China is a land of relatively young car drivers. Unsurprisingly, the country, which zoomed ahead to become the world's largest auto market, also has a mouth-watering insurance sector too. Fiercely protected for domestic insurers, until now, the auto insurance market will finally open its lucrative segments to foreign companies — making this a landmark on the reform calendar.

All these years, foreign insurers could offer only commercial products and not the profitable compulsory insurance. The car industry accounts for 70 per cent of the property and casualty market and global insurance majors have struggled to gain a foothold in China where an average 40,000 cars are sold a day. Auto accounted for more than $50 billion (Dh183.6 billion) in premiums last year according to the China Insurance Regulatory Commission but foreign companies won only a sliver of the pie chart. The premiums of 21 of these firms operating in the property and casualty insurance markets amounted to only 1.1 per cent of the total last year, whereas PICC Property & Casualty Co, a large domestic non-life insurer monopolises one-third of this market.

Significant timing

The timing of the May 1 ruling allowing foreigners to enter the high volume compulsory accident insurance market seems significant. Regulators had always promised to open up auto insurance but never was it high on agenda. The sudden decision seems to fit into the greater blueprint of reform planners have chalked out for the financial markets and the promise to give more elbow room to the under-performing pension and insurance segments.

Recently, the China Securities Regulatory Commission indicated that this year will see a ‘policy adjustment storm' as a raft of reforms to develop the capital market gets under way.

China's securities companies suffered a bad bear market in 2011 when the Shanghai Composite fell more than 20 per cent, pushing the government to escalate deregulation. Institutional market players are being encouraged to create new financial products and play catch-up in this new era of ‘openness'.

The Chinese insurance market has developed at consistently high growth rates during the past two decades and offers enormous potential due to a growing middle class and the universal social security scheme which plans to bring every Chinese under the life and health insurance umbrella by 2020.

With total premium income topping $220 billion last year, the country remains an insurers' dream. The market is far from saturated and insurance penetration remains extremely low. Despite the potential, both domestic and foreign insurers seem to be struggling.

More than half of the foreign life insurance companies operating in China estimate that their business has grown from 20 to 40 per cent in 2011, but their market share remains insignificant.

Capital shortfall

Domestic companies have their own challenges, despite being offered every kind of protection. One of the Chinese biggies, New China Life, indicated that it needs to raise equity because of severe capital shortfall. Ironically, this shortfall has been caused by their own success and rapid growth. Domestic insurers have signed up vast numbers of new clients over the years, which also means potential liabilities have gone up and extra premiums are slow to come in.

They have been unable to keep pace with the expansion in their customer base and there exists a wide mismatch between the industry's long-term liabilities and the typically short-term nature of company investments.

China has a vast underutilised pension capital. By the end of 2011, the pension system was estimated to have roughly 7.4 trillion Renminbi in assets under management, with insurance assets accounting for approximately 55 per cent of all assets and public pension funds accounted for about 2 trillion Renminbi. Up until now, investment management of this capital has been severely restricted with the capital stagnating in underachieving investment products — mostly fixed-income.

But with rising inflation and growing army of senior citizens, regulators can no longer play ultra-cautious. In all likelihood, the coming months will see greater openness and foreign participation in pensions and insurance.

 

The writer is a journalist based in China