Life Insurance in China

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Last week, it was announced that New China Life Insurance Co., a state-backed insurer that is partially owned by Zurich Financial Service AG and is the third-largest life insurance company in China, may raise up to $2.3 billion in an initial public offering in Hong Kong and Shanghai. China Life, Ping An and China Pacific, the first-, second- and fourth-largest life insurers in China, respectively, are already publicly traded, and Taiking Life, number five, is expected to have an initial public offering within the next 12 months. What’s up with China’s life insurance industry?

The life insurance industry is an interesting one in China because it is, in essence, another piece of the puzzle that may ultimately explain how China will make the transition from an economy led by exports and government investment, to one that that is led by consumption and investment by the private sector.

As everyone knows, China has one of the highest savings rates in the world. Incredibly, Chinese companies and individuals continue to save over one-half of the country’s gross domestic product (“GDP”) each and every year. There are many good reasons for this, which is a topic for another discussion, but developing alternative investment vehicles for those high levels of savings will be important to the future development of China’s capital markets.

Direct investment by individuals in property and the stock markets is positive, but speculation, or over-investment, can be problematic. On the other hand, investment in life-insurance products, which channels individual savings to professionally managed investment institutions, represents a potentially effective way to provide much needed capital for China’s private companies. With long-term investment horizons, life insurance companies in developed economies are important investors in the stock market, as well as in the private placement markets for debt and equity securities issued by small- and medium-sized enterprises. The same may ultimately be true in China.

With annual premiums of RMB 1.45 trillion ($214.6 billion) in 2010, a 32 percent increase from 2009, China’s insurance market is now one of the largest insurance markets in the world. The domestic China market (excluding Hong Kong and Taiwan) ranked as the sixth-largest life insurance market in the world. Over the past 10 years, China has led the world in insurance premium growth with a compound annual growth rate of 26.5 percent.

Even so, China’s life insurance market is still in its infancy. Despite the industry’s fast growth, annual life insurance premiums are less than 20 percent of the $1.2 trillion of premiums that are collected each year in the United States, the world’s largest life insurance market.

Penetration and density figures are also low. In 2010, premiums as a percentage of GDP were only 3.8 percent in China, compared to 8.0 percent in the U.S., 11.4 percent in Hong Kong, and an amazing 18.4 percent in Taiwan. In 2010, life insurance premiums paid were only $158 per capita in China, compared to $3,296 in Taiwan, $3,636 in Hong Kong and $3,759 in the U.S. Due to the low penetration and density figures, particularly when compared to those in the closely related economies of Hong Kong and Taiwan, analysts expect life insurance premiums to grow at an average annual rate of approximately 24 percent over the next five years.

Prior to 1949, China’s insurance market was dominated by foreign insurance companies that established themselves in Shanghai as early as 1919. Following the instability of the 1940s, all of the established foreign companies left China or moved to Hong Kong. In 1949, just 20 days following the foundation of the People’s Republic of China, the People’s Insurance Company of China (“PICC”) was founded. At that time the insurance industry was split into compulsory insurance and voluntary insurance. Compulsory insurance included railway, steamship, and airport passenger accidental injury insurance, while voluntary insurance included employee group life insurance and simple life insurance.

China’s insurance industry remained relatively small for the following decade, growing to approximately RMB 141 million ($22.0 million) in 1958, with approximately 1.8 million life insurance customers. In October 1958, the State Council suspended the insurance industry, stating that, following the establishment of the commune system, insurance would no longer be needed.

The insurance industry was reintroduced into China in 1979, first with property insurance that year, followed by life insurance in 1982. From 1982 to 1995, life insurance premiums grew by approximately 40% per year, reaching RMB 43.5 billion ($6.8 billion) in 1995.

In 1995, China’s first insurance regulations were issued stating that non-life insurance and life insurance should be operated separately. Following the issuance of these regulations, the life insurance business of PICC was broken out into a separate company, and 17 local life insurance companies were reorganized. Today, China’s life insurance industry consists of 30 domestic Chinese companies and 28 foreign joint ventures.

By law, foreign companies cannot own more than 50 percent of a life insurance company in China. Once foreign ownership crosses 25 percent, a company is considered a joint venture and subject to additional restrictions. For this and other reasons, foreign joint ventures, despite their number, accounted for only six percent of annual life insurance premiums paid in China in 2010. The domestic players dominate this market.

The Chinese are buying so much life insurance for several reasons. As with insurance products found anywhere in the world, insurance policies in China provide an element of a safety net, offering a measure of downside protection upon the occurrence of certain events. Faced with low yields on bank deposits, illiquid property investments and more risky investments in the stock market, however, life insurance is also viewed as a safe and stable investment. In fact, most life insurance policies in China are sold by the country’s banks.

China’s continued high level of savings is positive for the life insurance industry. Even more importantly, though, the continued growth and development of China’s life insurance industry is positive for the development of the country’s private economy.Enhanced by Zemanta

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