China's battle against illegal sales of insurance policies may take longer than anticipated, unless local firms can begin offering services that are on a par with their foreign counterparts.

Analysts warn that these illegal sales - worth US$1.59 billion every year - are spreading rapidly, and undermining the growth of local insurance firms by taking the most lucrative business.

One year after declaring war on these illegal policies - which have no legal protection on the Chinese mainland - the China Insurance Regulatory Commission is fighting an uphill battle, according to industry analysts.

The illegal agents, mostly hired by insurance companies based in Hong Kong, are simply moving further underground rather than quitting the job, according to industry observers.

Their annual sales are now worth the equivalent of one-third of Hong Kong's total premiums, or one-tenth of the Chinese mainland's life insurance premiums.

Complaining that little progress had been made in the commission's campaign, an anonymous industry analyst pointed out: "Many of them (the illegal agents) are taking the clients to Hong Kong to sign contracts."

But what is angering regulators even more is that these criminals are no longer happy to contain their activities to the Pearl River Delta region, which neighbors Hong Kong, as they did in recent years, but have been advancing in recent months to other wealthy regions of the nation, particularly Beijing and Shanghai.

Around 40 illegal policies, worth more than US$500,000, are reportedly being sold to Beijingers every day.

"It is just rampant," warned Li Jing, vice-president of the Beijing branch of Ping An Life Insurance Company of China.

And it is not just confined to well-off parts of the country, said Li, adding: "The numbers have grown large even in Xinjiang," a less-developed autonomous region in western China.

Regulator claims successes

But the regulator remains optimistic in the face of these trying circumstances, insisting that their efforts have achieved some initial success.

Chen Wenhui, director of the commission's Life Insurance Regulatory Department, said that the growth of illegal insurance policies "has been brought under initial control."

The insurance authorities of the Chinese mainland, Hong Kong and Macao, as well as the mainland's police, launched the crackdown last year.

Commission officials have warned overseas insurers that illegal sales of policies on the Chinese mainland may endanger their efforts to legally enter this massive and lucrative market in the future, and have stepped up efforts to educate the public about the risk of buying illegal policies.

While industry analysts and the regulator may differ on the impact of the crackdown so far, they generally have the same explanations for this disturbing phenomenon.

"One major reason is the huge potential of the mainland market. Driven by the prospect of profits, some overseas insurance companies are using various methods, such as offering 100 percent commission, to encourage agents and other intermediaries to coax mainland residents into buying their policies," warned Meng Zhaoyi, director of the commission's International Department.

Insurers both at home and abroad have in their sights the top 20 percent of the nation's wealthiest depositors, who hold 80 percent of the around 13 trillion yuan (US$1.6 trillion) of private savings in China.

And agents find that the temptation of this is just irresistible.

It is a common practice for these illegal agents, mainly hired by smaller Hong Kong-based insurers, to typically keep all the premiums the policyholder pays in the first year and more than 10 percent of premiums paid in subsequent years.

"What industry can offer such a rate of return?" asked Liang Hongjie, president of Heng'an Group, a leading insurance intermediary in South China's Guangdong Province, where illegal policy sales are most rampant.

In sharp contrast, mainland insurers pay their agents 25-30 percent of the first year premiums and a mere 3-5 percent of premiums after that.

Gap needs to be narrowed

Meng pointed out that mainland insurance firms lag behind insurers from developed markets in terms of products, services and investment returns, making it much easier for some overseas insurers to promote their products.

Backed by diversified investments in overseas financial markets, the illegal insurance policies typically offer returns two or three times higher than those sold by mainland insurers, who were prevented from directly trading stocks in the domestic market or entering overseas financial markets until very recently.

Annual returns on domestic life insurance policies now stand a little above 2 percent, close to the yield on bank deposits.

"And the protection is quite good," pointed out Li Yu, whose Beijing-based employer, a foreign-invested company, has bought its employees' health insurance from illegal agents.

"Everything is covered," she added.

In the minds of many analysts, the gap in what the products offer is the very reason that illegal insurance policies are selling so well on the Chinese mainland.

"It's that simple by comparison - the returns (on domestic insurers' policies) are really low, and the overseas policies offer far better protection," said Liang, who is also the deputy director of Intermediaries Committee of the Guangdong Insurance Association.

While most analysts pointed to China's growing middle class as the source of the majority of the buyers, some say corrupt officials account for a major proportion of the illegal agents' customer base.

"Government officials are a big part," said one source familiar with the situation. "The value of a single contract is sometimes as much as a few million yuan or more than 10 million yuan (US$1.2 million)."

The most obvious impact of illegal policy sales on the mainland insurance industry is the drainage of premiums. While it is generally difficult to calculate the sales figures, "that is the best part of the market," said Liang, referring to the fact that the buyers are all potential high-end clients for domestic insurers.

"And the high-end clients increasingly tend to compare the products offered by domestic insurers with those from overseas before they make their decisions," said Yu Wenbo, honorary director of Taikang Life Insurance Co Ltd. "That will affect the growth of the domestic insurance industry."

The mainland life insurance industry's growth already slowed to a meagre 7 percent from a double-digit rate in recent years, as major players trimmed unprofitable business to improve competitiveness.

And the policyholders are also likely to fall victim to the risks associated with the illegality of these contracts.

Regulators have repeatedly warned mainlanders that overseas-incorporated insurance policies are not protected by Chinese laws, and policyholders would have to file expensive overseas lawsuits should any legal disputes arise.

"What they (buyers) are most concerned about is fraud," said Yu. "That is a big risk."

The commission's Guangdong bureau has reportedly been receiving mounting complaints in recent weeks from buyers of illegal insurance policies. Reasons include invalid contracts or the insurer's refusal to settle claims.

But regulators have yet to find an effective way to smoke out these illegal agents. "It's quite difficult (to spot the illegal agents), because they mostly sell through friends or acquaintances," said Taikang's Yu.

The agents then typically take their clients to Hong Kong under the guise of being tourists, to sign the contracts, media reports said.

Such "tourist groups", which average 50 members, are being sent from Beijing on a monthly basis.

The fight to root out illegal sales will not be a short one. "With its opening up and its continued development, the local industry will grow to levels close to that in Hong Kong," said Yu. "But it will take a fairly long period of time."

(China Daily March 28, 2005)