Filling China's insurance gaps

Updated: 2012-10-26 12:43

By Diao Ying (China Daily)

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 Filling China's insurance gaps

The Shanghai office of Lloyd's. Specialty insurers from Europe are finding huge potential in China. Yong Kai / for China Daily

Western companies see huge opportunities in rapidly expanding specialist areas of business

China is home to some of the largest insurers in the world, but with the industry still at a nascent stage, huge opportunities remain.

While premium income from insurance was 1.43 trillion yuan ($230 million; 180 billion euros) last year and total assets of the industry were 5 trillion yuan, there remain major gaps in coverage.

Specialized areas including agriculture and disaster insurance have yet to take off. And extreme niches found in developed markets are unheard of.

Now specialist insurers from the West are on the way to fill the gaps, looking to profit from China's growth by providing their experience and expertise.

Lloyd's, the world's largest specialist insurer is among them. It aims to increase its China business faster than the country's GDP growth in the coming years, says the company's chairman, John Nelson. It also plans to develop Shanghai into one of its international centers for insurance and reinsurance.

Opportunities for foreign insurers have emerged as a result of China's fast-growing economy. This is particularly true of less developed areas of the country and industries more prone to natural disaster, such as agriculture. The China Insurance Regulatory Commission, the nation's insurance regulator, said in July that it will speed up efforts to improve insurance coverage for agriculture and disaters.

Insurance is one of Britain's largest industries, employing 350,000 people, 50,000 in London alone, and contributing 2.5 percent of the country's GDP. In China, by comparison, insurance is largely underdeveloped, but is growing rapidly. According to the 12th Five-Year Plan (2011-15), China's insurance industry premium income is set to reach 3 trillion yuan and the industry's total assets 10 trillion yuan by 2015.

Lloyd's has its roots in Edward Lloyd's coffee house in London where ship owners met to make insurance deals 300 years ago. Since then it has insured property and personal wealth against war, disaster and accidents. Among its most notable insurance deals was the ill-fated Titanic.

The company's China footprint is fairly recent. Lloyd's opened its first China office in Shanghai in 2007 and received a license to provide direct insurance in the country last year.

Lloyd's business model is new to China. In a world where most business is conducted electronically, it provides a market where insurers and brokers meet face-to-face, in an atmosphere of both cooperation and competition. Around the company's London headquarters, men and women in dark business suits carrying thick files abound, flitting between deals to insure anything from oil rigs to celebrity body parts.

Its biggest strength in China, says Richard Ward, chief executive, is that it can insure complex risks that other players do not know how to.

"If you want to insure a satellite launch, we know how to do that; if you want to insure property against earthquake risk, we know how to do that.

"We are not going to compete with the People's Insurance Company of China in the local market for motor insurance, or China Pacific Insurance Group for property," says Ward.

"We are competing for the more complex risks when you need special skills."

The growth potential of the Chinese insurance market is both attractive and challenging, he says.

"The market in China is highly competitive, to the extent that we worry about the profitability of business," he says.

Nelson says moving too fast in a developing market can be dangerous.

"It is better to write no business than to write unprofitable business. That is the message we are giving our team in China," he says.

Under the Lloyd's structure, insurers form syndicates to sign contracts. According to this model, the key in China is to build relationships with local insurers and let them push the business.

Lloyd's has hired Eric Gao, who previously worked for Swiss Re, to lead its China operations, with about 25 people working under him.

"It is a matter of having people on the ground, leaving their office and meeting the local business community," says Ward.

In addition to the domestic market, insurers could also profit from Chinese companies operating overseas. For example, China Ocean Shipping Company is increasing the number of vessels it has around the world and needs to insure them. Similarly, the aviation industry operates globally and needs overseas insurance. This will create opportunities for specialist insurers, Ward says.

However, there are issues for international insurers looking to expand in China. Above all, Chinese people differ from Westerns in their attitude to risks. Chinese companies are better known for hard work than taking risk.

"It will take a while for Lloyd's to understand China in the way it understands other markets and vice versa," says Nelson.

Regulatory and judicial systems in China are still developing and could also be a barrier. In the UK, the judicial system is highly developed and trustworthy. This is a precondition for Lloyd's operations.

"In order for the Chinese insurance market to develop, China needs to develop the same kind of reputation," says Ward.

Lloyd's business model also faces potential domestic challenges. For example, Shanghai is considering opening its own insurance exchange.

"We all compete with each other," says Ward. "But it is difficult to replicate a market. It is not something you build from scratch."

With more communication on both sides, things may improve. Chinese insurers are sending people to the West to learn about business practice. China Reinsurance Corp, the largest reinsurer in China, last year joined Lloyd's and became the first Chinese member of the market. It put $50 million into a syndicate along with Catlin, the biggest insurer in the market.

Lloyd's also wants to increase the number of Chinese nationals working in London. At the junior levels, it plans to hire from China's large student population in the UK through its graduate program. It also plans to send staff from Shanghai to London. The intention is that these Chinese nationals take their experience of China to London, and then return to China with a better understanding of the global insurance market.

"Creating business footprints both ways will create more connections and more business," says Nelson.

This year China Re sent six people to work in London. Steven Catlin, chairman of Catlin Group Limited, says it also sends its people to work at the sites of Chinese insurers to learn about how they do business. Catlin opened its second China office in Beijing this year, following an earlier one in Shanghai.

"As the Chinese economy develops, and as the Chinese insurance companies become more sensitive to their own internal capital, there will be a healthier market in which we can operate," says Nelson.

(China Daily 10/26/2012 page22)