Foreign Insurers Must Decide If China’s Growth Outweighs Disadvantages

Foreign insurers will have to answer for themselves whether their disadvantaged position relative to domestic insurers in China is outweighed by the country’s very substantial overall market growth, according to Moody’s Investors Service.

“Foreign firms have made little headway in the Chinese insurance market and to this day still suffer from low market shares and low profitability, despite significant growth opportunities,” said Sally Yim, a Moody’s vice president and senior credit officer.

Yim was speaking on the release of a Moody’s Special Comment on China’s insurance industry, which she authored.

China’s insurance industry has shown strong growth since 2001, when the World Trade Organization agreement opened the market further to foreign insurers. As of September 2011, the number of foreign insurers had grown from 13 in 2004 to 45, clearly showing the allure of a market with annual premiums exceeding RMB1.5 trillion (USD$236 billion) in 2010.

“Recent withdrawals by some foreign insurers suggest that for some, the growth story is losing some of its appeal,” said Yim.

“One key question raised by these recent withdrawals is whether they mark the beginning of a broader retreat by foreign insurers,” said Yim.

As of September 2011, foreign life insurers commanded an inappreciable market share of 3.7 percent, while property/casualty insurers had an even lower 1.1 percent. Moreover, among the 46 foreign insurers operating in China in 2010, only 11 made a profit, which contributed negligibly to their global profits.

The relatively modest success of foreign insurers highlights the various challenges, and the hidden costs. For example, all equally suffer significant regulatory hurdles, from licensing delays to restrictions on ownership and product lines — and these act as significant constraints on their growth in China.

As China’s operating environment has become more competitive in recent years, these problems have been compounded by high and rising operating costs, a lack of brand recognition, and difficulties in gaining access to distribution channels, according to the report.

“All these put foreign insurers at a competitive disadvantage to domestic players, and also inhibit their ability to deploy their sophisticated expertise in a developing market with mainly plain vanilla insurance products,” said Yim.

However, given the negligible size of foreign insurers’ businesses in China compared to their global balance sheets, Moody’s believes that the credit implications on these firms are also negligible at this stage. But China continues to offer significant growth opportunities — with a growing middle-income group and urbanizing population — and therefore, any successful market penetration by a foreign insurer could have long-lasting positive credit implications.

The report is titled “Foreign Insurer Strategy in China: Advance or Retreat?” and can be purchased on www.moodys.com.