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No assurance of success

By Hu Yuanyuan (China Daily)
Updated: 2008-10-13 11:24

After Deng Xiaoping, the chief architect of China's reform and opening up, made his southern tour in 1992 and reinvigorated the reform process, banking, securities and trust sectors have become much more active in the market. But the insurance industry still remains relatively quiet.

Before the Insurance Law was launched in 1995, there were only three Chinese insurance companies and three foreign insurers in the market - The People's Insurance Company (Group) of China, Ping An, China Pacific Insurance Co, AIA, AIU and Tokio Marine & Nichido Fire Insurance Co.

The first round of the insurance entities' expansion came in 1996 when five new domestic players were given the go-ahead, including Taikang Life Insurance Co, New China Life Insurance Co, Huatai Insurance, Yong An Insurance and Sinosafe Insurance. Also at the same year, Manulife-Sinochem Life Insurance Co Ltd, the country's first joint venture insurance company between Canada's Manulife Financial and China Foreign Economic and Trade Trust & Investment Company, a member of the State-owned chemical industry giant Sinochem Corporation, was also set up.

As more insurance companies were established, regulating the industry was also on the government's agenda. On November 18, 1998, the China Insurance Regulatory Commission (CIRC), the insurance sector's regulator, was established. Before that, the People's Bank of China supervised the industry.

Among China's financial sector, the insurance industry was the first to be fully opened to foreign investors in line with China's commitments to the World Trade Organization.

Since December 11, 2004, in addition to compulsory insurance, foreign insurers have been allowed to run other areas of the insurance business, such as health insurance, group insurance and pensions. Meanwhile, all the geographical limits on foreign insurers' business expansions were also lifted. By the end of 2007, there were 43 foreign insurers from 15 countries and regions that had established 134 operations in China.

The only remaining restraint is that foreign insurers must team up with Chinese partners and the stake ceiling allowed by the regulator for foreign insurers is 50 percent. However, because of historical reasons, AIG and Allianz beat the regulator to the altar - so they could set their own terms of endearment. AIG runs its wholly owned subsidiaries in China while Allianz has a controlling - 51 per cent - stake in the joint venture.

With the sector growing at an average of 30 percent annually in the past two decades, an increasing number of foreign insurance giants have hopped on the bandwagon, but many don't find it easy to deal with this specific rule.

While the regulation attempts to protect China's emerging insurance sector, it is also a significant factor in the rising divorce rate among joint ventures.

Commonwealth Bank of Australia, the foreign shareholder in China Life-CMG Assurance Co, is in talks to partner a large-scale Chinese enterprise. The talks stem from the fact that the controlling shareholder, China Life Insurance Co plans to sell its stake in the joint venture to avoid competing with the joint venture as both are involved in the life insurance business.

Sources said that Bank of Communications is contacting China Life-CMG Assurance about taking the 51 percent stake.

Pacific-Antai Life Insurance Co, a joint venture between ING Group and Beijing Capital Group, also faces a similar stake swap.

"Due to the huge gap in management philosophy between the two parties as well as the culture shock, this split-up of joint ventures could have been forecast," says Wang Guojun, an insurance professor at Beijing's University of International Business and Economics (UIBE).

Wang cites the high salaries of the foreign management as an example. In a joint-venture insurance company, the foreigners are paid a salary at least the same as they made in their own country.

This is jarring for the Chinese partners, especially since a newly established life insurer needs at least seven or eight years to reach the break-even point.

According to Liu Liyi, who used to be the chief representative of Aon Group Beijing Office, good cooperation between the top management of the two parties is the precondition for the joint venture's success.

An exception to the seven or eight year rule is Shanghai-based Aon-COFCO, a 50:50 joint venture between the world's second largest insurance broker Aon Group and China National Cereals, Oils & Foodstuffs Import & Export Corp (COFCO), which started marking profits after a mere 18 months.

"Their cooperation will be smoother if the foreign party can have more leeway in management," says Liu.

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