Foreign life insurance companies in China expect to grow by up to 30% in the next three years. Low penetration (2%) in the insurance market, strong upside for premiums, and the relative strength of China's economy is driving this sentiment, according to PwC's Foreign Insurance Companies in China 2012 Survey Report.
Similarly, foreign property and casualty (P&C) companies polled by the survey anticipate growth of 20% in 2012 through to 2015.
"Optimism among foreign insurers belies the continuing challenge they face in trying to build market share in China," says Peter Whalley, PwC Insurance Leader for Hong Kong. "The 27 foreign life and 21 P&C players only hold a 4.3% and 1.2% share respectively of the Chinese insurance market in 2012."
Projecting ahead, survey respondents expect modest growth of their slice of China's insurance market.
Foreign life companies expect their share to increase to around 5% by 2015, while foreign P&C insurers believe their share will remain the same in three years. These figures are significantly lower than the 10% - 20% share life insurers were forecasting when surveyed in 2007.
Two P&C respondents are predicting a major jump in their market share to 5.5% by 2015. This confidence stems from the opening up of the mandatory third party liability (MTPL) sector, which will create additional sources of revenue.
"There's no doubt foreign insurance companies would like a larger market share in China. It's a hard market to crack. But it's not impossible. Compared to the rest of Asia, China remains an underinsured market. Insurance penetration remains extremely low, at around 2%. The same is true in the property and casualty sector. Real premium growth is extremely strong in China but penetration rates are still below most other Asian markets," adds Whalley. "Also if you look at the commitment of these companies to the Chinese market, the 31 respondents that we spoke to made it very clear that China very much remains their hunting ground. In fact, their commitment level is at its highest since 2008."
The life industry is experiencing major realignments in its distribution channels. In 2012 more than half of respondents believe there is a continuing trend towards bancassurance.
The recent "three company" rule imposed by the China Banking Regulation Commission has significantly impacted foreign life insurers.
The rule places limits on the sale of insurance products in bank branches to just three insurers (which often includes the bank itself). Also, insurance companies are no longer allowed to station their own sales representatives in the banks, passing control of insurance product sales to bank employees.
Having said that, banks remain an important distributing channel for insurance companies. More than 50% of respondents believe there is a continuing trend towards bancassurance. Direct marketing and telemarketing are also important channels for the insurance players.
"The evolving nature of the distribution channel will prompt many foreign insurers to re-evaluate their business model. While the bancassurance channel has enabled foreign firms to grow market share, it has come at the cost of direct customer interaction. A focus on ways to reach consumers directly will be a priority for foreign insurers, as will building the critical mass and expertise in their workforce to do so," says Shu-Yen Liu, PwC Actuarial Practice Leader for China.
The channel experiencing the most pronounced decline was identified as agents. Two-thirds of respondents believe the agency channel is losing traction after reaching its peak of 3 million agents in 2010. Nine of the 14 life respondents are planning to layoff between 20% and 40% of their agents this year. While three participants say they would dismiss up to nine in 10 of their agent network.
"There's been increasing concern about the sustainability and future direction of the agent sales channel. Mis-selling scandals in recent years may have exacerbated the decline. High turnover rates, low expertise and skill level, limited income capacity and poor public image do not help either. They understand the need to upgrade their training programmes and focus on quality agents who are able to sell more sophisticated insurance products," adds Whalley.
A surprising aspect of the report finds that a majority of foreign insurers do not believe they have the right people in place to deliver on their current strategy. The most commonly expressed concern centred on a shortage of staff with 20 years or more experience. Twenty-six of the 30 respondents asked believe that talent shortage will have a considerable impact on their top line growth over the next three years.
Regulation environment a concern and a driver of change
As in the past surveys, China's strict regulatory environment remains a source of concern.
Over-regulation is a common grievance among foreign insurers. They however also point out regulation as an agent for change. For example on the life side, changes on pensions, retirement products, tax incentives and health insurance could allow foreign insurers to leverage their knowledge and expertise. While for P&C insurers, a relaxation on the entry to China's auto market will be a huge boost.
As these foreign insurers grow their business in China, additional capital is needed. An estimate of the projected increase for the 18 life respondents forecast that the current capital of RMB 54 billion will increase to RMB 83 billion by 2015.
Foreign insurers have been working hard to expand their reach in China. They're in for the long haul. And the involvement of these international players is, and will, pay dividends for the development of China's insurance industry.