Wall Street Journal: Insurers’ Chinese Pipe Dream

Dec 10, 2010

The following article was published in the Wall Street Journal on December 9, 2010:

Insurers’ Chinese Pipe Dream

By Hester Plumridge

Is China the promised land for insurers? Back in 2001 when restrictions on foreign firms were lifted, it certainly looked that way. But the industry’s high hopes are waning. Dutch insurer Aegon is to restructure its loss-making Asian business. Aegon still sees opportunity in China. But for the bulk of foreign insurers, turning a profit there will be a struggle.

Chinese opportunities appear mouth-watering. Insurance penetration is low. China is already the world’s sixth largest insurance market by premiums, with annual growth of 15% expected in coming years, versus 3-5% for developed markets.

But foreign insurers’ operations there are restricted. Virtually all must operate in a joint venture with a local partner. Domestic firms can apply for national licenses; foreign players must apply to expand separately in different regions. The combined market share of foreign life insurers is just 5%; that of property and casualty insurers just 1%. Both figures have fallen in the last five years.

Some insurers are happy with a small slice of a very large pie. But competition is fierce: 27 foreign life companies and 18 property and casualty players compete with home-grown behemoths such as China Life and Ping An.

Prudential, one of the biggest foreign players, managed only a £4 million pretax profit in 2009, after years of losses.

No major foreign firms have pulled out of China to date. But many are considering their options. Foreign insurers expect no imminent growth in their market share. They anticipate greater competition from banks, which are gradually entering the insurance market. And the majority of foreign firms PricewaterhouseCoopers surveyed in September said they believed their Chinese partners would like to leave the joint venture.

Foreign insurers’ best bet might be to own a minority stake in a less-fettered local operator, as Zurich Financial Services and Ageas do. Alternatively some areas of the market, such as reinsurance, enjoy fewer restrictions than life or general insurance. But for the majority of foreign players, dreams of Chinese profits will remain just that.