|return to MA Projects|
THE CHINESE INSURANCE INDUSTRY
This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone. Names of people, corporations, businesses and governments are used only as examples in fictitious sample correspondence, statements, etc. in order to depict a realistic, albeit fictional, scenario. This does not represent any knowledge of these examples, nor does it in any way represent an endorsement by an individual, corporation, business or government.
For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.
Table of Contents
Strategy for Opening the Chinese Insurance Industry
This project analyzes
China's current insurance policy, focusing on its “gradual, paced”
policies for allowing foreign competition into the market. The goal of the
project is threefold: to analyze the potential effects of allowing
increased foreign competition in China’s insurance market; to generate
recommendations for Chinese policymakers; and to set out a detailed plan
of action for liberalizing the industry.
industry has developed very quickly. Insurance premiums increased by
nearly 40 percent annually from 1980 to 1998—a rate that far outpaced
the country’s 9.7 percent GDP growth rate. Such growth shows that the
insurance sector is increasingly important to the country’s economy. The
growth is also attracting the attention of foreign insurance investors,
even though China’s insurance sector is relatively closed.
China will need to
liberalize its insurance market in the near future in order to meet the
commitments it made in its WTO accession agreements. Yet even if China had
not made WTO commitments on insurance, current economic and social welfare
reforms in China are increasing the country’s need for a strong
commercial insurance industry. Although policymakers remain concerned
about how the domestic industry will fare in the face of foreign
competition, past experience indicates that foreign pariticipation in the
insurance market can help it grow and diversify.
With the goal of
developing a coherent strategy for regulating the insurance sector in the
years to come, this project analyzes commercial, legal, policy and
political issues that will need to be accounted for in any liberalization
effort. These analyses highlight the real impacts of foreign participation
on the domestic insurance industry, and conclude that 1) the overall
impact of foreign entry will be positive, and 2) the market should be
opened in the near future.
The project also
outlines steps Chinese policymakers will need to take in order to
liberalize the country’s insurance sector. In considering the adoption
of a new policy, domestic political and public relations issues will need
to be considered, as will implementation and enforcement issues.
Finally, the project
offers a comprehensive strategy for reforming the current insurance policy
and legal framework. The strategy suggests Western style legislative and
public relations building activities that can help the Chinese government
and business community develop more fruitful relations.
For the purpose of this project, I assume the fictitious role of a staff analyst in the China Insurance Regulatory Commission’s (CIRC’s) Department of Policies and Regulations, Division of Policy Study. I have been tasked with developing a strategy for opening up the Chinese insurance market.
From 1949 to 1988, the People's Insurance Company of
China was the sole provider of insurance in China. Since 1988, however,
China’s insurance industry has developed very quickly. Insurance
premiums increased by 39.6 percent each year from 1980 to 1998, an
impressive figure compared to China’s 9.7 percent annual GDP growth rate
for the same period. Thirteen domestic companies are now established.
The potential market for insurance in China is huge. In
1998, 120 billion yuan in insurance premiums were collected. According to
the World Bank, premiums in China will reach at least 200 billion yuan
(US$ 24.44 billion) by the year 2000.
The Chinese insurance market was partially opened to
foreign companies in 1992. About 202 representatives of foreign insurers
now represent 11 different foreign insurance companies in China. However
China’s massive market potential has led to demands from foreign
insurance investors that China do more to increase access to its insurance
market. Moreover, while the Chinese government has favored a
"gradual, paced" policy for liberalizing the domestic insurance
industry, the rapid development of China’s insurance sector is straining
the government’s regulatory policies.
With the structural transformation
of China’s economy, the Chinese government has adopted a series of
social welfare reforms, particularly pension and health-care system
reforms that will increase opportunities for insurance companies and also
create pressure for ensuring that the private sector insurance system is
capable of covering growing portions of the Chinese population. With this
concern in mind, the China Insurance Regulatory Commission (CIRC), a new
insurance regulatory body, is considering how best to support the
development of China’s domestic insurance industry, including how or if
it should open this industry to increased foreign competition.
CIRC’s concerns are compounded by the fact that China will likely join the WTO this year. China needs a strategy for living up to commitments it made during the accession process.
The main obstacle to
developing a policy framework for opening up the Chinese insurance
industry is the concern that such opening will hurt the Chinese domestic
industry, which is still in its infancy. The healthy development of the
domestic insurance industry must be considered before any steps toward
market liberalization are taken.
experience to date suggests that increased foreign participation in its
insurance market will benefit the industry’ overall development, and
China will be obligated to liberalize its insurance market if it is
to join the WTO. China has already finished its bilateral accession
negotiations with the United States, Canada and other countries, and it is
likely to become a full WTO member within the year.
It is clearly time for CIRC to develop an overall strategy for allowing increased foreign participation in China’s insurance market. Specific issues that need to be addressed include:
Section I provides
background on the development and current economic situation of China’s
insurance industry. It also provides general information about the market
for insurance in China, the international context in which China is
attempting to reform its insurance policies, and the legal and policy
framework that regulates the industry.
Section II provides in
depth anaylses of commercial, legal, policy, and political and public
relations issues that affect China’s ability to liberalize its insurance
industry. This section also provides an analysis of policy implementation
issues that will need to be addressed.
Finally, Section III offers a comprehensive strategy for liberalizing China’s insurance market.
Strategy for Opening the Chinese Insurance Industry
Insurance was first
sold in China when two British insurance companies entered the Shanghai
market in 1846. In 1875, the Merchants Shipping Bureau of the Qing
Government established China’s first insurance institution, the
Merchants Insurance Bureau, and for the following 150 years, foreign
companies monopolized the market. Then, with the founding of the
People’s Republic of China in 1949, China established its own
government-controlled insurance company, the People’s Insurance Company
of China (PICC), and all foreign companies withdrew.
PICC’s own monopoly came to an end in April 1988 with the establishment
of Pingan Insurance Co. Ltd. in the Shenzhen special economic zone. When
the China Pacific Insurance Co. Ltd. was established in Shanghai in 1991,
a true insurance market began to take shape. Today, there are 13 domestic
insurance companies operating in the country (see Exhibit 1).
In September 1992, the
American International Group’s American Assurance Company (AIA) became
the first foreign insurance company since 1952 to receive approval to
establish a branch office in China. Other foreign companies quickly
Eleven foreign insurance companies with about 202 representatives are now operating in China. The most recent arrivals include John Hancock Mutual Life Insurance Co., Boston; Sun Life Assurance Co., Toronto; Prudential Assurance Co.; and Chubb Corp. (see Exhibit 2 and 3). Another 113 companies from 17 countries have applied for licenses without success.
The development of the insurance industry in the People’s Republic of China can be divided into three stages. From 1949 to March 1988, the People’s Insurance Company of China (PICC) monopolized the market. Then, with the establishment of Pingan in 1988 and China Pacific in 1991, PICC’s monopoly was broken and the market was characterized as a “tripartite confrontation.” Since September 1992, more domestic companies, as well as foreign ones, have entered the market, and true competition has begun to take shape (see Exhibit 4). As recently as 1997, however, the premium income of the PICC, Pingan and China Pacific still accounted for 96.56 percent of total Chinese insurance premiums.
insurance industry grew at a rapid 40 percent per year between 1980 and
insurance premiums in 1991 were still just 23.4 billion yuan (US$282
million). By 1997, however, this figure had leapt to 108 billion yuan (US$
13 billion), and the total assets of insurance companies reached 164.6
billion yuan (US$ 19.81 billion). During the first five
months of 1999, total premiums were already 52.895 billion yuan,
representing a 7.29 percent increase over the same period during the
previous year. According to World Bank estimates, premiums in China will
reach at least 200 billion yuan (US$ 24.44 billion) by the year 2000 (see
The Chinese insurance
industry is changing as it grows. In 1997, life insurance premiums
surpassed property insurance premiums for the first time, accounting for
60 million yuan (US$7.2 billion) or 56 percent of total premiums .
In major Chinese cities, the life insurance share of the total market was
even higher: in Beijing, it was 70.7 percent, in Shanghai, 64.8 percent,
and in Guangzhou, 60.5 percent. In
the first five months of 1999, of the total 52.895 billion yuan in
premiums, 31.276 billion yuan came from life insurance (up 11.07 percent
from the previous year), and 21.629 billion yuan came from property
insurance (up 3.06 percent).
There is no question that the
Chinese insurance market holds great potential. To date, however, it
remains almost completely untapped, even compared to insurance markets in
Insurance Density. In 1995, worldwide per capita premium income was US$357, while China’s per capita premium income was just US$6.10. In 1996, Chinese per capita spending rose to $7.64, which is higher than India’s $1.70 per capita, but far below Thailand’s $30. If China were to reach the worldwide US$357 per capita level, premium income in China would be US$400 billion. However this level still does not approach the levels of developed countries. In 1996, Great Britain spent $1,775 per capita, and the United States spent $2,191.
Although AIA snatched
up 45 percent the Shanghai life insurance market within in three years of
entering the city,
the market share of foreign companies has dropped significantly in recent
years. From 1995 to 1997 the Shanghai market grew about 50 percent, but
foreign companies’ share of the market dropped from 20 percent in 1995
to seven percent in 1997. AIA’s share of the Shanghai life insurance
market concomitantly fell to an estimated 14 percent or only 1.5 percent
of the national market.
According to the China
Insurance Institute, the 1997 Shanghai property insurance shares for Tokyo
Marine and Winterthur Schweizerische Versicherungs Gesellschaft were only
0.46 percent and 0.16 percent respectively. Foreign companies currently
hold a mere one percent of the nationwide insurance market.
The vast majority of
Chinese people still enjoy free medical care, low-rent housing and
retirement pensions. It is not surprising then that the majority also
still consider insurance to be unnecessary. Even when citizens (usually in
big cities) recognize insurance as a necessity, they lack basic insurance
knowledge. In a survey conducted by the Beijing Road to the Future R&D
Company found that only 18.6 percent of respondents said that they know
According to a case study conducted in Shanghai, the majority of Chinese feel that the introduction of foreign insurers has advantages. They believed that the benefits of foreign participation in the market overwhelm any perceived disadvantages. A majority felt that more foreign insurers should be introduced to the market.
insurance industries in other developing countries, China’s insurance
sector once emphasized business insurance such as marine, fire, commodity,
transportation, and casualty insurance. Now, however, China permits
insurance companies to offer either of two broad categories of insurance:
property insurance and life (group and individual) insurance. Property
insurance includes business property, family property, cargo
transportation, motor vehicle, ship, and agricultural insurance. Life
insurance instruments include “simple” life insurance (similar to term
life); life insurance with saving features; group life insurance;
“simple” and group disability insurance; group accident insurance;
highway accident insurance; collective-enterprise employee retirement
insurance; individual pension insurance; children’s education and
marriage insurance; major medical insurance; and other combination
Opening up China’s insurance market is a complex undertaking that involves not only the CIRC but also many other government agencies. Major government agencies that will be involved in the decision-making process include:
The Ministry of Foreign Trade & Economic Cooperation (MOFTEC), which is responsible for foreign trade policy and represents China in WTO negotiations;
In addition to the above government agencies, the other two players are:
Insurance has been on the
international trade agenda since the Uruguay Round began negotiating the
General Agreement on Trade in Services (GATS), the first set of rules
covering international trade in services (see Exhibit 4 for information on
Asian countries’ GATS commitments).
The WTO financial services
agreement, which includes insurance, was signed in December 1997 and
covers 102 countries representing 95 percent of the global financial
services market. Under the agreement, which went into effect at the
beginning of March 1999, 60 countries pledged to open their insurance
sectors to foreign competition. Fifty-five nations now allow 100 percent
foreign-owned subsidiaries and branches. Ten additional countries allow
majority control. Only four countries—the Dominican Republic, Honduras,
Sri Lanka and Tunisia—do not permit majority ownership. Malaysia allows
51 percent for existing investments but only 30 percent for new ventures.
countries, especially the United States, treated the 1997 agreement as an
historic accomplishment. In a letter to the President Bill Clinton, the
Washington-based International Insurance Council claimed victory stating
that the agreement “captures more than 98 percent of the world’s
insurance business in over 60 countries within a system of binding foreign
trade principles. The USTR takes great satisfaction in the success.” There is no doubt that
developed countries are in a much better position to benefit from the WTO
agreements on insurance than are developing countries.
While China is not a WTO member yet, it is expected to gain membership within the year 2000. Liberalization of China’s insurance industry has been a major issue for both the United States and the EU during accession negotiations.
As part of its overall program for resutructuring the country’s economy, the Chinese government has launched a series of social welfare reforms. In turn, these reforms are generating a growing need for private, commercial insurance. Commercial insurance will play an import role in maintaining social stability in the country.
The rapid expansion of China’s
insurance industry in the 1980s pushed the Chinese government to begin
establishing laws and regulations to manage the insurance market and make
it more competitive. In 1992, to regulate the experimental opening of the
Shanghai insurance market, the government issued the Shanghai
Administrative Measures for Foreign-Invested Insurance Companies, the
so-called Shanghai Measures. Some of these measures also applied to
Then, on June 30, 1995, a national
insurance law was promulgated at the fourteenth session of the Standing
Committee of the Eighth National People’s Congress of China; it became
effective on October 1, 1995. The insurance law mainly focuses on
regulating the domestic insurance industry. It also includes some
provisions on foreign insurers. In 1996, the Provisional Regulations for
Administration of Insurance were established to supplement the insurance
supervision section in the 1995 law.
In 1997 and 1998, partly in response
to the growing number of door-to-door sales agents in a number of
industries, new regulations were enacted to control the activities of
insurance agents and brokers. The government issued the Provisional
Regulation for Administration of Insurance Agents in November 1997, and
the Provisional Regulation for Administration of Insurance Brokers in
Self-regulation by the insurance
industry is developing rapidly as well. In 1994, the Shanghai branches of
PICC, Pingan, China Pacific, and AIA formed China’s first insurance
industry association to coordinate and self-regulate the insurance market
in Shanghai. By the end of 1997, insurance companies had established
industry associations in 19 cities.
Chinese law and
regulations stipulate that insurance companies and agencies must regard
property and life insurance business as separate entities. Additionally,
the 1995 insurance law stipulates that premiums can only be deposited in
banks or used to purchase government and financial bonds or various other
funds approved by the State Council. According to the law, “the use of
premiums to establish securities institutions or invest in enterprises is
foreign participation in the Chinese insurance market, the insurance law
lays out the following rules:
Despite the clarity of these provisions, the process that foreign companies must go through to obtain a license lacks transparency and each company seems to be evaluated based on different criteria. Personal contacts, support from a company’s home country government, and a company’s “demonstrated commitment to the Chinese market” in the form of contributions to the Chinese economy are reportedly deciding factors in obtaining a license.
 Ibid 1.
 JingXiao Xue, The Progress in Multilateral Negotiations on Financial Services and the Opening-up of Chinese Financial Industry, 1998.
 New star publishers, Insurance Reform and Development, 1997.
 China’s reinsurance sector premiums were Yuan 9.6 bil in 1997, available from http://www3.xls.com. Internet, accessed Dec. 1998.
 Nationwide Financial News, available from http://www.web.lexis-nexis.com Internet, accessed July 1,1999.
 China—opportunities and obstacles for the insurance industry in an emerging country, CPCU Journal, Spring 1998.
 Ibid 4.
 Impact of Foreign Insurance Company Entry into the Chinese market, AmCham Insurance Industry Forum, May 1998.
 Qixiang Sun, China's Insurance Industry: Contradiction, Challenges and Countermeasures, 1998.
 John Jennings, U.S. insurers hail WTO deal to life world trade barriers, National Underwriter; Chicago, Dec. 1997.
 Xuesheng Li, The Health Market, The China Business Review; Washington ; Nov/Dec 1998.