(Bloomberg View) — In most countries, insurers are among the most staid and conservative companies in financial markets. In China, they’re becoming some of the riskiest.
On the surface, China’s insurers seem to be enjoying a golden age. Over the past two years, premium revenue has risen by 88% and total assets by 49%, while claims are up only 43%. The industry now manages some $2.4 trillion in assets.
In a country with an aging population and high savings rate, it’s a good business. The continual inflow of premium income along with predictable claims appeal to China’s many aspiring investment moguls. It’s no coincidence that the face of Warren Buffett — who of course made his fortune in insurance — adorns Cherry Coke cans in China.
Look beneath the surface, though, and dangers are lurking everywhere. In a business where risk management is fundamental, China’s insurers lack the basic actuarial manpower and data tools necessary to make informed decisions. A recent survey found that 47% of Chinese insurance firms “haven’t developed any methods at all” to conduct risk and solvency analysis. Many lack even rudimentary internal controls.
One regulator recently sought to reassure the public by declaring the industry “solvent” — a term that doesn’t exactly inspire confidence.
Another problem is that China’s modern insurance industry doesn’t have much to do with insurance. Firms typically view it as a capital-raising exercise, not a way to protect companies and individuals against risk. They often offer high-yielding investment products “that include a small insurance component,” as Bloomberg Gadfly’s Nisha Gopalan put it recently. Consumers view such products as multi-year investment vehicles that offer a higher rate of return than banks but are safer than the stock market. For executives bent on becoming the Chinese Buffett, insurance has become the go-to way of generating investment capital.