Foreign Insurers Find It Difficult to Achieve Profit in China

Although foreign insurers have been playing an increasingly important role in China's insurance industry since the country entered the World Trade Organization in 2001, a market survey found those companies are mostly still far from generating profit in this market.

Difficulties involve strict regulations, relatively low market awareness of buying insurance products for risk protection and wealth management, and intense domestic price competition and high investment costs, which according to market observers are cutting down foreign insurers' profitability.

Business Obstacles

Market consultant PricewaterhouseCoopers' "Foreign Insurance Companies in China 2009" survey discovered that foreign insurers today are still challenged by "a lack of critical mass," and in aggregate still "only account for a market share of less than 5% of life and 1% of property and casualty" insurance in China.

The expectation coming out of the survey is that foreigners' share of the life market will "grow to just 8% in three years time by 2012," which is "much less optimistic" than reported in 2008.

Arthur Hau, associate professor of the department of finance and insurance at Lingnan University of Hong Kong, told BestWeek Asia/Pacific that high investment costs and cultural differences are major problems that have hindered foreign insurers' profit-making activities.

Insurance consultants at Towers Perrin said tighter solvency and capital adequacy controls, as well as unfriendly regulations, which for example bar foreign insurers from more profitable businesses like cargo liability insurance in China, have blocked those insurers from generating profits or reaching economies of scale.

According to Hau, foreign insurers have to satisfy the minimum capital requirement set by the Chinese government by injecting funds into China in the form of foreign direct investment. Thus a foreign insurer's initial cost of capital is "often relatively high" compared with its initial return.

Other costs involved in establishing new businesses in China include training, setting up offices and moving executives from overseas.

"Exchange control is another problem faced by foreign insurers," noted Hau. "These companies found it difficult to invest their idle funds outside of China, while investing their funds in China may not be always efficient because the Chinese capital market is still in its infant stage."

Because many international insurers gain not only underwriting profits but also investment profits, the lack of diversification of investments means foreign insurers are "subject to political and other geographically specific risks," according to Hau.

Another major problem faced by foreign insurers is "cultural shock." Hau said that in China, almost all business-to-business insurance transactions rely on some kind of "guanxi" (relationship), which is "difficult to develop within a very short period of time."

This issue also creates "many forms of ex gratia (favor) compensation, which are common among Chinese insurers, but may be unacceptable to foreign insurers," said Hau.

Strategies for Survival

Adrian Liu, Beijing-based general manager of the insurance consulting business of Towers Perrin, said in an interview that to survive in such a competitive market, foreign life insurers should increase their "unique" strengths from their parents or partnerships in China, reinforce their product distribution and innovation and their servicing abilities.

On the nonlife side, Jenny Lai, Hong Kong-based insurance consultant at Towers Perrin, said that 25 of the 51 nonlife insurers in China are foreign companies, and only account for around 1.2% of the total market share. Those companies are facing profit sustainability and overhaul expense problems.

Lai said foreign nonlife insurers who want to survive in China should first pay attention to the legal system, then use their international experience and knowledge to "localize" their expertise, providing customized products to address market needs.

For example, foreign insurers who plan to sell directors and officers liability insurance in China need to check the differences between the litigation system of China and international systems before setting up their local underwriting practice, noted Lai.

Hau, indicated that joint venture partnerships have proved to be difficult in the long run, as once two partners have received what they intended to get, such as "technology and capital" gained by the Chinese companies, or "connection and marketing expertise" gained by the foreign companies, cooperation can "easily turn into competition," making the partnership "unstable."

A more viable model to access the Chinese market is through mergers and acquisitions, but Hau believes such M&A activities are unlikely to gain approval from the Chinese government in the near future.

Hau suggested foreign insurers may strengthen their risk management by "utilizing newly available hedging instruments" such as nondeliverable forward contracts, to minimize their foreign exchange exposures to the current exchange control regime and the fluctuation of the yuan against non-U.S. currencies.

Foreign insurers may also use the Internet for marketing simple personal product lines and for building their image among Chinese businesses.

In addition, improving after-sales customer supports by providing information and consultation to their customers on personal financial planning, personal and corporate risk management and legal issues may help foreign insurers create a niche that is not yet occupied by their Chinese counterparts, said Hau.

(By Rebecca Ng, Hong Kong news editor: [email protected])