital-intensive nonlife foreign players still suffer from business limitations in the policy-driven China market.

The restrictions on compulsory automobile third-party accident insurance, which is the largest nonlife sector in China but has yet to open to foreign insurers, has kept foreign companies from tapping enormous premium growth.

"Automobile insurance premiums account for more than 70% of total nonlife insurance premiums in China," said Yuan.

Foreign nonlife insurance companies are allowed to sell auto insurance, but are not yet allowed to sell compulsory auto third-party accident insurance, which according to Yuan is "less convenient for customers who apply for insurance with foreign companies."

This is one of the reasons why foreign nonlife insurers "have only about 1% market share" in China, said Yuan. Other reasons for the low penetration of nonlife foreign insurers in China include lack of branch networks and lack of sources for group customers.

Foreign insurance companies still have market advantages in areas of management experience, products and services, according to Celent. To tackle the problem of a lack of branch networks, Yuan said developing alternative distribution channels such as bancassurance and direct marketing could be an option.

She added the Chinese insurance market "will be more open in the future." For instance, the China Insurance Regulatory Commission is considering opening the market of compulsory auto third-party accident insurance to foreign firms.

Market Outlook

China, according to Aite Group's analyst Clark Troy, is not as westernized as India, and the country does not have a classic democratic and market-driven framework for business operations like India. Nevertheless, domestic Chinese insurers such as China Life and Ping An are ahead of their Indian counterparts in finishing business reforms and received approvals to be listed on domestic and overseas stock markets in 2003 and in 2004, respectively.

At the end of June 2010, there were 60 life insurers and 52 nonlife insurers in China. Among the life insurers, foreign players accounted for 28 and generated premiums of 30.45 billion yuan. In nonlife, there were 18 foreign players generating premiums of 2.13 billion yuan, according to the CIRC.

The total market share of foreign or joint venture companies in China rose slightly compared with 2009, reaching 4.9%, compared with more than 6% in 2007 and less than 4% in 2008 and 2009 due to the effects of the global financial crisis. The rebound this year indicates "many foreign companies are confident in future growth," said Yuan.

The Chinese insurance market has not seen a substantial growth in the number of new foreign comers in the past year. South Africa's largest private health insurer, Discovery, formed a partnership with Ping An Health, a subsidiary of China's second-largest insurer Ping An, by acquiring a 20% stake in the Chinese health insurer in August.

Some foreign reinsurers registered in China won approval to expand in the market. Lloyd's China will be allowed to write direct insurance in addition to its existing reinsurance business (BestWire, May 20, 2010). In comparing China and India, Swiss Re recently commented that China is likely more "business-friendly" to foreign reinsurers than India.

Reinsurance business in China and India is still heavily influenced by respective national reinsurers China Re and GIC Re.

"It will be in the interest of these markets to encourage higher cessions to the international market as a mean to diversify insurance risks, particularly natural catastrophe risk. International reinsurers also offer better and more sophisticated pricing tools to help these markets to price risks accurately," said Clarence Wong, Swiss Re Asia's chief economist.

The reinsurance markets in both countries are "already highly competitive" as both onshore and offshore reinsurers compete for business, said Wong. "China already allows the establishment of reinsurance branches, while a bill to allow reinsurance branching is currently under consideration in India."