Germany’s Ergo Targets China Life Market Through Joint Venture

While other foreign insurers are now adjusting their fast-growth strategies in China, Germany-based Ergo Insurance Group said it is taking a "moderate" expansion step with a 50-50 life insurance joint venture with a Chinese partner, aiming for long-term domestic market cultivation with a "high-quality" agency distribution model.

"Our main target is to assure growth opportunities in China. So our short-term goals are moderate -- gross written premium of 50 million euros(US$70 million) to 70 million euros within five years," said Andreas Kleiner, a board member of Ergo International AG with responsibility for Asia and Turkey, in an interview with BestWeek Asia/Pacific.

Particularly in the early years, Kleiner said it is important to establish a solid base for growth, which includes recruiting talented professionals and establishing scalable operating and distribution systems.

"This will take time and in this context we have also learned from the lessons of earlier market entrants whose ability to provide adequate human resources for fast geographic expansion was in some cases less than ideal," said Kleiner.

Easing Into China

The Chinese life insurance market is one of the fastest-growing insurance markets, with around 24% to 26% per annum growth, ranking it the seventh worldwide, noted Kleiner, who added the Chinese market will "take over" Italy and Germany and become "number five" in 2011.

Although China's insurance market "should and will" always be dominated by domestic risk carriers, the German insurer said there are several significant economic and policy trends that determine a consistent and long-term presence for foreign players in China.

There is a "widening gap" between improvements in living standards and the ability of the state to provide adequate health and pension provisions, which is where Ergo sees market opportunities to foreign players.

Kleiner explained that the third pillar of pension provision -- private pensions -- will be significantly more relevant than in European countries as central and local governments will only undertake covering very basic needs for a larger share of the population, and corporate annuity schemes have yet to be accepted among China's growing number of medium-sized private enterprises, as well as state-owned enterprises.

Chinese insurance regulation and legislation also increasingly emphasizes qualitative supervision of the market with a strong focus on internal risk management and solvency, where the German insurer said foreign insurers are still able to contribute best international practices.

"China's financial services will gradually seek international integration once their corporate structures and management expertise are compatible with mature markets. We are convinced that this, over time, will also permit integration of foreign financial services, including insurance in China," Kleiner said.

He added Ergo aims to build a high-quality agency distribution model focused on "needs-based selling" and "comprehensive advice" to consumers and corporations through unique agent requirement systems, consistent training and agent activity management.

For the nonlife market, China currently "poses significant restrictions" on foreign insurers. Kleiner said a foreign nonlife joint venture can only start operations in one province and only expand into other provinces over time. Foreign joint ventures are not allowed to underwrite compulsory nonlife business, limiting access to motor insurance, the largest market segment in China.

"Notwithstanding, the market develops dynamically and there are indications that restrictions will be gradually lifted. We constantly look for investment opportunities in the nonlife market that fit our strategy," noted Kleiner.

A survey recently conducted by consultancy PricewaterhouseCoopers found foreign insurers are concerned about the highly regulated market environment in China, which appears not to be "fair game" for them.

China is likely to review the economic efficiency of earlier restrictions formulated at a time when the Chinese market was "less mature" than today, said Kleiner.

"Initial concerns over the competitive impact of foreign insurers have proved largely unfounded as China is a true growth market and both larger and smaller domestic companies have expanded significantly. In view of China's own interests, we believe that there may be much more flexibility in the future," he said.

Another challenge to foreign insurers in China is the direction of bancassurance as several domestic lenders, such as Industrial and Commercial Bank of China and China Construction Bank, have already entered the domestic insurance space in the past two years. Ergo doesn't expect Chinese banks to become a threat, or that they will take over the market position of insurers in China gradually.

China's banks will "certainly" increase their role in insurance distribution, which Kleiner said should be seen as a positive development as it gives room for increasing the spread of insurance awareness and ultimately insurance coverage.

"It will help the market to mature. However, banks are not lined up to act as insurance risk carriers. Their role will be confined to distribution," he added.

Joint Venture

Having conducted intense market research and a search for a suitable local partner for more than two years, Ergo has decided to form a 50-50 life joint venture with Shandong State-owned Assets Investment Holding Co. Each partner has invested 300 million yuan (US$46 million) in initial capital.

The joint venture will mainly offer life insurance to private customers, and will have its head office in northern China's tier-2 province -- Shandong -- about 400 kilometers south of Beijing, where the German insurer has had a representative office for more than three years (BestWire, Jan. 21, 2011).

"We decided to establish the head office in Shandong province due to the large population, the economic performance and large number of city clusters," said Kleiner.

Shandong is an "economically very attractive" province, which according to Ergo ranks second in gross domestic product and is the third-largest insurance market in China with life gross written premiums showing a 26% compound annual growth rate since 2005.

Kleiner noted Shandong's provincial government also showed a clear interest in having more international players in the province and was "very supportive" of Ergo's plan to set up a life joint venture. In addition, Shandong is a partner province of Bavaria in Germany and both states have had close ties for years.

Under the agreement, SSAIH provides China-specific market know-how, political support and access to captive business, while Ergo provides management, insurance and marketing expertise, experience in sales/distribution and training, according to the insurer.

"Our JV is built on a strong commitment of both partners to set up a successful, long-term life business in Jinan, the capital of Shandong province. Our JV partner is deeply rooted in Shandong province and the JV will profit from our partner's strong business network in the area," said Kleiner.

Having studied the market situation in Shandong, Ergo's management said they have put an emphasis on offering "high-quality products that might be priced slightly above market average" to fit domestic customers' needs.

Ergo is part of Munich Re. The management said the company is focusing on its key markets in Europe and Asia by leveraging on "prudent expansion and sustainable value-creation."

With a presence in more than 30 countries, Ergo's Asian focus is on India, China and Southeast Asia, with a regional hub in Singapore.

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