Looking for ways to boost growth, U.S. insurance companies are taking a closer look at the newly liberalizing China market. Several factors are behind the surging interest in China.
China lifted many restrictions on foreign insurers at the end of last year, as part of its accession to the World Trade Organization in 2001.
With a population of 1.3 billion, a rapidly growing middle class and an insurance market still in its infancy, China has huge, untapped potential.
China’s rapid economic expansion, social welfare reforms and efforts to improve the efficiency of the sector make it a potentially attractive place to do business.
Foreign insurance brokers may now form joint ventures and will be allowed to form wholly owned foreign enterprises next year.
Emerging Market. China’s insurance market is the world’s 8th largest, thanks to remarkable annual growth. Overall insurance premiums have increased at an average of 26% over the past five years.
Assuming continued premium revenue growth, China is likely to take its place among the top 5 insurance markets in the world within 10 years. Sustaining 20% annual growth appears feasible, considering China’s 9% average annual GDP growth over the past quarter century, rising household income and its very low penetration rate (total premiums as a percentage of gross domestic product), which ranks 44th globally, behind Zimbabwe and Panama. (See Chart 1: Selected Markets.)
A soft-landing attempt by China’s government is under way, but GDP growth is not expected to slip much in the next few years. Even seemingly tiny increases in China’s insurance density rate (premiums per capita) will likely result in huge gains in overall premium value.
Attracted by the growth potential of China’s insurance market, many foreign insurance companies are competing head on with domestic firms by setting up joint ventures with Chinese insurers or by acquiring minority equity stakes. Others are entering the market more indirectly, such as providing claims, information technology and related services to the sector–services which are typically less regulated than the providing of insurance itself.
Traps for the Unwary. While China is far more open to foreign insurers than ever before, the path to success remains strewn with hurdles for those who are unprepared to navigate this huge, complex land.
Product processing and selling, channel distribution and payment systems are very different than in the West. Geographic restrictions, joint-venture requirements and licensing rules can give domestic firms an advantage. Since insurance is still a new business, insurers compete fiercely for the few Chinese managers with Western training and experience. And foreign firms can’t simply replicate their back-office technology platforms in China because local language systems are needed.
For Chinese consumers, long accustomed to a welfare state, insurance is largely a foreign concept. Another challenge is figuring out how to encourage consumers to divert their substantial cache of bank savings into insurance products. The country’s shift toward a more privatized economy, as well as the government’s gradual dismantling of the social security safety net, is likely to lead to greater interest in protection products.
Grabbing market share from huge, entrenched domestic firms like formerly state-owned China Life, which controls roughly 58% of the market, will be a challenge. Of all the foreign life insurance companies licensed in China, only AIG has a sizeable market share (1.26%, according to 2004 premium data), with the remaining companies representing just 1.54% on a combined basis. (See Chart 2: The Players.)
However, the market share of AIG and many other foreign insurers is understated because they operate primarily in metropolitan areas such as Shanghai (China’s largest life insurance market) where sales are stronger due to higher consumer awareness of insurance. Indeed, the 19 foreign insurers in Shanghai held a 15% market share in 2004, an increase of two per percentage points over 2003.
Fresh entrants to China must also compete with domestic firms’ well-established distribution networks, which include battalions of salespeople. China Life, for example, employs over 650,000 sales agents, and the fast growing Ping An has over 200,000. Those numbers are staggering when compared to the 381,000 total agents across the life and non-life industry in the United States.
Bancassurance–distributing insurance products through bank branches–is also growing in importance, particularly as a means of selling simple life insurance. Bank sales accounted for about 20% of China Life’s business in 2002, and 28% of new premiums for the entire Chinese insurance industry that year. However, most bancassurance arrangements with banks are not exclusive–many major banks in China have relationships with multiple insurers. So, the bancassurance channel is not a sure formula to success.
Taking on the Giants. Although domestic insurers control most of the market, their foreign counterparts’ profits are higher. Foreign insurers will eventually capture additional market share through greater operational efficiencies, a wide array of product offerings and first-rate customer relationship management capabilities. Every gain, economy of scale and alliance forged in this highly lucrative, yet relatively young industry, will prove beneficial.
Foreign entrants are leveraging product innovation to differentiate themselves from locals, using creative marketing approaches such as focusing on niche segments, and, in some instances, embracing bancassurance faster than domestic competitors.
Although it is a domestic insurer, Taiping Life’s experience illustrates a path to success for foreign companies. Taiping Life was effectively dormant a few years ago when Fortis, a European banking and insurance group, and China Insurance Group joined forces and won regulatory approval for it to sell insurance again.
Taiping pumped significant resources into its sales force and bancassurance channels and centralized its operating model, enabling faster expansion and improved customer servicing capabilities. Centralizing operations helped Taiping:
o Build a scalable operational infrastructure with a more variable cost structure to support profitable growth and expansion,
o Allow local branches to focus on business development and sales,
o Take advantage of new technology to improve service level at lower cost, and
o Develop a multi-channel environment with common processes across all channels.
Taiping has continued expanding– recently becoming the second insurer to win regulatory approval to enter China’s lucrative annuities market. Many foreign insurers also have expressed interest in this market, now that restrictions against foreigners providing annuity products have been lifted.
Keys to Success. The following are some keys to success for new entrants in this promising, yet challenging, marketplace:
Long-Term Thinking: No company will profit in China with a short-term strategy. Regulations, competition and consumer demand are all evolving and will take considerable time to mature. The longer your company plans to stay competitive in China, the better its chances of success in both the short- and long-run.
Different Market, Different Products: Products that have enjoyed success in your home markets may not be as appealing to Chinese consumers. Market research and local knowledge are irreplaceable in this new insurance frontier.
Operational Efficiency: Since the market is extremely competitive and non-traditional, success will be gauged on how quickly and to what extent resources are devoted to overall business strategy and front-office operations. Sales and marketing should be the primary concern. Back-office headaches or distractions will undoubtedly diminish your company’s revenues and competitiveness.
Staffing: Training managers, salespeople and support staff is critical.
Distribution: As insurers compete to build or gain access to channels, the ability to reach customers through effective distribution channels is key. Winning companies will lock in relationships with distribution networks with nationwide reach or in the major cities. Insurers also need to start looking at alternative distribution channels such as leveraging marketing partners.
The Chinese insurance market is bursting with opportunity for the foreign insurer that takes the time to understand the intricacies of the environment, has the patience to overcome obstacles, isn’t intimidated by domestic firms with large operations but thin profit margins, and creatively seeks a niche.
Foreign insurers already are competing successfully. They achieved an impressive 50% growth in premium income in the first 6 months of 2004 from the same period in 2003, more than two times faster than their Chinese counterparts.
The window of opportunity, however, won’t stay open indefinitely. Foreign insurance companies that already have a presence in China are actively looking to expand operations, while many others are preparing their entry strategy. The time for sitting on the sidelines is fading fast.
Sandra L. Leitch, a partner with Accenture, heads the firm’s insurance practice for Hong Kong and southern China, and is based in Hong Kong.She can be reached via e-mail at [email protected].
Glenn A. Sieber, the global managing partner of Accenture’s insurance group, is based in Hartford, Conn. He can be reached at [email protected].
Caption for chart 1
Some of the world’s largest and fastest growing life insurance markets still have relatively low penetration, which means their growth potential is great.
Caption for chart 2
China Life is the behemoth in the Chinese market with a market share of over 55%.