China's insurance industry, now blessed with government support and huge growth potential, has taken a literally tortuous path during the past decades.

Before the founding of the People's Republic of China (PRC), the nation's insurance industry was controlled by foreign capital.

There were as many as 64 foreign insurance companies operating in 1948, while the Chinese insurance industry mainly included six Kuomintang-controlled insurance providers and some private insurers.

After the founding of the PRC in 1949, in an effort to end economic chaos and promote the role of insurance, China set up the State-owned People's Insurance Company of China (PICC) on October 20 the same year.

Kuomintang-controlled insurance companies were taken over, while private local insurers were merged into the State-controlled Taiping Insurance and Xinfeng Insurance companies in 1951, which were further restructured under the name of the Taiping Insurance Company to specialize in overseas insurance.

Foreign insurance companies started to gradually withdraw from the Chinese market in 1952.

State-owned insurance companies expanded their business scope rapidly in their early years of establishment, and their market share kept growing. Out of all insurance premiums as of the end of May 1950, the PICC accounted for 70 per cent, while private Chinese insurers and foreign players held 8 per cent and 22 per cent respectively.

This essentially changed the structure of China's insurance market and signaled the establishment of State-owned insurers as market leaders.

Period of stagnation

Largely due to the planned-economy mentality and influence of the former Soviet Union, where insurance was seen as merely a collector of idle funds, the PICC suspended all domestic operations in all but a few cities in 1959, keeping its overseas business only.

In the early 1960s, China's foreign trade insurance, international reinsurance and overseas insurance sectors were promoted to a certain extent as part of the State's efforts to boost foreign trade.

With the Chinese economy undergoing a full-scale recovery, the PICC resumed its domestic insurance operations in selected cities including Guangzhou, the capital of South China's Guangdong Province, and Tianjin.

In 1967, under the influence of the "cultural revolution," domestic insurance operations were suspended again, signalling another serious setback to the Chinese insurance industry.

Recovery and development

China's embarkment on an opening-up and reform policy in 1979 breathed new life into the insurance industry. A national insurance conference in late 1979 decided to resume domestic insurance business and accelerate overseas insurance operations, bringing the Chinese insurance industry into a new era.

The number of market players kept growing during this period, fleshing out the market structure. Three new Chinese insurance companies were established in 1986, 1988 and 1991, breaking the PICC's monopoly, while American Insurance Assurance won regulatory approval in 1992 to set up a branch in Shanghai, marking the first step to usher in foreign players.

The total number of insurance companies amounted to 57 at the end of 2002, including five State-owned companies, 16 foreign players and 15 Sino-foreign joint ventures. Meanwhile, insurance intermediaries numbered 262.

During the same period, the market grew rapidly, increasing the role of insurance in the nation's economy. While nationwide premiums were only 460 million yuan (US$55 million) in 1980, the figure grew to 388 billion yuan (US$46.7 billion) last year, representing a 35 per cent annual increase.

China's insurance penetration, measured by premiums to gross domestic product (GDP), grew to 2.98 per cent in 2002 from 0.1 per cent in 1980, while the insurance density, or per capita premiums, rose to 237 yuan (US$28.5) from merely 0.47 yuan (6 US cents).

The resumption of domestic insurance operations started in the property sector, while life insurance was picked up again only in 1982, and life premiums for the entire year were only 1.6 million yuan (US$192,000).

Life insurance premiums maintained high growth especially in the 1990s, surpassing property insurance for the first time in 1997.

With the continuous development of the insurance industry, its role is becoming increasingly clear. In 2002 alone, insurance companies provided risk coverage worth a combined 53 trillion yuan (US$6.4 trillion), and paid a total of 70.7 billion yuan (US$8.5 billion) in claims.

Insurance companies' prompt compensation payouts have played a particularly important role in reconstruction efforts following natural disasters and major traffic accidents.

With the growth of the insurance industry accelerating, the pace in related legislation has quickened. The PRC Economic Contract Law, enacted in 1982, contained special clauses on property insurance contracts, making it the first law related to the insurance industry.

The State Council promulgated the nation's first provisional regulations on insurance companies in 1985, 10 years before the PRC Insurance Law came into effect in 1995.

To meet the needs generated by China's accession into the World Trade Organization, regulations on foreign insurance companies were promulgated in 2001.

A revised version of the PRC Insurance Law became effective on January 1, 2003, while a series of related rules and regulations signalled the basic legal foundations of China's insurance system.

A regulatory system was gradually built up during this period of time.

The People's Bank of China (PBOC), or central bank, was long the supervisor of all the three key financial sectors of banking, securities and insurance. An insurance regulatory department was established only in 1995 under the PBOC to oversee the insurance sector.

But with the rapid development of the domestic insurance industry and the entry of foreign insurance companies making insurance supervision all the more complicated, the regulatory regime became outdated since the PBOC needed to focus most of its attention on monetary policy.

Following the outbreak of the Asian financial crisis in 1997, the State decided on a policy of segregation for the financial industry, setting up firewalls between the banking, securities and insurance sectors to minimize risk.

In December, 1998, the China Insurance Regulatory Commission (CIRC) was established, starting a new phase in the development of China's insurance regulatory regime.

An eventful 2003

Major changes in the market structure took place last year.

Premiums at joint-stock insurers expanded to increase their market share, while State-owned players saw their share shrink despite further business growth.

The market share of the PICC in property insurance and that of China Life in life insurance dipped by 2.9 percentage points and 2.3 percentage points respectively from 2002 to 67.5 per cent and 54.3 per cent.

Secondly, the revised PRC Insurance Law allowed property insurers into the short-term health insurance and personal accident injury insurance market on January 1, 2003.

Property insurers garnered a combined 2.37 billion yuan (US$285 million) of premiums from short-term health and personal accident insurance for the entire year, which accounted for 6.94 per cent of all premiums from the business.

Life insurance continued its rapid growth, accounting for 77.59 per cent of total premiums of the insurance industry, up 3.07 percentage points from the previous year.

Major strides were also made in the reform of premium rates. Based on months of trial operations, a market-oriented premium rate reform system was launched on a nationwide basis on January 1, 2003, three months before the old uniform rates were abandoned.

The insurance assets management reform took a major step forward when the PICC and China Life won regulatory approval to set up separate asset management subsidiaries.

While major reforms proceeded impressively, insurance companies also embraced some long-awaited loosening on investment scope, which was expected to help improve profitability.

The CIRC enacted new rules on insurance companies' bond investments, broadening their investment scope from four industries to all corporate bonds with AA or higher credit ratings. The insurers were also allowed to invest up to 20 per cent of their assets in corporate bonds, from 10 per cent previously.

In July, they were allowed to invest in central bank bills.

Major problems

China's insurance industry has grown by an average of more than 30 per cent per year since it embarked on the reform and opening-up policy, becoming one of the nation's fastest growing industries. But the industry remains in a preliminary development stage, facing many difficulties and problems.

A major concern is the small scale of the industry. The number of China's insurance companies - standing at 61 as of the end of 2003 - still lags far behind that of developed countries. There are more than 5,000 insurance companies in the United States, more than 800 in Britain, and more than 150 in Singapore.

Total assets of all Chinese insurance companies were only 912 billion yuan (US$109 billion) at the end of last year, which was about the size of one large insurance company in a developed country.

Insurance assets accounted for a mere 3 per cent of China's total financial assets, far behind the banking and securities sectors.

Partly owing to its small scale, insurance still has limited influence in Chinese society. China's insurance penetration is 3.33 per cent, nearly 5 percentage points below the world average; the insurance density is US$35, only 7 per cent of the world average.

While insurance plays a paramount role in compensation for losses in developed countries, it is only a complementary method in China, where fiscal support, preferential policies and social donations are relied upon.

Insurance compensations account for about 1 per cent of losses incurred in disasters in China, which compares to 20 per cent in Europe.

The supply of underwriting capacity in the marketplace remains inadequate. Although the number of insurance products has grown considerably, there is still a lack of products that can meet the increasingly diversified needs of Chinese customers.

Statistics indicate that around 40 per cent of China's savings deposits are saved for such purposes as pensions, education, medical care and accident provisions, which are mostly handled by insurance companies in developed countries.

And only around 5 per cent of Chinese households have purchased homeowner property insurance. Even in the relatively developed motor vehicle insurance sector, the coverage level is only 30 per cent.

Largely due to the small scale of the industry and the huge market potential, many analysts say competition in the marketplace is inadequate.

In 2003, the three largest insurance companies held 92 per cent of the property insurance market and 86 per cent of the life insurance sector.

And most companies have a similar product mix, which not only prevents insurers from providing differentiated services, but also tends to result in low-level price competition.

Some companies have unreasonable business structures and a low capacity for innovation, which has led to frequent fluctuations in their development.

In addition, irregularities remain quite a serious problem. Some companies have weak internal control mechanisms and are frequently found giving fraudulent data and misleading clients, especially when promoting new products.

A more significant worry, many analysts say, is the low investment return that threatens to erode the capacity of insurers to settle claims.

Although investment channels for insurance companies were broadened further in 2003, they are still largely restricted to bank deposits and low-yield products like bonds.

At the end of last year, 52.06 per cent of insurance assets were held in bank deposits, 16.1 per cent in treasury bonds, 9.48 per cent in financial bonds, while only 5.23 per cent was in securities investment funds.

Due to various factors including fluctuations in capital and money markets, the average return on insurance assets was only 2.68 per cent in 2003, 0.46 percentage points down from the previous year.

The low investment yields of insurance funds have a direct impact on the repayment capacity and operational stability of insurance companies, and have restrained the growth of the insurance industry.

Promising outlook

The continued rapid growth of the Chinese economy provides huge room for the development of the insurance industry.

Research shows the growth of insurance premiums will accelerate as GDP grows. Looking at long-term factors such as the industrialization process, China's economic growth has huge potential in the future.

China has set a target of quadrupling GDP by 2020, which translates into a 7.2 per cent annual growth rate for the coming years, promising to generate enormous room for the growth of the insurance industry.

Meanwhile, the ongoing systematic reforms and strategic economic restructuring will bring fresh vigour into the insurance industry.

With the reforms deepening, the responsibility to shoulder risk is being transferred from the government to businesses and individuals, who, in turn, have been increasingly opting for insurance as the method to pass on risk.

The State's strategic steps to readjust the economic structure, stimulate domestic demand, expand exports and promote growth in the relatively underdeveloped western and northeastern regions are expected to propel infrastructure construction as well as foreign trade, which requires huge risk coverage from insurance companies.

The fundamental social changes taking place in the nation will also provide favourable conditions for the insurance industry.

The expected increases in the urban population and the aging of the entire Chinese population are going to increase demand for insurance protection, while uncertainties in the areas of employment, medical care and education - partly a result of ongoing reforms - also require risk coverage.

(China Daily October 8, 2004)