Investing

China's Insurers Don't Know Their Own Risks

Business is booming. Watch out.

Not so safe.

Photographer: Zhang Peng/LightRocket

In most countries, insurers are among the most staid and conservative companies in financial markets. In China, they're becoming some of the riskiest.

On the surface, China's insurers seem to be enjoying a golden age. Over the past two years, premium revenue has risen by 88 percent and total assets by 49 percent, while claims are up only 43 percent. The industry now manages some $2.4 trillion in assets.

In a country with an aging population and high savings rate, it's a good business. The continual inflow of premium income along with predictable claims appeal to China's many aspiring investment moguls. It's no coincidence that the face of Warren Buffett -- who of course made his fortune in insurance -- adorns Cherry Coke cans in China.

Look beneath the surface, though, and dangers are lurking everywhere. In a business where risk management is fundamental, China's insurers lack the basic actuarial manpower and data tools necessary to make informed decisions. A recent survey found that 47 percent of Chinese insurance firms "haven't developed any methods at all" to conduct risk and solvency analysis. Many lack even rudimentary internal controls.

One regulator recently sought to reassure the public by declaring the industry "solvent" -- a term that doesn't exactly inspire confidence.

Another problem is that China's modern insurance industry doesn't have much to do with insurance. Firms typically view it as a capital-raising exercise, not a way to protect companies and individuals against risk. They often offer high-yielding investment products "that include a small insurance component," as Bloomberg Gadfly's Nisha Gopalan put it recently. Consumers view such products as multi-year investment vehicles that offer a higher rate of return than banks but are safer than the stock market. For executives bent on becoming the Chinese Buffett, insurance has become the go-to way of generating investment capital.

Such an environment is bound to lead to excesses. Take Anbang Insurance Group Co. At the end of last year, its Chinese stock holdings had risen to a staggering 203 billion yuan, up from 27 billion yuan at the end of 2014. Anbang's domestic holdings grew so fast that it soon counted itself as a top-10 shareholder in each of the four major state banks. It also became one of China's largest outbound investors, buying up everything from the Waldorf Astoria to Japanese real estate. It started to look more like a too-big-to-fail wealth manager than an insurance company.

One product Anbang offered was a type of high-yielding investment known universal insurance, which offers buyers a guaranteed redemption value upon maturity and included a death benefit to qualify as "insurance." Regulators have started to get wise to this kind of thing: Last month, they said one product Anbang wanted to offer "deviates from the fundamental origin of insurance" and imposed a temporary sales ban on the company for causing what they called "market havoc."

Yet cracking down on insurers more broadly won't be easy. When Foresea Life Insurance Co. was barred from selling new products last month, the company threatened to block customer redemptions unless it was allowed to gear up again. It issued something close to a threat, urging regulators to avoid "inciting mass incidents by clients and localized and systemic risks."

The message was pretty clear. As with tightening money markets, authorities can't clamp down too hard on insurers or they risk triggering collapses -- and the resulting "mass incidents."

Even so, the China Insurance Regulatory Commission could continue to tighten standards on what products qualify as insurance. It should also start demanding improved risk analytics from insurers. The world-class credit analytics developed by WeChat -- China's ubiquitous social media and payment app -- offers a useful model. Then there are the basics: Hiring more actuaries, prudently pricing risk, and matching assets with liabilities may not be the most exciting way to make a living, but it's all fundamental to any insurance company.

Aspiring Chinese Buffetts also ought to pay closer attention to the Oracle of Omaha's investment philosophy. Buffett is famously detail-oriented -- and happy to walk away from deals he doesn't understand. One wonders if even he could comprehend what China's insurance companies are up to.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Christopher Balding at cbalding@phbs.pku.edu.cn

    To contact the editor responsible for this story:
    Timothy Lavin at tlavin1@bloomberg.net

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