Soon-to-be-relaxed rules in China have firms including American International Group Inc. and Allianz SE eager to grab a bigger share of the $50 billion that the country’s drivers spend each year on auto insurance.
Both insurers are making plans to offer more products as China lifts a ban on foreign companies selling mandatory policies for drivers. On a recent two-week trip, Kevin Goulding, the Shanghai-based head of Chartis China, AIG’s property-casualty business in the country, scouted four municipalities and provinces with a combined population of 500 million, as he weighs where to open the company’s next branch and lays plans to sell car coverage for the first time.
“We’re definitely looking forward to moving into the auto market in China,” he said in a phone interview. “It’s an extremely large market and will also allow us to offer other products to consumers.”
The policy shift, announced in February during Chinese Vice President Xi Jinping’s visit to the U.S., may be a boon for foreign insurance companies, which have struggled to gain a foothold in the world’s largest auto market, where an average of about 40,000 cars are sold a day. Non-Chinese property-casualty carriers’ share of premiums has been stuck at 1 percent since 2004, a December report from PricewaterhouseCoopers LLP shows.
The compulsory coverage, which protects drivers against third-party liability, is a loss leader for Chinese insurers. The companies often bundle the policies with more-lucrative voluntary insurance that covers damage to cars. Taken together, the protection has been a profitable business in China since 2009, representing about 70 percent of all property-casualty insurance sold in the country.
Based on that ratio, auto would account for more than $50 billion in premiums in what the China Insurance Regulatory Commission said was a 478 billion yuan ($75.8 billion) property-casualty market last year. PICC Property & Casualty Co., China’s largest non-life insurer, with about one-third of the market, generated more than 100 billion yuan in premium revenue from the auto segment in 2011.
The rule that limited foreign insurers only to sales of the optional coverage has stymied their growth in the country, said Sally Yim, an analyst at Moody’s Investors Service in Hong Kong.
“If a customer wanted to buy motor insurance, why would they want to choose a foreign company that can’t provide the compulsory coverage,” she said by phone. Being able to offer a comprehensive package will “help them build their brand recognition and gradually build scale.”
Chinese regulators have protected the domestic industry, still in its early stages of development, from foreign competitors, said Yim. About 60 percent of PICC’s 8.02 billion yuan total underwriting profit came from auto coverage in 2011.
The largest local companies made at least 5 cents for every premium dollar on underwriting auto insurance in the first half of 2011, according to a Moody’s report in February. Insurers in the U.S. lost 1 cent per premium dollar on consumer auto policies in 2010, the last year of available data, according to a report by the National Association of Insurance Commissioners. Insurers also make money by investing float, or the premiums held before paying claims.
Allianz, which got about 5 million euros ($6.7 million) in auto premiums from China in 2011 after five years of selling voluntary coverage, plans to offer the compulsory policies and invest to increase its market share once it’s permitted, said Peter Nestmann, chief executive officer of the Munich-based insurer’s property-casualty unit in the country. The company’s strategy is to sell coverage at car dealerships and target buyers of luxury brands, such as Mercedes-Benz and BMW.
“If you’re not allowed to sell the most basic liability coverage, it’s not easy to compete,” Nestmann, who’s based in Guangzhou, said by phone.
For now, non-Chinese insurers are awaiting rules from regulators detailing when, where and how they’ll be able to sell the mandatory coverage. Liberty Mutual Holding Co. projects that it will take six to 18 months before it will be able to offer the products, according to Jackson Tang, CEO of the Boston-based insurer’s China subsidiary.
The company began selling voluntary auto coverage in the country in 2005 in Chongqing on the expectation that the rules would be relaxed for foreign insurers selling compulsory car policies, said Tang. Liberty Mutual has more than 90,000 auto policyholders in the country and plans to enter areas where there are few foreign rivals, he said.
The insurer may have competition as it expands. Japanese firms including Tokio Marine Holdings Inc., Sompo Japan Insurance Inc., Mitsui Sumitomo Insurance Co., and South Korea’s Samsung Fire & Marine Insurance Co. all expressed interest in selling the policies as soon as regulators permit. Mitsui, like Liberty Mutual and Allianz, already offers voluntary auto insurance in China. Sompo said it will begin providing that coverage in Shanghai as early as June.
For AIG’s global property-casualty insurer Chartis, the move into China’s auto market compliments a shift toward selling more coverage to individuals. Consumer insurance accounted for 38 percent of the unit’s policy sales in 2011, compared with 30 percent two years earlier, according to a regulatory filing. Chartis China is the largest foreign property-casualty insurer in the Asian country, on sales of commercial coverage and accident-and-health policies.
AIG traces its roots to an insurance agency founded by Cornelius Vander Starr in Shanghai, after the American entrepreneur arrived in the city in 1919. More recently, the New York-based insurer has been invested in China’s auto insurance market through a 9.9 percent stake in PICC. The two firms have had a strategic relationship since the Chinese insurer’s initial public offering in 2003.
Peter Hancock, who heads Chartis globally, is relying on growth in developing economies to boost returns, as AIG seeks to attract private investors to replace government funds from its 2008 U.S. rescue. Asset sales to pay back the bailout led AIG to retreat from selling life insurance in China in 2010, when the company sold a majority stake in AIA Group Ltd., the Hong Kong-based insurer with operations across Asia.
Hancock personally thanked Xi for the decision to lift the auto-insurance ban at a luncheon at the Marriott Wardman Park hotel in Washington on Feb. 15, during the Chinese vice president’s visit. After years of lobbying by the insurance industry, Chinese regulators are relaxing regulations to benefit from foreign companies’ expertise and improve service.
Still, building an auto business in the country faces hurdles. The government sets rates for the mandatory coverage. And foreign insurers face restrictions on where and how fast they can open new branches.
It takes about 18 months to win approval to sell coverage in a new province or municipality, said Liberty Mutual’s Tang, who’s based in Chongqing. And the licenses are granted one at a time. Chinese firms don’t face the same requirements.
‘Can You Imagine’
“Can you imagine, if I wanted to open 10 provincial branches, it would take me 15 years,” said Tang in a phone interview. “Local companies can apply for 10 branches, 15 branches in the first year and just open them.”
One way for foreign insurers to distinguish themselves from local companies, said Moody’s Yim, is on service. Domestic carriers have struggled to process and settle claims as the number of vehicles surged to 228 million, China’s insurance regulator said in a work plan posted on its website this month. Companies were ordered to submit plans for how to improve service by the end of March.
Even with better service, foreign insurers may find it tough to steal customers in cities like Beijing. Local companies such as Ping An Insurance (Group) Co., China’s second-biggest insurer, have claims staff at car dealerships to handle almost everything after an accident.
“We drove back to the dealership where we bought the car, they took pictures of the broken part, had us fill a form, they paid the bill, and we drove home after the repair,” said Dong Xuan, 34, a manager at a Beijing-based construction company. “It’s simpler than we thought,” she said of her experience last year after her Ping An-insured Toyota Corolla smashed its front light hitting a taxi.
“The first thing I look at is convenience, then service quality,” said Yang Guang, 35, an English teacher at a Beijing-based college who won the right to buy a car in the otherwise-restricted city as part of a government monthly car-license lottery in February. “I’ll see what foreign insurers have to offer, but I doubt they can elbow their way into the dealerships that have already partnered with local insurers.”
Figuring out which customers are the best risks may also pose a challenge. The number of drivers in the country climbed to 239 million at the end of February, according to the Ministry of Public Security. Chartis’s Goulding said it would take a few years before the company has enough data to make accurate forecasts about the business.
“Worldwide, auto has small margins, so you have to be very smart on how you profile your customers,” he said.
Official statistics show that China’s roads have gotten safer in recent years, even as the country has added more cars and drivers. Road fatalities fell to about 2.8 for every 10,000 vehicles from 3.2 in 2010, according to the State Administration of Work Safety.
Still, that’s more than twice the rate in the U.S. in 2010, according to the most recent data from the National Highway Traffic Safety Administration. Further, a study of death records published in the January 2011 Bulletin of the World Health Organization showed that the rate of fatalities from road traffic may not have declined and could be double what’s reported by the police.
China is adjusting to the increase in motorists, said Peter Hessler, a New Yorker staff writer and author of “Country Driving: A Journey Through China from Farm to Factory,” which chronicles how the car is transforming the country. Driver education in China is “the blind leading the blind,” he said in a phone interview from Cairo, where he now lives.
“In the developing world people drive in ways that people in the States think is crazy,” said Hessler. “The difference in China is that they all learned in the last five years, basically. I don’t think you’ve ever had a country that’s had this scale of the automobile suddenly becoming a part of life.”