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China’s insurance industry holds a mirror to the government Jul 21st 2011 | Hong Kong |
THE insurance industry, designed as it is to smooth over life’s dramas, is meant to be somewhat dull. Insurers themselves mostly conform to this type: they produce modest, consistent returns—steady growth and, to reassure the skittish, a dividend. Things are different in China. Dividends are a trivial component of share prices, and the industry’s growth prospects are breathtaking, not boring.
One measure of its buoyancy is the industry’s resilience in the face of a series of recent setbacks. Concerns over questionable sales practices have prompted regulators to restrict banks’ distribution of life-insurance products, a channel that is responsible for about half of all life sales. If that was not bad enough, the end of subsidies for car purchases introduced during the global crisis removed a main impetus for sales of car-insurance policies. Car insurance is three-quarters of the country’s property and casualty business.
Even so life-insurance sales are off by only 5% so far this year, compared with the same period in 2010, and car-insurance sales, after slowing early in the year, seem to be rebounding. In the longer term most analysts are looking at 15% earnings growth for both life and non-life products for years to come. Optimists think growth in excess of 20% a year is a good bet.
Some of the reasons for this rosy prospect are obvious: China’s size, its growing wealth and the immaturity of the industry (see chart) all explain its potential. But the fact that the industry has so far to go also reflects two historic shifts in government policy, one which set the market back and the other now propelling it forward.
The first shift dates back to the revolution and wiped out the industry. British firms began selling policies in China in 1846. In 1875 a precursor to the current China Merchants group entered the market. AIG was founded in Shanghai in 1919. Small agencies peddling policies speckled the streets of major cities, says Paul French, a Shanghai-based writer.
All, however, were tossed out or shut down after the revolution on the premise that the state provided all, so there was no need for a separate intermediary. Even hard-core communists were gradually convinced of the need for shipping insurance for the country’s tiny foreign trade—no one wanted to allow anything on a boat if there wasn’t a clear way of being reimbursed if it did not arrive. A single company, the People’s Insurance Company of China (PICC), was established as a government monopoly, although the amount of business it did was trivial.
Things began to change in 1988 when China Merchants was able to convince the government that it should be allowed back into the business it had set up for China a century before. It was permitted to establish Ping An Insurance, at first providing coverage for trucks moving goods from a single part of Shenzhen in the south of the country. Eventually, insurance offices were established at the end of each truck route.
From these modest roots, an extraordinarily valuable industry has emerged. Ping An is now worth $66 billion. PICC has been broken up into at least three bits. One part, China Life, is the only pure insurance company in the world worth more than Ping An; another part, carrying the old PICC name and selling property and casualty insurance, is worth $20 billion; a third will go public soon. Various other insurance companies have emerged as well, often carved out of a state entity. China Pacific, a Shanghai-based firm, is worth $30 billion. Along with these giants there are hundreds of smaller outfits and dozens of foreign-linked ventures, all crowding into what they sense is a growing market.
That growth reflects the second great shift in government policy. Having previously dispensed with insurance as redundant in a socialist society, the new China has reversed course. The state is intimately involved in business and many aspects of life, but the provision of social insurance—for ill-health, accidents and old age—is either inadequate or non-existent. In the case of a disaster, help is unlikely to come from the courts or from government. That creates a staggeringly large gap for insurers.
The most popular life-insurance products tend to be simple: pay a premium for 10-15 years and get a return, plus protection for your family in the case of death. They are useful for retirement, for a child’s education or for an emergency. As investment products, however, they are less attractive than they once were. Banks have recently had to raise reserves: that has created a hunger for deposits which has pushed up what they are willing to pay. It is now common to be offered 3% for a one-year bank deposit and 5.5% for a five-year one. Insurers are allowed to guarantee only a 2.5% return; policies linked to the stockmarket that dangle the promise of much higher returns have disappointed recently.
That might hurt if enough customers moved in search of higher returns. But in China many people are only just becoming affluent enough to invest. There is lots of opportunity for agents with a product to flog. China Life has more than 700,000 agents working on its behalf; other firms have armies of salesmen, too.
As is often the case in China, foreign firms face huge barriers. With one exception, they are required to enter the country through joint ventures or to hold only tiny, direct stakes. The exception is AIA, which was recently spun out of AIG. Its erstwhile parent was quick to follow China Merchants in successfully pushing for a new licence based on its history, and managed to obtain approvals for five provinces.
AIA’s life-insurance operations have the largest market share of any foreign firm as a result, at a trivial-sounding 1%. Even that sliver still accounts for 8% of all its new business, notes Mark Kellock, an analyst with Barclays Capital. Up that share just a little and the impact on AIA would be vast. China’s insurance market may be daunting. Dull it is not.
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