China's life insurance sector is becoming crowded. Just seven years ago there were no more than a dozen companies active in the market. At the end of 2006, this had risen to 46, over half of them foreign joint ventures.
At least 10 more foreign names are likely to be added to this list over the next three years, according to the majority of overseas insurers interviewed for a recent PricewaterhouseCoopers (PwC) survey. A similar number of respondents said they expect the foreign firms' share of the overall insurance market to hit 10% by 2010. Last year, this share stood at 5.9% in the life sector and 1.2% in the property and casualty sector.
"Some companies are projecting premium growth of 200-300% in 2007 thanks to the wider geographical market, the wider range of products and the opening of new branches," said David Campbell, PwC's Asia Pacific insurance practice leader.
The bullishness is understandable. In 1996, China's total life insurance premiums came to US$3.76 billion. In 2006, it was US$53.8 billion, according to the China Insurance Regulatory Commission (CIRC). Financial services consultancy Celent has predicted that China will become the fourth-largest life insurance market in the world by premiums in 2008, after the US, Japan and the UK.
However, Sally Ng, a Hong Kong-based financial institutions analyst at investment bank UBS, stresses that carving out a market presence is not purely about premium growth.
"The volume is up a lot but does it contribute to embedded value?" she asked. "Foreign insurers could build up a 20% market share but if it is all low-end products then it's meaningless. Single premium products generate one-tenth of the value of regular premium products."
HOLLOW VICTORY?Ng points to the one-off group life insurance transaction undertaken in 2005 by Generali China Life Insurance - the joint venture between Italy's Assicurazioni Generali and China National Petroleum Corp (CNPC) - which covers 390,000 former CNPC employees.
It generated a premium of US$2.4 billion but Ng said the profit margin was negligible. Generali's premiums slipped to US$714.1 million in 2006 and US$136.4 million in the first half of 2007
This is an indication of just how competitive the market has become in China, particularly for group insurance.
Speaking to CHINA ECONOMIC REVIEW in March, Bartholomew Ng, China country manager for ING Asia Pacific Insurance, recalled how local competitors had undercut ING's China joint ventures by as much as 50% when bidding for group contracts.
"We weren't sure whether we could make money on our quotation so surely the local firms are going to post losses," he said. "They just want market share."
These firms are trying to position themselves with strong - and hopefully long-term - client portfolios that will become more lucrative as the insurance market develops. Fine in theory, but the movement to higher end products is likely to be slow.
The companies surveyed by PwC cited the recruitment and training of competent staff as their most pressing challenge, particularly given their plans to boost employee numbers by 133% in three years. Four of the companies reported staff turnover rates of 25% last year and it is difficult to believe that domestic firms are not in the same position.
The quality of staff has an impact on the effectiveness of insurers' distribution channels. Nowhere is this more apparent than in Bancassurance, the system whereby banks sell products on behalf of insurers. According to Ng, Bancassurance currently accounts for 20% premiums and it is generally acknowledged as having great potential. But the bulk of products sold are low margin and single premium, simply because the bank staff are not familiar with the more sophisticated packages.
"There is starting to be some integration but the banks are still just third -party distributors," said Mark Kellock, a Hong Kong-based insurance analyst with Deutsche Bank.
"They don't have trained agents to assist them. They basically say, 'You have this much money in your account which is currently getting this much interest. Why don't you buy this short-term investment product and get more upside?'"
PARTNERING UPAlliances between insurers (foreign and local) and domestic banks are rising, and in some cases, insurers are actually buying into banks with a view to exploiting the distribution channels.
In Campbell's view, though, the primary concern of foreign insurers in China may be the domestic banks - once they learn how to sell and manage life insurance services, they could just go off and do it by themselves. The foreigners, who have limited branch networks, would lose a distribution channel and gain a set of well-established competitors.
"Foreign insurers have become increasingly exposed to Bancassurance and they see this as a risk," he said.