- Life insurance market in the most populous nation, challenges and scope for growth.
- The three major life insurance firms in China.
- How Chinese regulations are affecting the industry and its players?
- Digitisation and Chinese life insurance firms.
The life insurance market in China is the fourth largest in the world. Secondly, the Gross Written Premium (GWP) for life insurance policies in the nation grew at 43.6% Y-O-Y in 2016. This was the biggest rise in a year as reported by China Insurance Regulatory Commission (CIRC). The fast pace of growth can be attributed to the growing middle-class population and urbanisation. Besides, 56% of the total population lived in the urban areas at the end of 2015 and the same is expected to expand 60% by 2018 as per the Chinese census. In order to meet requirements of growing customers, insurers are re-evaluating their plans, policies, distribution channels as well as strategies to capture a high market share. However, a large addressable market may not mean high profits.
While China has a huge market that has boosted its top line continuously in the past few years, but Chinese life insurers are struggling to make a healthy bottom line.
China Life Insurance Co. Ltd. (CLICL), Ping An Insurance (Group) Co. of China, Ltd. (PICCL) and China Pacific Insurance (Group) Co. Ltd. (CPICL) are the three companies that contribute ~50% of the total GWP in the nation. Thus, with an increase in the GWP, these companies registered a growth in their revenue in absolute terms. However, except for the CPICL, the remaining two companies showed a declining growth trend. The CPICL was able to manage growth due to its aggressive selling techniques and increased up-sell ratios.
Additionally, individual life insurance business of all the insurers witnessed a tremendous growth and formed the basis of increased revenues for these firms. However, most Chinese insurers have been selling short term investment schemes with high yield ratios (8%). Although such schemes lured in lots of investors, insurers failed to deliver on their promises. Therefore, in order to protect the consumers, CIRC banned such schemes (March 2016) until 2021 and brought in new regulations where these cannot be more than 30% of a company’s product portfolio. In addition, insurers are required to file for regulatory approvals prior to a launch of a scheme that yields more than 3%. The rise in such schemes/policies and their subsequent ban during the period (2015-16) may have led to a mixed growth trend for most Chinese life insurers.
Chinese insurers have not been able to limit their loss and expense ratios despite the increase in revenues. This coupled with a nearly stable investment yields resulted in low or negative insurance margins for these insurers. While insurers somewhat contained their loss ratio in LTM (Last Twelve Months) of 2016, expense ratios continued to see an upward trend as shown in the below charts. Moreover, net investment yields were consistent and were in the range of 4.5-5.5% for the companies in the past 5 years. However, investment yield came down in 2016 owing to several reforms undertaken by the Chinese government and regulatory bodies. The People's Bank of China undertook monetary easing measures in 2015 by reducing interest rates by 165 basis points. This led to a decline in profits of insurers due to downward pressure on bond yields. Furthermore, CIRC imposed novel regulations such as tightening of capital rules, wherein insurers must set aside a part of their profits as reserves. This also impacted the bottom line negatively.
The insurance companies have a huge untapped market to expand their businesses due to low life insurance penetration rate in China, this was merely 3.57% in 2015. This, in turn, was far below in comparison with developed nations such as the US (11.3%) and the UK (10.5%). However, a sole increase in the GWP is insufficient for the profits to grow, other factors such as a lower underwriting expense, a lower distribution expense, a higher yield on investments should also be attained to gain profitability.
For instance, Chinese firms are lagging the US market in terms of combined ratio (loss ratio + expense ratio) which was recorded at 116% in China as compared to 63% in the US (2015). In this respect, the key differentiator was digitisation. In the US, a majority of people moved online to buy insurance and carriers used this opportunity to expand digital distribution, reduce dependence on banks and grow profitably by making more targeted investments in building agency sales forces. The US is further innovating its marketing approach through the use of social and digital media, direct business, which includes online product customisation and purchasing. Subsequently, the governmental reforms such as adjusting hospital incentives to control treatment costs and the development of community health-centre networks have increased insurers’ ability to manage claims, reduced frauds and improved profitability.
Thus, Chinese insurers may need to replicate a few strategies to increase their profitability. Whether China will be able to follow the US model and translate the market opportunities into a profitable business is remained to be seen.
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