China urged to speed up acceptance of mutual insurers

Mutual insurance companies account for some 27% of global insurance premium. The sector appears to be healthier than ever in some markets such as the Netherlands, where it holds a 51% share of all premiums, France (47.4%) and Germany (44.4%) in Europe; and Japan (40.8%) and the Republic of Korea (10.4%) in Asia. The sector has grown faster than the standard commercial insurance market since the financial crisis of 2007. But lack of experience within China of the sector means that mutual insurers only claim 0.3% of the Chinese market, according to the International Cooperative and Mutual Insurance Federation (ICMIF). A lot of interest has been shown in the mutual concept in China in recent times, and the Chinese authorities are keen to foster the development of the sector to help underpin its continued economic growth and deliver greater financial security for individuals.hideChina introduced new rules to govern the expected rise of the mutual insurance sector last year and some 30 applications are though to be awaiting approval by the CIRC. But the CIRC is taking its time as it attempts to ensure this sector is properly regulated and is seeking advice from leading international experts. At the end of April, for example, the global captive practice of broker Willis Towers Watson hosted a workshop in Beijing with senior officials from CIRC, to discuss the development of the mutual insurance sector in China. The event was supported by AM Best and ICMIF and focused on trends and best practice in the global mutual insurance industry, particularly regulatory frameworks. An officer from the Development and Reform Department of the CIRC said it fully supports the development of the mutual sector, but his words did not suggest the regulator is in a hurry. “The CIRC would like to thank Willis Towers Watson and the guest speakers for their contributions and cooperation in the continuing discussions on the development of a mutual insurance sector in China,” he said. “Developing insurance partnerships is an important part of our strategy to proactively promote and encourage innovation in the insurance sector. The government is supportive of a mutual insurance market in China, which is appropriately regulated and controlled,” continued the CIRC official. Following the meeting with CIRC and subsequent seminar, attended by more than 150 delegates in Beijing, Paul Owens, chief executive officer (CEO) of Willis Towers Watson’s global captive practice, said: “The mutual insurance sector is often seen as a risk transfer solution for organisations where affordable capacity is not available in the traditional insurance market. “The seminar demonstrates the enormous interest that is developing in China to set up mutual insurance companies, and the desire to learn from global best practice. I look forward to working closely with businesses in China and the CIRC to develop the necessary regulatory framework to facilitate the growth of this sector.” This is all positive stuff for Chinese risk and insurance managers of course, as the rise of a domestic mutual sector would add potentially interesting alternatives, particularly in more tricky risk areas such as cyber. It could also help spark more action in the captive sector, for which the CIRC has also introduced preliminary rules. AM Best was represented at the meeting with CIRC at the end of April by Jose Ribeiro, managing director – Asia-Pacific and former head of international markets at Lloyd’s. In a report published on the sector in late May, AM Best said the market wants the CIRC to speed things up. The credit rating agency said that there is undoubtedly “tremendous” growth potential in China’s insurance market. “The question is: How can the China Insurance Regulatory Commission (CIRC) promote and supervise this unfamiliar form of insurance company, in the framework of an aggressive annual insurance premium growth target? This is a completely new concept to the regulator, insurance professionals and consumers, in contrast to the developed mutual markets with long history,” stated AM Best. The agency noted that CIRC issued a trial regulatory scheme on the supervision of the mutual insurance organisations early last year. This states the requirements for applying for a mutual insurance company license, including the minimum start-up capital requirement based on the type of mutual (general, professional or regional). The requirements are CNY 100m with a minimum of 500 members for general mutual insurance companies and CNY 10m with a minimum of 100 members for professional and regional mutuals. But, despite more than 30 applications to CIRC, the process appears to have ground to a halt. “A year after the announcement of the trial scheme, all 30-plus applicants still are waiting for CIRC’s mutual insurance license approval. The industry generally thinks that CIRC is giving time to the interested applicants to study the mutual insurance operations, while CIRC is also developing regulatory knowledge through studying how other regulatory bodies supervise this structure of insurance companies,” states AM Best in its report. The credit rating agency urges action because abuses of the proposed system have already been found. It pointed out that some non-insurance online platforms have started using the marketing terms “mutual” or “cooperative” to attract members for insurance contributions. The agency explained that these schemes use social media distribution channels such as WeChat, gather members to pay a small premium to join the insurance pool and promise to pay a significant insurance amount when the stated event such as cancer or motor accident happens. In April, the CIRC issued a warning to the public about these illegal insurance operations, as they are not licensed insurance companies and do not comply with the solvency requirement. “The industry believes there is a need to both speed up the mutual license approval process and educate the general public about the characteristics of mutual insurance companies, to avoid a major market failure,” states AM Best. The credit rating agency says there are good reasons for the popularity of mutuals and the potential benefits offered to Chinese individual and commercial policyholders. It points out that, because mutuals are owned by the policyholders, they have a distinct operating philosophy that truly aims to maximise the company value and issue policyholder dividends in terms of lower renewal premium, cash dividend, better services or better insurance benefits. “Generally speaking, they tend to have a longer horizon on profitability requirements and investment strategies,” states the credit rating agency. AM Best’s analysis of US property and casualty mutual insurance composite operating performance shows that the mutual insurance composite has consistently had a higher loss ratio in the past nine years than the stock insurance composite. It said that, despite the higher loss ratio, the mutual insurance composite consistently had a slightly lower expense ratio in the aggregate than the stock insurance composite. “In the US, many longstanding mutual companies compete somewhat on price as they are not beholden to stockholder demands. Others are more member-driven, incorporating steady policyholder dividends or level pricing as part of the service to their member insureds,” states AM Best. “The US composite of mutual includes companies following both of these strategies. Regardless of the organisational structure, an insurance company may experience weak underwriting performance in the short term due to market pressure or poor loss experience; however, a clear business plan to address future risks is the key to balance sheet strength and sustainability,” states the credit rating agency. Also, the median AM Best Capital Adequacy Ratio of the mutual insurance company composite has been consistently higher than the stock insurance company composite, possibly attributed to a more conservative capital management philosophy as they have limited financial flexibility and access to new capital. Capital access could also be a problem for the Chinese mutual sector, points out AM Best. “While the mutual insurance market in China is in its infancy and regulations are still being developed, fulfilling the capital requirements stated by CIRC might be a challenge for startup mutual insurance companies in this market. It will take years and a sizeable group of participants to determine whether China mutuals’ results will be comparable to the established US mutual market,” it states. AM Best stressed that education of potential policyholders and mutual members will be key in China. “The CIRC has not yet explicitly stated its view on permitting member assessment. Nevertheless, the policyholders participating in mutual insurance companies should be educated on both the benefits and the obligations of being the owners of insurance companies,” states the credit rating agency. “To ensure a smooth transition when introducing the mutual insurance structure in China, education is the key to success. The insurance professionals running the mutual insurance companies should bear in mind the characteristics of mutual insurance companies. On the other hand, the consumers need to understand policyholder rights and responsibilities,” it continues. “A mutual is just a different organisational structure for an insurance company, but should be viewed and evaluated the same way as all other insurance companies and subjected to CIRC’s regulations,” concludes AM Best. It may be assumed that the commercial insurance sector would not be fans of the mutual sector, seeing it as a rival for premium. But this is not necessarily the case in the corporate and commercial insurance sector at least, in which mutual and captives are regarded essential partners. Indeed, a number of the world’s leading international insurance and reinsurance groups started out as mutuals in one form or another. Leading German and international insurance group HDI Global started life as a mutual for German industry. XL (now XL Catlin) and Ace (now Chubb) were formed in the late 1980s in Bermuda by US commercial policyholders, as they tried to cope with a sudden capacity crisis for liability insurance. And Lloyd’s of course was founded as a form of mutual with its unique membership system and market structure. Indeed, earlier this month Lloyd’s CEO Inga Beale stressed the important role that mutuals continue to play in the global insurance market and urged emerging nations in particular to embrace the concept and lift regulatory restrictions. Ms Beale spoke on the topic at the ICMIF’s 23rd Meeting of Reinsurance Officials, held in London. The Lloyd’s CEO spoke of the need for more innovation in the whole insurance sector as it tries to support its corporate customers as they deal with ever more challenging and complex risks. The mutual sector has a key role to play in this challenge, said Ms Beale. “We need to not only survive, but thrive. The industry must not hide behind regulation as a reason not to innovate. The cooperative and mutual insurance market plays a vital role in covering people all over the world. Representing 27% of the global insurance market, it represents an amazing presence across the world.” But the Lloyd’s chief warned that there are still hurdles for the mutual insurance sector to tackle. “An estimated 43% of the world’s countries do not have mutual or cooperative law. Protectionism is not good for these countries,” she said.

China urged to speed up acceptance of mutual insurers

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