Life insurance industry in China posts a negative growth for the first time in 10 years. Steps sought for revival

Modernizing Insurance


By TANG YUANKAI

‘It’s been a hard time for the life insurance industry this year. Clients are few and commission is low,” complained Xiao Tingting, a staff member of a prominent Chinese life insurance company.

Her feeling was confirmed by statistics released by the China Insurance Regulatory Commission (CIRC), the industry watchdog, at the end of May. China’s life insurance industry posted a negative growth in the first quarter for the first time in 10 years. Premium revenue reaped in the first three months was 0.77 percent lower than the same period last year.

Poor Product Variety

The recent 10 years witnessed the vigorous growth of China’s life insurance industry. Since 1996, it has maintained an average annual growth of 40 percent. The premium income of life insurers accounts for over 70 percent of the industry total premium revenue.

STRIKING CONTRAST: Foreign-funded life insurers enjoy a soaring growth while their local counterparts suffer a slowdown

However, the products of life insurance, lack of variety and individuality, and poor service make it difficult for the sector to meet the changing market demand, explained Wu Dingfu, Chairman of the CIRC when responding to the question about negative growth.

These thoughts were echoed by Wu Zhengming, a high school teacher in Beijing. “It’s hard to buy the insurance policy that you need.” She planned to buy a policy for her nine-month-old daughter and her 83-year-old grandmother, but was left disappointed after consulting several insurance companies.

Though Chinese consumers have been increasingly aware of the importance of insurance and thus raised more demands for policy options, local insurance companies are slow in improving product variety and service, which in turn has led to the drop in sales.

Wang Xujin, head of the Insurance Department of Beijing Technology and Business University, believes that local insurance underwriters should come up with more products that are tailored to consumers’ needs.

“Many local insurance companies care more about the premium growth, instead of developing new products to cater to market demand,” admitted a life insurance company manager who asked to remain anonymous.

Experts point out that local insurance companies have been driven by the “market share counts” strategy during the last 10 years. They have achieved large-scale market share but low profit.

Fund Aggression

So far, the premium from insurance products with attached dividend make up about 70 percent of the total life insurance premiums, which also serves as the main source of the rapid premium increase over the past years. But a Beijing company official, who declined to be named, disclosed that currently such investment-oriented insurance products, especially those sold through banks, are unsalable, as many policyholders with a purpose of investment have shifted their capital to funds at the temptation of higher returns.

Professor Hao Yansu of the Central University of Finance and Economics examined such an example. In both 2002 and 2003, insurance products with attached dividend ended the year with a poor performance. The dividend of a policy worth 10,000 yuan ($1,208) was only 87 yuan ($10.51) at the year-end. However, investing in funds with the same amount of money could reap a bonus of 300 yuan ($36.23) at best.

Zheng Wei, with the China Insurance and Social Security Research Center of Peking University, believes that the souring reputation of bonus-attached insurance products also contributes to the negative growth of the life insurance industry.

Insurance companies misled consumers by promising high returns when such products were initiated, said Zheng. Before 1999, local life insurance companies promised an interest rate of 6.5 percent or even higher to policyholders, but the present real return on investment is only about 3 percent.

During the first two years, consumers were not clear how much exactly they could earn and thus their confidence was not affected. But as the real return fell short of expectations, consumers got cold feet.

Working With Banks

The rapid growth of life insurance in past years cannot do without banks, as most policies are sold through banks in China, said Xie Guanxing, CEO of the CITIC-Prudential Life Insurance Co.

“Insurance through banks” model was introduced to China in 2001 and has gained strong momentum since. Last year, five major local insurance companies collected a premium of 287.3 billion yuan ($34.7 billion), up 30.19 percent year on year. Of this, 78.2 billion yuan ($9.5 billion) came from policies sold by banks, accounting for 27.2 percent of the total premium revenue and representing a year-on-year growth of 101.66 percent.

But such a model is not immune to problems. After a short period of hot sales, some insurance companies have lost their enthusiasm for the model because of the high bank commission.

Industry insiders say selling policies through banks has been and will continue to be a major characteristic of the insurance industry in Asian countries for the foreseeable future. China is not an exception.

So far, banks mainly work as sales channels of insurance companies and cooperation involved with equity and financial services is still hard to prosper. How the two sides can both benefit from their cooperation without chilling the momentum of development has become a hot topic.

Lin Zhongwen, General Manager of Manulife-Sinochem Life Insurance Co., said the declining premium is not bad, because real individual life insurance grows and the premium bubble bursts.

Competing With Foreign Counterparts

Though life is not easy for local life insurance companies, their foreign counterparts, however, have made big strides. In Shanghai, the premium revenue of foreign insurance companies accounts for more than 10 percent of total industry revenue. American Insurance Co. Shanghai Branch registered a year-on-year increase of 88 percent in March alone, a record high since 1992. Of this, life insurance policies rocketed by 116 percent. Other foreign underwriters also said they attained targets and achieved sustained positive growth.

CIRC Vice Chairman Li Kemu said at a forum recently that foreign insurance companies will be “allowed to go anywhere by the end of this year,” as location restrictions are lifted. Meanwhile, as group insurance and occupational pension markets will be open soon, Chinese insurance underwriters may feel the pinch of their foreign counterparts in the near future.

The Boston Consulting Group (BCG), one of the world’s top management consulting firms, released a report recently, urging Chinese life insurers to take quick action to improve the overall operation, otherwise there might be a risk of foreign insurers taking the lead in the market.

Xie Guanxing of CITIC-Prudential said the ideal insurance industry is expected to offer an all-dimensional money management service. So far such service has been popular on overseas market, but some domestic insurance companies are still in the fundamental stage of soliciting policies from relatives and friends.

Wang Xujin also believes that additional services offered by Sino-foreign joint ventures are still limited, not to mention local players.

Rosy Prospect

CIRC Chairman Wu Dingfu has noted that his commission will pay high attention to the negative growth of the life insurance industry and it will adopt various measures to fend off the risk of a slowdown.

On the other side, the falling premium revenue also reminds Chinese life insurers of the importance of adjusting market structure and product options.

During the past years, limits on insurance capital investment have been a headache for local insurers and Chinese companies expand revenue mainly through premiums. The issuance of a provisional regulation on the supervision of insurance asset management companies (AMC), which took effective on June 1 and allows selected insurers to set up AMCs, is regarded as good news for local insurers.

In addition, a temporary regulation on occupational pensions, released by the Ministry of Labor and Social Security in May, is expected to pave the way for the development of an occupational pension market. This could become a new revenue source for China’s life insurance companies.

Occupational pensions first emerged in China in 2000. The scale has been limited due to policy obscurity, estimated at about 27 billion yuan ($362.4 million) by 2002.

Experts have estimated China’s occupational pension to expand by 100 billion yuan ($12 billion) each year when the market mechanism is fully launched and more tax incentives and other policy supports are provided.