Business volumes in the Chinese market continue to develop in most lines of business, supported by underlying growth and client demand. Yet foreign reinsurers have, to date, been unable to crack such a vast, self-contained market.
Over the past few years, three main growth drivers have surfaced in China’s re/insurance industry: economic development, regulatory change and market losses. The drivers have applied to both insurance and reinsurance, but reinsurers appear to have been the main beneficiaries of increased capital requirements resulting from regulatory changes. Reinsurance underwriters in China have been presented with significant opportunities as a result.
According to Malcolm Steingold, CEO of Aon Benfield Asia Pacific, “Although China may be laying substantial regulatory change on the table right now, and the Chinese economy has slowed down somewhat, it is still the envy of the rest of the world.”
In the 10 years to 2010, China’s GDP recorded a compound annual growth of 17.25 percent, as well as substantial economic growth of 21.1 percent between 2005 and 2010. As a result, China now holds the title of the world’s second largest economy. Since then, the pace of expansion has slowed; growth was at 9.8 percent in 2012, due to interest rate drivers and a tightening of bank lending, not to mention the global financial collapse of 2009. At present, China’s growth rate is down to 7 percent—not back to its heady days, but still enviable in the current economic environment.
In terms of insurance development, the Chinese market has been largely underpinned by motor insurance, and until 2010, China’s P&C market was the second fastest growing jurisdiction in the world. It is apparent that the market has nearly boundless potential.
To put reinsurance potential in China into context, aggregate premiums ceded by Chinese P&C insurers in 2011 totalled $12.7 billion, up from $6.56 billion the previous year, indicating substantial growth. Reinsurance tends to be bought locally, however, with 85 percent of reinsurance business contracted on a treaty basis, but that trend appears to be slowly changing.
"Although China may be laying substantial regulatory change on the table right now, and the Chinese economy has slowed down somewhat, it is still the envy of the rest of the world."
According to Steingold, this was originally driven by compulsory cessions which have since been phased out. He says that companies are seeking solvency through excess of loss programmes, which are gradually becoming more common and that as a consequence, the market is becoming more accessible to foreign reinsurers—although they “still have the hurdle of facing cultural issues, relationships, and heavy licensing and capital requirements if they want to set up onshore”.
James Beedle, senior managing director at Willis Re Asia, said he has seen growth in earthquake exposures in property lines, for example, spurred on by rapid economic development in China. “However, we are seeing the greatest potential in a number of specialty lines, in particular crop insurance along with credit and surety related products,” he says. These represent significant opportunities for insurers and their reinsurance partners in China.
The interesting part from a Bermudan perspective is that most offshore reinsurance is assumed by those operating out of the Asia-Pacific region, specifically the Hong Kong and Singapore markets. London and the European markets currently write around 30 percent of this offshore business, but their participation is nowhere near as large as the unrivalled influence of the local reinsurance carriers. Bermuda players will undoubtedly be looking to change this.
Apart from motor, agriculture and property have been the other major lines of growth in China. While there has been a focus on both of these lines among re/insurers, the latter has seen more modest development. In the 10 years to 2010, agriculture grew by 37 percent, liability by 19 percent, and property by 7.3 percent, although both agriculture and liability grew from lower bases.
Agriculture is emerging as a vital building block of the local insurance market. “China has the challenge of feeding 1.3 billion people, so agriculture should be important; the Chinese government is keen to ensure there is a healthy agricultural industry,” says Steingold.
Due to its magnitude, agricultural insurance is subsidised by the government, and receives central, as well as provincial, funding. The degree of these subsidies tends to vary depending on each particular problem. By comparison, the reason for the lack of growth in property classes is because there is still relatively limited private asset ownership in China compared to the West.
"If you don't have Asia as part of your development plans, that’s very surprising."
To date, foreign insurers have found it difficult to build scale in a market which remains dominated by domestic carriers. Presently no foreign players account for more than 1 percent of China’s domestic insurance market. Beyond obvious challenges to entry such as language and culture, distribution remains a significant hurdle for European and US companies, “which certainly lends itself to adopting a joint venture model whereby the overseas-based insurer offers product knowledge and pricing capabilities, and the local partner offers broad distribution capabilities,” explains Beedle.
Steingold agrees that the barriers of entry are quite high, highlighting significant capital and investment as a must, distribution as a massive issue due to the country’s size, and cultural issues and relationships as being crucial to success. He explains that while one does not necessarily need a joint venture partner to get a Chinese insurance licence, it would be the more successful route to follow because it is important to have government connections. He says: “If you choose the right joint venture partner, it certainly puts you in a better, stronger position.”
Nonetheless, Bermuda-based reinsurers are well represented in the China market, including acting as leaders on a number of placements, according to Beedle. Interest from Bermudan companies has undoubtedly grown more intense over the last three or four years, although this is yet to be reflected in their impact on China’s reinsurance market. While some Bermudans have been quite successful in boosting Chinese books, the more minor players have struggled to find their feet. Many are looking to use their Singapore operations as a springboard into the market.
Steingold believes that Bermuda companies’ technical approach to business is helping them to capture an increasing amount of business in China. He says that a noteworthy development in the last year or two is the fact that Bermudan companies are upping the ante, “by putting in experienced underwriters with decision-making authority that does not require reference back to Bermuda”.
Beedle affirms that Bermuda as a whole remains a committed long-term partner to China by showing increased interest in placements despite recent loss activity, and adds: “We don’t doubt that Bermuda-domiciled reinsurers will continue to be significant capacity providers in P&C classes and increasingly in specialty lines such as marine, crop and surety.”
Currently, the unquestioned regional reinsurance hub for China and the wider Asia-Pacific is Singapore and it seems likely that its position as an entry point into China will continue to grow. “What the local talent lacks in experience, it certainly makes up for in academic backgrounds, and in the future this will be fantastically developed,” says Steingold.
Hong Kong was seen as a contender as a centre for Chinese insurance at one stage, although Steingold says he envisages the emergence of Shanghai as a major reinsurance centre to cater for China in the future, with the development of its economic zone and its abundance of access to indigenous business. Seasoned underwriters who have been in Singapore for many years are now being complemented by experienced global underwriters, as well as a new generation of highly-qualified graduates with engineering or mathematical backgrounds who are eager to enter the market. Some of those may head to the mainland, but it is apparent that regional talent—from Bermuda and elsewhere—is being ramped up.
Despite all this potential, supply continues to far outstrip demand in the Chinese reinsurance industry. However, Steingold insists that the markets will become significantly bigger, offering enormous opportunities for growth in the near future. The advent of substantial third party capital and large insurers’ willingness to retain more risk has meant that global reinsurance premiums have not grown for the past five or six years. This has presented challenges.
As Steingold says, “You ask any reinsurance CEO what his biggest issue is, and he’ll say growth.” It is reasonable to suggest then that these Asian rapid growth markets—China in particular—are absolutely crucial to the expansion strategies of global re/insurers. Steingold concludes: “If you don’t have Asia as part of your development plans, that’s very surprising.”
China, reinsurance, Aon Benfield, Malcolm Steingold, P&C, Willis Re, James Beedle, agriculture, Singapore