The liberalization of the Chinese financial industry is making substantive progress. As an important sector of the financial industry, the insurance industry is witnessing an increasing emphasis on opening-up.
Foreign insurers will greatly benefit
The China Banking Regulatory Commission successively launched 27 measures to open up the financial industry in April and May 2019. This was followed by Measures for Further Opening up the Financial Industry (Opening-up Measures) launched by the State Council in July this year with immediate effect.
Eleven policy changes are included in Opening-up Measures, which aim to further improve the environment for foreign investment and operation in the financial sector and encourage foreign investment to get involved in developing China’s financial sector. The following 3 measures are specific to the insurance industry:
- Reduce the transition period of foreign stock ratio for life insurance: The newly issued regulation will bring the financial opening-up measures forward from 2021 to 2020. The aim is to introduce advanced overseas life insurance products and the superior operation concepts of overseas institutions and facilitate foreign life insurance companies' expansion in the domestic market, thus diversifying existing life insurance institutions and products in China. These measures liberalize the upper limit of foreign ownership of life insurance companies to 51% and remove all restrictions after three years, as required by the Boao Forum in 2018.
- Cancel the restrictions on the shareholding ratio of insurance assets management companies: The restriction that “domestic insurance companies shall hold no less than 75% of the total shares of insurance assets management companies” specified in the Tentative Provisions on the Administration of Insurance Assets Management Companies from 2014 is cancelled and foreign investors are allowed to hold more than 25% of the shares with no upper limit. This measure will break the investment bottleneck of foreign insurance assets management companies who have long been restricted by the very low proportion permitted investment and thus assist them in expanding within the Chinese market.
- Lower access criteria for foreign insurance companies: The regulation that “an applicant for establishing a foreign insurance brokerage firm is required to have more than 30 years' operation history in foreign insurance companies in WTO members” specified in the Notice about Allowing Foreign Insurance Brokerage Firm to Establish Wholly Foreign-owned Insurance Brokerage Firm of 2006 is cancelled. This will lower the hurdle for foreign entities and allow more of them to gain better access to the Chinese market and accelerate the development of foreign investment in China.
On the whole, the market access threshold for foreign insurance companies has been substantially reduced, and the restrictions that might have “shackled” foreign companies have been cancelled significantly, which will vigorously stimulate foreign insurance companies to enhance their competitive edge in Chinese market.
The opening course of the finance market
China's insurance industry has been making attempts to march towards the world since the Reform and Opening up. Since AIA established its presence in Chinese market in the early 1990s, China has witnessed a boom in foreign insurance companies gaining a foothold in the early 21st century.
After China's became a member of the WTO, China's insurance industry was multi-dimensionally opened up to the world, gradually transiting from limited scopes and sectors to multi-directional opening-up, from policy-based opening-up to the predictable opening-up among WTO members under the legal framework, although such an opening-up was promoted under international pressure. However, China's insurance industry was still under-developed, and policy makers at that time wanted urgently to protect the domestic insurance market. Eventually, access restrictions were reduced, but some major sections remained protected. The specific actions and strategies under the principle of opening up are cautious, controlling the actual progress of opening-up and possible risks.
As a whole, after 40 years of reform and opening up, as well as competition in international arena, China's insurance industry has opened-up significantly to the point where a pattern of dynamic competition and common progress has been formulated among Chinese and foreign insurance companies. Currently, 50 foreign insurance companies already have a presence in China’s insurance market, of which 22 are property insurers and 28 are life insurers, together accounting for 28% of the total number of insurance companies in China. According to the industrial statistics in the first half of this year, foreign insurance enterprises realized original insurance premium income of 172.212 billion yuan which is an increase of 44.79% over the same period last year, and the market share reached 6.74% which is an increase of 1.43% over the same period last year.
Difficulties encountered when exploiting the Chinese market
Though growth momentum is remarkable, the current market share of foreign insurance companies is still low, which is closely related to “lack of acclimatization” and a variety of “latent restrictions” faced by foreign insurance enterprises:
- Once the ideas and experience of foreign insurance enterprises gained in international developed markets are separated from their original market contexts and directly applied to countries with different backgrounds, they will become inherently different, which may further result in “lack of acclimatization”;
- “Latent Restrictions” include the difficulty in obtaining business qualifications for types of insurance that are closely related to the national economy and people's livelihoods, and more cumbersome process and longer approval time for foreign insurance enterprises when establishing offices and branches. Having to obtain approval process province by province exhausts applicants' patience. That is probably why overseas insurance companies hardly ever expand their business throughout China.
Besides the aforesaid, Chinese local insurance companies, with their long established and large portion of the Chinese insurance market, are not the one to be trifled with. Their huge teams with agents numbering in the millions have extended their influence into every family.
The booming insurance market may mean a bright future for foreign insurers in China
As the income of Chinese residents has increased, their perspective on insurance has also changed. As a result, China's insurance market is increasingly in demand, and quickly becoming one of the most important insurance markets in the world. According to A Report on Global Insurance and Market Research released by Allianz Group in 2018, “Nearly 80% of the total 60 Billion Euros increase in global premiums came from China, and China witnessed a continuously strong growth momentum in life insurance, replacing Japan and becoming the biggest life insurance market in Asia.” In addition, Allianz also predicted in its latest Global Insurance and Market Research Report released in May 2019 that the Chinese insurance market would achieve an average annual growth rate of 11% over next decade, and that about 1/3 of the world's new premiums would be generated in China. Meanwhile, The Foreign Investment Law of the People's Republic of China, adopted in March 2019 and coming into effect as of January 1, 2020, will provide better investment protection for foreign companies by strengthening the principle of national treatment through various provisions. All of these undoubtedly will be a positive sign for foreign insurance companies that have accessed or are still considering the Chinese market.
It is worth mentioning that China's insurance market is continuing to boom. Both property insurance companies and life insurance companies are experiencing increasingly severe market competition. High debts increase loss risks, and some functions of life insurance are weakened by the development of short-term and mid-term existing businesses. The continuous promotion of “returning to the essence of security”, “allowing insurance market to develop more rational requirements” and premium reforms for the insurance of commercial vehicles have all increased the value to the market of the refined attitudes and the more extensive experience of foreign insurance enterprises in respect of clients, risks and channel management.
Though demand and policy are assisting foreign insurance enterprises in cultivating their markets in China, some foreign insurance enterprises have a clear understanding of the inherent defects of weak market basis and channel, and are constantly trying to make improvements. For example, some foreign insurance enterprises have already begun to accelerate their integrated development with influential internet enterprises in China. For instance, Allianz Property Insurance accepted JingDong as an important shareholder, and Ant Financial acquired Cathay Property Insurance. Additionally, some foreign life insurance companies have already started to establish individual agent teams and launched elite sales campaigns to make up for their disadvantages. All these measures can provide valuable reference for other foreign insurance companies.