Land of 1.3 billion clients

British companies have begun to make inroads into the Chinese insurance market. The American insurer AIA is the key player among the foreign insurers, which now account for 6% of market share. But with a population of more than 1.3 billion people, China is becoming the focus of the global industry.

A reduction in government-sponsored benefits and a swelling middle class have created demand that has dramatically outstripped expectations.

China’s insurance industry is forecast to grow at almost double the world average until 2020, when its share of the global market will reach about 4%. The uncertain economic environment at home makes it even more pressing for UK firms to capitalise on these opportunities.

But companies are right to be cautious about whether this rapid growth is sustainable. Future expansion will depend on economic growth and not even China can escape the global slowdown. Yet, because of the early stage of development, growth in insurance is likely to continue.

According to the China Insurance Regulatory Commission, total premium income rose 49% to 794 billion yuan (£81bn) in the first nine months of 2008. Premium income for the full year is expected to total 1 trillion yuan.

Besides the obvious opportunities in life and pension products – the result of China’s ageing population and lack of state pension – reinsurance is another largely untapped area.

The ratio of reinsurance premiums to total insurance premiums is far below that of more mature markets.

Brokers have played an important role in developing international reinsurance cover, starting with the People’s Insurance Company of China. They shared expertise and brought capacity from Lloyd’s and the London market, as well as from reinsurance companies.

The shortage of actuaries and professional insurance management staff has also increased demand for foreign providers.

All over the map

Business opportunities now stretch far beyond the established centres of Beijing, Shanghai and Shenzhen into other fast-growing smaller cities. Recent research from UK Trade & Investment, the China-Britain Business Council and the Centre for International Business at the University of Leeds has identified 35 cities currently experiencing substantial economic growth.

All of these cities – which include Tianjin, Hangzhou and Dalian – have large consumer and industrial markets and low cost bases, making them an important market for foreign insurers. They offer a great opportunity for British financial and professional services companies.

The UK’s strong market presence puts it in a prime position to capitalise on those openings. But there are significant obstacles. A recent report by PricewaterhouseCoopers pointed to restrictions on branch locations, joint ventures and product offerings for foreign firms.

China’s banks have been granted approval to acquire stakes in insurance companies, which has increased competition to foreign investors. The PricewaterhouseCoopers report also noted that high staff turnover and 20% wage inflation had created difficulties for external firms.

Although the regulatory context is challenging, many of the restrictions that once held back overseas investors are slowly relaxing. The China Insurance Regulatory Commission has shown its support – through a memorandum of understanding with the China Banking Regulatory Commission – for foreign companies to hold shares in Chinese companies as strategic investors. This will allow the companies to develop mainly liability, agricultural, endowment and medical service insurance businesses, and to enter into markets in the country’s north-east, central and western regions.

Illustrating how this trend of investment into China is working, HSBC announced in July last year that it would spend $1.039bn (£551m) to double its stake in the Chinese insurer, Ping An, making it the largest foreign investor in the country’s financial services industry.

Lloyd’s, meanwhile, has set up a wholly foreign-owned enterprise with the help of the British government. RSA has also set up four offices.

Lloyd’s, which has had a representative office in Beijing since 2000, faced a specific challenge when it realised that to capitalise fully on the maturing insurance market it had to underwrite local currency business, not just dollar business in the UK. Careful negotiations were needed to secure a licence from China Insurance Regulatory Commission permitting it to underwrite non-life reinsurance.

These examples give a snapshot of the opportunities and challenges of the Chinese insurance market. Despite the difficult global economic environment, this market will continue to offer valuable potential for those firms willing to invest time and effort.