Why China's insurance industry is suffering

Fierce competition, poor sales tactics and low returns are keeping profits in the industry back.
WhatÆs happening to the China insurance market? Compared to the frenzy surrounding the restructuring and listing of ChinaÆs state banks, the lack of enthusiasm in the insurance sector is striking.

ôForeign companies came to China hoping for an explosion in insurance, since insurance is often linked with GDP growth. But they were often unprepared for the practical challenge,ö says one local manager at a joint venture.

The initial rush was not surprising given the hype surrounding the sector. In 2002, for example, a survey by the Boston Consulting Group announced that since 1996, premium income growth had averaged 40% per annum, and that it expected premiums to grow at a rate of between 15% and 25% per year over the next five years. The report concluded that calculated at a compound growth rate of 20%, the market could reach more than Rmb830 billion by 2008. High growth rates apart, the trillions of dollars in the banking system are also tempting to foreign and domestic insurers.

And indeed, China needs insurance. An aging population, a privatised health system and a government pension system deep in the red, makes the potential market huge.

But like numerous industries in China, the macro figures can mask the practical difficulties of doing business in the world's most populous country.

In fact, after years of spectacular growth (nationwide life insurance premiums reached Rmb320 billion in 2004, compared to under Rmb50 billion in 1996) prospects appear to be dimming. And despite the high salaries available for experienced staff, two people interviewed for this article said they were on the point of changing jobs.

Common to both were the unsatisfactory short and mid-term prospects for the China insurance markets.

Such negativity is easier to understand if you take a look at the Shanghai life insurance market. In 2004, life insurance premium growth turned negative and in 2005, the growth amounted to a meager 5.42% according to the industry regulator. Market participants agree that Shanghai is the key market because itÆs the richest, most mature and most open. Thus what happens in Shanghai, is likely to repeat itself across China.

The story for the first quarter of 2006 also caused a stir. According to the Shanghai Insurance Association, growth in first quarter life premiums was a stunning 140% quarter-on-quarter.
But company sources said this spectacular growth was not æhigh qualityÆ as it was generated to a great extent by single-premium products and the increased role of bancassurance as a distribution channel.
Bancassurance-generated premiums contributed 36% to total insurance premiums in the first quarter, compared to only 19% in the first quarter of 2005. ôItÆs clear that what appears to be strong growth in the first quarter of this year rests fundamentally on the bancassurance distribution channel and on single-premium products,ö notes one local manager at a JV.

The problem with the bancassurance model is that insurance companies are essentially held hostage by the banks.

ôBanks like ICBC and China Construction Bank have disproportionate shares of deposits. They are the biggest banks in every way. We donÆt bother with the city commercial banks. As a result, the big state banks can hold a gun to our head,ö says one insurance manager.

China Construction Bank, for example, charges a 3% commission for selling the most popular product in Shanghai: a single-premium product costing Rmb9,500. In this product, he customer puts down Rmb9,500 in one go. At the end of five years, the customer gets Rmb10,000 back. The shareholder also gets yearly dividend income which insurance companies must set above the five-year bank deposit rate to attract those customers. For the banks, itÆs a good deal: on top of the lucrative commission, selling such a simple product simply means a change in the type of account held at the bank.

ôThese products are not attractive to insurance companies, but the banks find them easy to sell because customers canÆt differentiate between good and bad insurance products,ö says one manager, adding that the banks have little incentive to explain those more complex products which would benefit the insurance companies. Single-premium products fail to provide the steady supply of premiums over many decades which represent the lifeblood of insurance companies. Indeed, some industry sources say they should not be defined as insurance products at all, but as savings products û and that such a move would also make the life insurance premium market look a lot less robust.

Insurance companies are also competing against the fund management companies, who have direct access to the ChinaÆs resurgent stock market û up 70% in the past few months. Insurance companies have been permitted to expand their exposure to the stock market, but investors donÆt trust their investment skills.

ôChinese insurers are more accustomed to bank deposits and debt. They donÆt have the stock market expertise of the mutual fund industry, so people shun them in favour of the funds,ö says one manager.
Insurance companies look particularly poor bets when the stock market is booming, because the bulk of their investment is in government bonds and bank deposits.

"Investors want yield. They see the accumulation of assets as the best kind of insurance, and that's were the insurance companies look uncompetitive," says one manager.

Insurance companies also have an actuarial problem. Actuarial data is poor in China, because one needs at least a 100 years of relatively peaceful growth to build up an effective demographic picture. As a result, the data is imported from Taiwan. To ensure they err on the side of caution, insurance companies estimate people live to 105. This makes annuity products expensive and unattractive.
Insurance companies also have an image problem. Until recently, a hyper-aggressive and ethically-challenged agency salesforce was the main sales channel. Their reputation is far worse than that of the state banks, which depositors believe have an implicit government backing and who have never refused to pay out depositors.

In total, the first quarter of 2006 in Shanghai brought in life insurance premiums of Rmb8.79 billion, of which Rmb3.2 billion was obtained through bancassurance and Rmb1.87 billion came from single-premium products.
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