Editor's comment: China’s coming of age - FREE

Editor's comment: China’s coming of age - FREE

Great Wall of ChinaChina’s insurance industry – but particularly its life and pensions sector – has grown exponentially in recent years. Assets managed by insurers have doubled within four years, reaching around $2.1trn. 

The work force has also expanded rapidly, more than doubling within a year, to reach at least 7.2m people, meaning one in fifty workers in Chinese cities is involved in selling insurance.

But the “coming of age” analogy is not so much about the growth spurt. 

As highlighted by a recent article in The Economist, the expansion represents a major risk for its life and pensions sector, driven by excessive debt, unreachable guarantees of returns for an aging populace, and dangerous asset/liability mismatches. 

A recent report from Fitch Ratings came up with the same conclusions. The coming of age is more about the country’s watchdogs: China’s regulators are policing the sector (life and non-life) more maturely in response to the threat of a bust, which should have some positive consequences for the market’s development.

Probes into Anbang and Sino Life by supervisors suggest a more robust approach to enforcement. 

It is not long since Fosun’s chairman was allegedly picked up by police and questioned as part of a broader corruption investigation, although the details behind his temporary absence remain obscure in a country where government transparency is an alien concept. 

However, as that Economist story noted, Anbang’s political pedigree (its chairman is married to the daughter of former Communist boss Deng Xiaoping) did not stop regulators forbidding a would-be $14bn deal to take over a major US hotel chain.

The new Chinese regulatory framework, the Solvency II-inspired China Risk-Oriented Solvency System (C-Ross), suggests an institutionalised clampdown on excessive risk taking and under-reserving. Even so, the regulation reflects an industry with some growing up to do.

Foreign non-life re/insurers might face tougher hurdles on capital, as their Chinese property and casualty premium will be less made up of the motor business which represents 70% of domestic carriers’ books, due to compulsory third party liability cover. 

That business is subsidised through lower capital charges, noted by pulling some stats from an Oliver Wyman report: 7-9% for motor; versus 25-40% on property and fire insurance business.

The comparable figures for Solvency II capital in Europe are much more balanced, at 29% and 22% respectively, suggesting Europe’s relative maturity and a truer representation of appropriate reserving, versus the need to soften the capital blow on an industry still very much based on the compulsory insurance buying – the marker for those markets still in the emerging stage around the globe.

High capital charges on equity investments (as much as 51%) seem a harsh but conservative measure in the context of 2015-2016’s volatility, which reached crisis levels for China last year, wiping billions from balance sheets as well as contributing to the capital flight seen in many struggling emerging markets.

The increased internationalisation of China’s insurers, notable among groups such as Fosun, Anbang and China Minsheng, whether on the assets or underwriting sides of their business, probably represents an overall force for good, as they are integrated into the global financial system, bring the weight of their investment to bear elsewhere in the global economy, and in turn benefit from global diversification by spreading their business and risks further afield.

For international re/insurance firms in China, a maturing market has benefits. It might still be imprudent to implicitly trust the judgment of China’s regulators too much – state ownership, political patronage, authoritarian impulses and distrust of market forces all still run deep in Beijing. 

Watchdogs did lock up some hedge fund managers suspected of rigging the stock market last year. However, turbulence should also have provided a learning experience for them, to react maturely if China does face a much-feared “hard landing”, particularly over increasingly unsustainable debt levels.

Improving standards of solvency, regulation and supervision bode well for foreign firms in China getting a fairer deal – versus the protectionist impulses common to all emerging markets. 

And the more that Chinese firms look and behave like their international rivals, the more China’s domestic market will reflect that evolving composition. 

That in turn should allow an easier and more receptive environment for those re/insurers wanting to do more business in China’s fast-expanding re/insurance market.

By David Benyon - dbenyon@euromoneyplc.com

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