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China’s
Insurance Market After WTO: A Reality Check By Mary
Studdert Phone: (86 21)
6279 8069 Posted to Web Site: 20 August 2001 |
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Regulatory
restrictions on foreign insurers
Those foreign insurers who have
spent the last few years resourcing and staffing representative offices, pressing
the palms of central government politicians and funding philanthropic causes
in the name of good corporate citizenship are breathing a sigh of
relief. Even if they are not one of the
7 insurers earmarked to receive one of the insurance licences promised to the
EU in its bilateral agreement with China, they are closer now than they've
ever been to obtaining a licence to sell insurance in a market expected to
grow at an average rate of over 10 per cent per annum over the next 5 years
and be worth more than RMB 270 billion by 2005. However, many of the finer
details relating to the future regulation of foreign insurers in China are
yet to be determined by the country's insurance regulatory body, the China
Insurance Regulatory Commission (CIRC).
For both foreign insurers already licensed to operate and those
awaiting approval of their application or contemplating applying for a
licence to operate, a reality check is called for. China's insurance market is
still in its infancy and there are potential risks that should be defined,
recognised and factored into any foreign insurers' China strategy. The following are some regulatory and
market considerations which foreign insurers may wish to factor into a risk
assessment of their investment in China. |
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While the long-awaited Insurers with Foreign Investment
Regulations are rumoured to have been
presented to the State Council for review, they are yet to be proclaimed. These regulations will apply to
all wholly foreign-owned insurance companies, joint ventures and foreign
company branches and are expected to deal with fundamental issues in the
establishment of a presence in China, such as minimum capital requirements
and permitted scope of business. Until these regulations are
proclaimed, many matters continue to remain "grey" areas for those
already operating in China. As an
example, because foreign insurers are restricted from underwriting automobile
third party liability insurance in China, several foreign insurers in
Shanghai reportedly engage in the practice of introducing a domestic
underwriter to the customer and both the foreign insurer and domestic insurer
sharing the premium. While this
practice is not strictly permitted, there are no regulations yet in place
that say otherwise. Taxation Given the concept of "equal
treatment" specified in the WTO rules and regulations, it is unlikely
that various tax incentives currently enjoyed by foreign insurers will be
continued after WTO accession, since their domestic counterparts do not enjoy
such incentives. Furthermore, it is unclear what
indirect tax burden will be levied on the various product lines that foreign
insurers are likely to sell following WTO accession. For instance, at present a business tax of
8% is levied on the gross revenue from insurers in China. Foreign insurers licensed to conduct life
insurance are in a particularly advantageous position over those licensed to
conduct non-life insurance business as business tax is exempt on a range of
products for life, old age and health insurance. It is unclear whether a business
tax exemption will apply to new product lines that will be offered by foreign
insurers after WTO accession, such as group life policies, health policies or
pension products. Product lines It is still unclear whether
certain product lines will fall under the scope of business permitted to be
conducted by holders of life insurance licences or those conducted by holders
of non-life insurance licences. For
example, it is unclear whether pensions, which are traditionally sold as a
rider to life insurance, will be permitted to be sold by those holding life
insurance licences or those holding non-life insurance licences. Therefore, foreign insurers who
obtained a life insurance licence or non-life insurance licence before WTO
accession on the pretext of being able to sell certain product lines with
that licence after WTO accession may be disappointed if CIRC decides that the
scope of that licence does not apply to that particular product line. Investment
alternatives Insurers are still required to
invest about 85 per cent of their assets in bank deposits and government
bonds. CIRC has recently broadened
the investment channels to include corporate bonds and mutual funds, however,
the choice of investments remains limited. While the Shanghai and Shenzhen
stock markets have a capitalisation of about USD 500 billion, the total value
of closed-end mutual funds, the only stock market channel insurers are
allowed to invest in, is a mere USD 10 billion. |
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WTO accession will result in
increased competition in the insurance market from both foreign and domestic
players. China's insurance market is currently
dominated by 3 insurance companies which account for more than 95 per cent of
the market – PICC/China Life, Ping An and China Pacific. While more than 20 foreign insurers have
obtained business licences in China since 1992, the market share of foreign
insurers is still tiny at less than 1 per cent for non-life and slightly more
than 1 per cent in life insurance. With the limit on the number of
licences granted each year being lifted, more entrants are expected. Furthermore, domestic insurers
are also gearing up for the WTO changes through strengthening their capital
base, accelerating the pace of product innovation and broadening their
distribution channels. Uncollected premiums The high percentage of
uncollected premiums is a problem faced by both foreign and domestic insurers
in the current market. According to
some sources in Shanghai, on average 15 per cent of domestic insurers' and 25
per cent of foreign insurers' premiums remain uncollected. Inconsistent
application of policy Domestic insurers, who have a
presence nationwide, face an inconsistent application of industry policy in
different regions and cities. This is
something that foreign insurers should be aware of when geographic
limitations for foreign insurers is lifted after WTO accession. Part of the reason is due to the
history of CIRC. CIRC was only
established in 1998. Prior to that a
division in the People's Bank of China (PBOC) was responsible for industry
regulation. While CIRC now has a
sub-branch in Shanghai, it is yet to establish an independent presence in
other cities around China. In the
meantime, the duties of CIRC in those cities where it has not yet established
a presence remain in the hands of the PBOC.
This is one of the factors which has led to inconsistent interpretation
and application of policy across the nation. Insurance awareness The apparent size of market
growth in insurance may be misleading as there exists a general lack of
insurance awareness in China. In the
years to come both foreign and domestic insurers will probably be devoting a
large portion of their marketing budget to simply making companies and
individuals aware of the need for insurance, let alone selling their product
lines. Human resources Both domestic and foreign
insurers face difficulties in finding staff with sufficient skills and
experience in China. So far CIRC has
not approved a foreign surveyor or loss adjuster to conduct their service in
China. Further licensing of foreign
insurers after WTO accession will inevitably place pressure on sourcing the
right talent within China. |
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