Rich growth opportunities will prompt more Chinese companies to join insurance market

Diversifying risk is a necessity for China as the country becomes more industrialized and urbanized, says John Nelson, chairman of insurance market Lloyd's of London.

Nelson says that China will become increasingly exposed to specialist risks like business interruption, cyber security, energy and property as its economy matures. Institutions like Lloyd's of London, which have rich international experience in risk management, are in a good position to help China through the maze.

"China is very important to Lloyd's. Historically most of our business comes from developed markets, but significant growth is also coming from the emerging markets, led by China," Nelson says.

According to Nelson, insurance penetration is still low in China and cites the April earthquake in Sichuan Province as an example. Only 1 percent of the estimated economic losses of around $27 billion (20.5 billion euros), fell in the insured category, he says.

As the Chinese government often funds the relief for big disasters like earthquakes, China may have the resources to meet such sudden economic shocks, but in the long term it is more sustainable to diversify risks with the help of international insurance carriers, Nelson says.

"At the moment everything is self-insured by the government and paid for by the people. But if you look at developed economies worldwide, they've all gone for the risk transfer model, and China is also on its way down that road," he says.

Nelsons says one such example is the floods in Thailand, which can create significant economic losses as and when they occur. But with Thailand's economy maturing, many foreign insurance companies have entered the Thai market with reinsurance solutions to mitigate risks.

"The risk is thus dissipated away from the host economy. Since the losses are insured, great economic benefits can also be expected," Nelson says, adding he expects China to take steps to liberalize regulations for foreign insurance companies soon.

Home to the world's largest insurers, Lloyd's insurance market started operations in a coffee house in London where ship owners met to make insurance deals 300 years ago.

Despite its long history, Lloyd's entry into China has been fairly recent. It established a representative office in Beijing in 2000, and an underwriting office in Shanghai in 2007.

Nelson says Lloyd's entry into Shanghai "was very much noticed", explaining that the group effectively facilitated the entry of several other international insurance companies that did not have the resources to set up subsidiaries in China themselves.

Because Lloyd's is an insurance market, Western insurance companies that are already syndicates of Lloyd's can enter the Chinese market without applying for licenses separately. Instead, they work and are regulated under the Lloyd's umbrella, which is in turn regulated by the China Insurance Regulatory Commission.

Currently Lloyd's Shanghai has nine syndicates, which are: Ace, Arch, Brit, Catlin, Kiln, Navigators, Sportscover, Starr and Travelers. Together they underwrite around $300 million, an amount which has tripled over the past five years.

The success of Lloyd's Shanghai underwriting office has led the company to apply for licenses to open an underwriting office in Beijing, and Nelson says he expects this application to be cleared by the CIRC over the next 18 months.

"We will expand our Chinese footprint in a consistent manner. Beijing is an important destination and the China headquarters for several global insurance companies. That is why we are keen to open a new branch there," Nelson says.

He says that while Shanghai will still host the majority of Lloyd's underwriting business, having an additional branch in Beijing will make it more attractive for international insurance firms wanting to enter China through Lloyd's.

He says Lloyd's plan to open a Beijing underwriting office has already attracted interest from some syndicates, and the scale of this underwriting office will depend on the number of syndicates willing to send underwriters to Beijing.

While reinsurance is its main business in China, Lloyd's is also making progress with its direct insurance services. Nelson says that the direct insurance business, for which it got CIRC approval in 2010, is relatively small in scale, but could see considerable pickups in the long run.

Lloyd's is also banking on attracting Chinese insurance companies to join the Lloyd's market, so that they can take advantage of the more diversified marketplace, Nelson says.

"At the moment, most of the capital for Lloyd's comes from North America, Bermuda, the UK, Europe and Japan. We want more capital to come from countries like China, India and Turkey," Nelson says.

Currently there is only one Chinese carrier on Lloyd's. China Re, the Chinese national reinsurance company, entered the Lloyd's market in 2011 through a partnership with the Bermuda-based insurance and reinsurance company Catlin.

Nelson says he hopes Lloyd's can attract more Chinese carriers to its market, and expects this to happen in tandem with the surge in Chinese outbound deals.

"As more Chinese enterprises internationalize, the demand for global insurance cover will also surge. Chinese insurance carriers may want to follow their clients internationally, and markets like Lloyd's can provide them the necessary infrastructure," Nelson says.

He says if Chinese carriers become syndicates of Lloyd's, they will also have access to Lloyd's license worldwide, and also benefit from the Lloyd's brand. Lloyd's expertise in risk assessment for insurance business could also be a helpful tool for Chinese companies, he says.

China's insurance market has opened up significantly since the country joined the WTO, but restrictions on foreign capital still exist, and consequently the total market share of foreign insurance companies in China is still only around 1 percent.

However, Ernst & Young said in a report released in June that foreign insurers' market share could grow four fold by 2018, as the regulatory landscape gradually opens.

Major contributory factors for the growth have been the opening-up of the third-party motor insurance market to foreign players in February 2012 and the market-based pricing introduced a month later. These changes allow foreign insurers to develop their own rates and provisions, E&Y said in the report.

Nelson agrees that the restrictions for foreign players in motor insurance have given domestic companies a big advantage. But he remains optimistic that foreign insurance carriers can still look for growth opportunities in the business-to-business insurance sector.

"It's natural to be defensive about allowing foreign competition. I think gradually there needs to be full liberalization, but I can't see regulations at the moment as holding us back," Nelson says.

"I think the opportunity (for foreign insurers) is in the kind of risk we are looking at," Nelson says. Examples of these business-to-business sectors include property and casualty, marine and aviation, he says.

Nelson says Lloyd's is committed to international expansion, especially in emerging markets where insurance penetration rates are rapidly growing. China's importance is reflected in the huge potential its insurance market has over other emerging economies, he says.

He expects Lloyd's expansion in the Chinese market to be faster than China's GDP growth, given China's current low insurance penetration rate.

But one challenge, he admits, is the task of persuading syndicates to send underwriters to China, as often there is the fear of the unknown. He says what Lloyd's can do is to educate syndicates about the opportunities that exist in China, and provide them with the platform to enter this market.

Yet another China link for Lloyd's came in July, when China's Ping An Insurance bought the freehold of Lloyd's headquarters building for 260 million pounds ($388 million; 309 million euros). This purchase has prompted discussion as to how it would affect Lloyd's.

Nelson laughed when the matter was brought up, explaining that he has been questioned about it by a lot of people since the purchase, but in reality he says the purchase will have no impact on Lloyd's operations.

"It was Ping An's investment arm that bought the building, as opposed to their insurance business. The building was sold by Lloyd's some years ago and we've had (a few) owners, this is normal in the UK real estate market," he says.

cecily.liu@chinadaily.com.cn

John Nelson says Lloyd's will expand its Chinese footprint in a consistent manner. Cecily Liu / China Daily

( China Daily European Weekly 09/13/2013 page20)