Big things are expected of China's life insurance industry. With insurance penetration coming in at around 2%, compared to 4-5% for the heavyweights of Europe and North America, the market potential is clear. Foreign involvement is still nascent stages, dwarfed by three domestic giants responsible for 70% of business. ING arrived in China in 1993, growing its operations as the market opened to foreigners. The acquisition of Aetna in 2000 gave ING control over what is now known as Pacific Antai Life, a joint venture with China Pacific Insurance. ING Capital Life, a joint venture with Beijing Capital Group, came in 2002. Bartholomew Ng, China country manager for ING Asia Pacific Insurance, talked to CHINA ECONOMIC REVIEW about where he expects the market to go from here.
How do you coordinate expansion of your business into new regions?
In the early 1990s, foreigners could only apply for licenses city by city while domestic companies were given nationwide licenses. Under pressure from the EU and US during the WTO negotiations, China started opening things up province by province. When we set up ING Capital and acquired Aetna, we didn't expect the government to open up the market so rapidly. At that time our strategy was to use ING Capital to focus on expansion in the north of China while Pacific Antai expanded in the south.
How effectively can you compete with domestic insurance companies?
Most foreign companies can't really compete with the domestic firms because they have much smaller networks and client bases. But insurance is not about 10 years, 20 years—it is about 50, even 100 years. Foreign companies can increase their market share, but as to whether we can ever get to 50-50 with domestic firms, it is very difficult to say.
So what do you focus on to give you an edge?
Two things are important in China: the first is patience; the second is people. China lacks good quality people, so our priority right now is to train our own staff and this will enable us to expand more rapidly in future. Recently, I was talking to one of my provincial managers and asked him how many cities he wanted to have expanded into two years from now. He said four. I asked him how many staff he had and he said 84. Then I asked how many of these 84 could head a city branch. He was stuck, he couldn't answer. People in China still think very short term. You tell them that next week you will set up a new branch and they say, ‘Okay, tomorrow I will recruit people.' But would these new people really understand the company's business objectives? No. If you want to expand into a new market you need the people at least 6-12 months beforehand.
How do you market your products to people who haven't really had much exposure to commercial insurance?
It's different wherever you go in China, but in big cities the younger generation know they need insurance—if not now, then in the future. They cannot rely on social benefits in the long term because they will be almost nothing.
You said the market had opened up more rapidly than you expected. To what extent can this be tied to the need to fill the holes in the welfare system?
The Chinese government sees the importance of developing the insurance market further—it helps them develop the capital market and also passes on some of the state burden to the private sector. They want the insurance companies to educate people on the importance of buying insurance and not relying on the government.
What can Beijing do about insurance for people living in rural areas?
The government is encouraging the private sector to provide insurance to people in rural areas. Companies that do this are not going to make a lot of money from it so the government is offering various commercial incentives such as tax benefits.
Much is made of Bancassurance (insurers selling premiums through banks) as a distribution channel. How effective is it in China?
In the West, Bancassurance is bundled into one thing—loans, mortgages, credit lines, etc.
In China, banks still don't appreciate that this is something they should do, so as much as 90% of Bancassurance is single payment products. This is not a very profitable business for insurance companies. To do regular payment products, insurance companies have to put salespeople in the banks but the banks aren't comfortable with this.
What alternatives to Bancassurance are you looking at?
We are trying to develop multi-channel distribution, not confined to Bancassurance. These channels include insurance brokers and telemarketing.
What about selling packages directly to companies?
Most foreign companies still have quite small portfolios as the domestic companies are far more aggressive in this area. There have been times when we have submitted competitive quotations but local competitors have undercut us by 50%. We weren't sure whether we could make money on our quotation so surely the local firms are going to post losses. They just want the market share.
And domestic companies are also at an advantage when it comes to investing the premiums...
Some investment channels available to domestic companies are still not open to foreign companies. For example, they say foreign companies can invest in infrastructure projects but you can only do this if your asset base is of a certain size. There is no way foreign companies can reach this level in the near future.
How important is the introduction of enterprise annuities?
We are looking into this but the market for enterprise annuities is not fully opened up. You have four different players: trustee, custodian, pension administrator and investment manager. At the moment, insurance companies must apply to set up a pension fund company. This company can currently only play two of three roles: trustee, administrator or investment manager. Only domestic banks can act as custodians. There are no regulations on how foreigners can set up pension fund companies, so we are effectively banned from participating in enterprise annuities.
In the long term, will enterprise annuities dominate the market?
The reason corporate annuities are not so popular now is because insurance companies can provide a one-stop service for group insurance business. Employers get a 4% tax rebate if they transfer their business from a private insurer to a corporate annuity. But when they do this, they have to find a trustee, an administrator, an investment manager and a custodian—and all these parties need to be paid.
In five years time, where do you see ING positioned in the Chinese insurance market?
Our long-term goal is to be in the top three in every market in which we are operating. This is top three in terms of new business, not total premiums, as the domestic players have been there for so long.