Strong domestic players and restrictions on foreign companies keep the market's potential out of reach
When insurer AIA moved back into its gray stone colonial headquarters on Shanghai's waterfront Bund in 1998, it marked the return of foreign insurance companies to China after their ejection nearly five decades earlier. Since then the floodgates have opened as Cigna (CI), AXA (AXA), Allianz (AZ), and dozens more have set up shop on the mainland, aiming to tap a market of 1.3 billion people with few options for life insurance.
As it turns out, their optimism may have been overblown. While there's vast potential—life insurance premiums represent just 2.2% of China's gross domestic product, vs. 13.6% in Taiwan and 9.9% in Hong Kong—cracking the market has been tough. In June foreign companies took in only 4.7% of premiums paid in China. Their revenues have been on the rise, but that's a big step backwards in share: In 2007 foreigners had 8% of premiums, according to the China Insurance Regulatory Commission.
The newcomers underestimated the strength of China's incumbents. China Life (LFC), Ping An, and other domestic insurers enjoy tremendous name recognition. And they can have nationwide licenses, while foreigners need separate permission for every new city or province where they want to do business. "There is clearly an uneven playing field," says Gary Bennett, China chief for New York Life, which has a joint venture with Qingdao-based appliance maker Haier Group. "It's a fact that there is some level of protectionism." While Beijing doesn't explicitly acknowledge that, some mainlanders say domestic insurers need a leg up to survive. "There is a general sense that this industry is in its infant stage and needs to be protected," says Jin Feng, a former government official who now runs CNinsure (CISG), a Guangzhou insurance brokerage listed on Nasdaq.
Then there's the problem of joint ventures. Virtually all foreign insurers in China must work with local partners, and these often lack any experience in the industry. Canada's Manulife (MFC) Financial, for instance, is teamed up with state oil company Sinochem, while the U.K.'s Aviva is partnered with food conglomerate Cofco. Relations in joint ventures can be strained under any circumstances, and in insurance—where it may take a decade or more before profits start flowing—it's doubly difficult. "There are frictions between the partners when more cash is required for expansion," says UBS (UBS) analyst Kenneth Lo.
A further concern for the new entrants is the underdeveloped state of China's capital markets. The bond market is small and illiquid, and it often takes good connections to get in on primary issues. So the foreigners have a harder time than their domestic rivals in buying assets to assure the predictable income streams needed to meet payments on policies years from now. "It's an ongoing problem," says Simon Machell, Aviva's Asia chief, "of taking on liabilities of up to 25 years when the availability of long-dated assets in China is quite limited."