China Market Report: opportunities but challenges too

Economic growth may be slowing in China, but the outlook for the insurance sector remains excellent. That’s the view of Munich Re in a recent report, and it is not alone. There is still a good deal of optimism surrounding the Chinese insurance market, and foreign insurers are as keen as ever to get some sort of foothold on the country, despite the barriers.

The market
Munich Re goes on to say in its report that the insurance industry in China is forecast to grow at twice the rate of the economy as a whole until 2020, with on average, a low double-digit annual growth rate when adjusted for inflation.

Swiss Re’s recent sigma report – World insurance in 2016: the China growth engine steams ahead – shows that China is the third largest insurance market in the world, with $466bn in premiums. The growth has been dramatic since China was ranked 16th in 2000. China now accounts for more an 80% of Asia’s non-life premiums, and reported growth of 20% in 2016. Swiss Re said demand for health insurance in China surged due to increasing consumer awareness and the introduction of tax incentives, and despite tariff liberalisation, a rebound in car sales resulting from government incentives supported demand for motor cover in China. But it also notes that price competition was made more acute by de-tariffication.

The Belt & Road Initiative is expected to increase demand for non-life insurance in China. According to Willis Towers Watson’s Asia Insurance Market Report 2016: “Though many Belt & Road construction activities will be in foreign countries, insurance decisions will be taken in China by investors situated locally. With ample capacity in the market, insurers are beginning to leverage their domestic and international networks in order to harvest opportunities arising from this massive project. With $16bn in additional premiums expected to be generated by projects from now to 2030, China is definitely the market to watch for both insurers and brokers alike.”

The report also reveals that the Chinese reinsurance market is growing rapidly. Until last year there were just two domestic reinsurance companies in China: China Re and Taiping Re. In 2016, PICC Re and Qianhai Re were granted approval from China Insurance Regulatory Commission (CIRC), and the Willis reports says it is believed that at least three other applications to set up local reinsurers are currently in the pipeline, with another 20 companies planning to start the application process in the coming years. This would position China to be the largest reinsurance market by 2022.

And the report notes that the number of outbound insurance M&A deals by Chinese insurers reached $10.2bn, up from $6.6bn in 2015. “Chinese insurers are increasingly looking at acquiring foreign targets, as these can absorb foreign currency-denominated premiums and provide long-term cash pools that support investments. This trend is expected to strengthen in the coming years,” notes Willis Towers Watson.

Challenges
There are challenges though, as last year’s report on China’s insurance market by Aon explains: “China’s insurance sector, and in fact the country itself, are going through a period of momentous changes, which will shape the future of the industry, creating new challenges or exacerbating existing ones, but also opening up spaces of opportunity and growth for global insurance companies well prepared for the journey.”

It adds: “Domestic corporate insurance buyers tend to be price-sensitive, and added-value services such as risk control struggle for attention and appreciation. Many businesses still self-insure rather than buy any commercial insurance, or perceive insurance as a form of cashflow management, entitling them to a return on premiums paid. Nevertheless, with time, the diffusion of stricter corporate governance and risk management best practices is likely to provide a stronger impetus for insurance and related added-value services.”

There is also increasing supervision of the insurance industry. The CIRC recently announced that it is to tighten supervision of the insurance industry to guard against financial risks and deal with loopholes in the current insurance regulation, which have given rise to risky practices in recent years.

CIRC said insurance regulators at all levels should shore up weak parts of the regulation to build a strict and effective supervision framework. In a statement quoted by the Xinhua News Agency, it refers to risky practices such as the disorderly buying of stakes and the unchecked growth of risky business.

In a later statement, the CIRC said that insurance funds should serve the real economy and help supply-side structural reform, according to Xinhua. The statement added that the CICR will find and defuse hidden risks in the use of insurance funds, by stopping the illegal use of insurance funds, keeping the leverage ratio under control and filling regulatory gaps. “Inspections will be focused on major investment in stocks, equities, real estate, alternative and financial products, as well as overseas investment. The sector will be screened for compliance risks, regulatory arbitrage, asset-liability mismatches and other major risks,” said Xinhua.

Global programmes
What does all this mean for multinational companies and their global insurance programmes? To begin with, there has been no change in the authorities’ attitude towards non-admitted insurance. Sophie Zhou, associate, AnJie Law, Kennedy’s partner law firm in China, said the attitude of the People’s Republic of China (PRC) government towards the purchase of overseas insurance by PRC residents has not changed since 2016.

She said that, in accordance with the PRC’s World Trade Organisation commitments, the PRC only permits the cross-border supply of reinsurance, international marine, aviation and transport insurance plans by overseas insurance companies. “That is to say, overseas insurance companies are only allowed to sell international marine, aviation and transport insurance policies or conduct reinsurance activities in Mainland China,” she explained.

“For other types of insurance policy, CIRC does not prohibit Chinese residents from voluntarily purchasing offshore insurance overseas. However, offshore insurance marketing, promotion, solicitation or other sales activities in Mainland China, including arranging or organising for Chinese residents to take out insurance from outside Mainland China, is strictly forbidden,” she said.

But when it comes to compliance, it seems there is a tougher stance being taken by the regulatory and tax authorities in China, as indeed it is in the rest of the world. For example, the CIRC has launched and taken special action targeting the illegal sale and promotion of Hong Kong insurance policies in ten Chinese provinces and cities, according to Ms Zhou.

On the tax side, she said her firm had heard that the adoption of the Common Reporting Standard in China may help foster increased transparency and help crack down on cross-border tax evasion.

In general, there have not been any legal and regulatory changes recently that impact non-life insurance or global insurance programme business, according to Clare Wu, CEO, Aon-COFCO Insurance Brokers. But she noted that on the tax side, the VAT reform which was effective from 1 May 2016 has impacted the insurance business, both non-life and life insurance.

Foreign insurers
The Chinese insurance market is still dominated by a handful of insurers. The top three leading insurers on the non-life side are PICC, CPIC & PingAn, which account for about 60% of the market.

The situation with regards to foreign insurers in China remains that they are still subject to license restriction from doing business on national basis, said Ms Wu, adding: “They can only underwrite risk locations in the same cities where their branch offices are domiciled, unless the risk location satisfies threshold imposed by CIRC as per master policy and large commercial scale.”

Ms Zhou said: “We understand foreign insurance companies are allowed to sell consumption type insurance products to PRC residents outside of mainland PRC, but the sales of such insurance products and related sales activities within mainland China are still strictly forbidden. This includes holding product introduction or promotional meetings and events within mainland China, conducting insurance policy marketing activities, organising or arranging for Chinese residents to take out insurance outside Mainland China, and so forth.”

So overall, is it getting easier or harder to incorporate Chinese risks into a global insurance programme? “It is a difficult question to answer,” said Ms Zhou, “but generally speaking, we think foreign exchange controls and anti-money laundering in the PRC are getting stricter, not only in terms of lawmaking but also in its enforcement.”

Ms Wu added: “Normally, there are no extra barriers to incorporate Chinese risk into a client’s global master programme. However, in some cases we have seen that a Chinese partner is reluctant to join the global master programme because they focus more on pricing, compared to policy coverage in the master programme. They may not be fully aware of the advantages that global programmes could bring to their company. This situation could potentially be more challenging for joint ventures, especially with 50/50 holding.”

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