Insurance companies in China are undergoing a major shake-up as smaller and weaker insurers are struggling to meet the heightened solvency requirements introduced by the China Insurance Regulatory Commission ("CIRC") in December 2008 in light of the economic crisis. The aims of these requirements are to increase risk management and efficiency in the insurance sector.

It is estimated that about 14 insurers are likely to fail the new solvency requirements in 2009, a 40 percent increase from the number of failures in 2008. This could lead to an accelerated trend of consolidation in China’s already highly concentrated insurance market.

At present, China has 47 non-life insurers and 56 life insurers. The top five biggest property and casualty insurance companies account for a combined 75.5 percent market share, while the top five life insurers hold a 78.5 percent share.

Solvency problems are hurting smaller insurers that are seeking new business in a bid to increase their market share when the economy is operating at low margins. They have already lost a combined 2.7 percent market share in the first four months of 2009 to three big insurers in China, according to an ABN Amro report.

In today’s economic environment, foreign insurers are not enthusiastic to acquire these smaller and weaker local insurers to help them shore up their capital. AXA, Europe’s second-largest insurer, reportedly dropped plans to acquire China United Insurance in May 2009, citing concerns over solvency issues of the mainland insurer. However, domestic big insurers are eyeing those smaller players for a bargain price.