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From Resource,
October 2005
Copyright by LOMA
Charting A Course
Intrepid life insurers—domestic and foreign—are discovering a world of
opportunity in emerging markets, especially
Asia.
By Jennifer C. Rankin
Improving
economies, favorable demographic trends and the gradual dissolution of
international barriers to entry have converged to create high growth potential
in emerging markets, especially in the Asia Pacific region.
In
fact, Swiss Re says emerging markets will be the new frontier for insurance
throughout the 21st century. According to the latest study from its sigma
series, the life premiums collected from these markets will increase from US$
188 billion to US$ 450 billion by the year 2014.
Although
the world’s emerging life insurance markets differ widely in terms of size,
culture, politics, financial stability, insurance regulation and GDP per capita,
as a group they enjoyed strong growth in 2004, the most recent year for which
statistics are available.
According
to Swiss Re, life insurance premium growth remained strong in most Asian markets
in 2004 (9.8 percent), except for
China
and
South Korea
.
In
China
, premium growth slowed sharply to 2.9 percent in 2004, after growing 30.1
percent in 2003. Why? Sales of the products that boosted growth in 2003—single
premium endowment products—plummeted last year due to poor profitability
performance. As a result, insurers refocused their sales forces on
protection-type products, and the latest statistics indicate a sharp rebound in
life business growth in the first quarter of 2005.
In
South Korea
, consumer confidence remained weak in 2004 and premiums rose by only 3.4
percent over the year.
By
contrast, business continued to expand robustly in
India
(10.5 percent),
Taiwan
(17.6 percent) and
Hong Kong
(30.8 percent). Markets in
Southeast Asia
also registered remarkable growth, benefiting from a low interest rate
environment and local economic growth.
Looking
ahead, says Swiss Re, life insurance premium growth in the region is likely to
remain resilient, especially in China and India, which are further opening their
markets and where private-sector insurers are making significant inroads.
Bright
Spot
Let’s
start with
China
, one of the brightest spots on the global horizon, where the growth prospects
for both local-national and foreign insurance companies are excellent, given the
country’s high savings rate, scarcity of investment choices, and continuing
economic growth.
The
story of
China
’s insurance industry is well known. Since 1949, the market has gone through
several stages of development. The first was the birth of the independent
insurance market, which occurred between 1949 and 1952. The first
nationally-owned insurance company—People’s Insurance Company of China (PICC)
was formed in 1949 and sold a wide range of products and services throughout the
country. The shift to a centrally-planned economy shortly thereafter obviated
the need for insurance; as a result, PICC stopped operating and foreign insurers
left the country.
In
1980,
China
reformed its economic policy and PICC started operating again; as the only
insurance company, it enjoyed an absolute monopoly. The creation of Ping An
Insurance in 1988 ended PICC’s monopoly and set the stage for the 1990s,
during which China Pacific was founded (1991); AIA was
licensed (1992); and foreign insurers by the dozens established representative
offices and negotiated for licenses. China’s entry into the world trade
organization (WTO) in 2001—the terms of which call for China to, over time,
allow effective management control in life insurance joint ventures; phase out
geographical restrictions; allow foreign insurers into the group life, health
and pension sectors; and permit wholly-owned non-life subsidiaries—was the
icing on the cake. Today, state-owned, privately-held, joint-venture and foreign
insurers compete in the market and almost every multinational financial services
player has a presence.
In
fact, interest in
China
’s insurance sector continues to grow. Less than four percent of
China
’s 1.3 billion people have life insurance coverage. Although three
local-national companies—China Life, Ping An and China Pacific—dominate the
market with a combined market share of more than 80 percent, there now are
dozens of Sino-foreign life insurance joint ventures. Chinese life insurance
premiums rose six percent in 2004 to US$ 38.5 billion and grew 13.4 percent in
the first half of 2005.
China
remains one of the world’s most attractive markets and most global firms are
targeting it as a major growth market.
Recent
moves by the China Insurance Regulatory Commission (CIRC) have only spurred on
that interest. During the past year, the CIRC made great progress on the
country’s WTO commitments, crafting new rules that:
*Reduce paid-in capital and double
the stake that local and foreign investors may purchase in Chinese insurers to
20 percent
*Allow
foreign companies to expand beyond the 15 mainland cities to which they once
were restricted
*Allow the 30+ foreign life insurance
companies and their joint venture partners to sell group insurance
*Allow the formation of insurance asset
management companies
*Allow local and joint venture insurance
companies to invest assets directly into Chinese shares and bonds.
Insurers
and banks have moved quickly to capitalize on these new rules by acquiring large
stakes in local-national companies; establishing new branch offices; entering
the newly-opened group life, health and pensions markets; and establishing asset
management operations (see
sidebar,
China: Expanding Opportunity,
below).
Let’s
start with some recent purchases. Last month,
U.S.
partners Carlyle Group and Prudential Financial won approval to buy 25 percent
of China Pacific Life, the country’s third-largest life insurer. A month
earlier, HSBC Holdings raised its stake in No. 2 Chinese life insurer Ping An to
19.9 percent. In addition, Zurich Financial Services upped its stake in New
China Life from 10 to 19 percent.
One
of the most savvy and successful players in China is Manulife-Sinochem, a joint
venture between Manulife Financial (Canada) and China Foreign Economic and Trade
Trust & Investment Company (a member of the Sinochem group), which is taking
advantage of the phase-out of geographical restrictions in a big way.
Headquartered
in
Shanghai
, where it began its
China
operations in November 1996, Manulife-Sinochem opened its first branch office
in
Guangzhou
in November 2002. Next, the company established offices in
Beijing
(2003) and
Ningbo
(2004).
The
pace of expansion really took off this year. First, Manulife-Sinochem converted
its
Guangzhou
branch license into a province-wide license for
Guangdong
, excluding Shenzhen, which has a special status and still issues special
licenses. Shortly thereafter, the company opened offices in Foshan, Dongguan and
Zhongshan. Today, Manulife Sinochem’s 4,000-strong staff and agency force
serve almost 220,000 customers across
China
.
That
number will only continue to grow. Why? Because Manulife-Sinochem has begun to
expand beyond individual insurance as one of just a handful of companies to
which the CIRC granted a license to sell group life, health and pensions
products this year.
“Our
long-term goal,” says Marc Sterling, executive vice president for Regional
Operations,
Asia
, “is to become the employee benefit provider of choice in the mainland for
joint-ventures and small-to-medium sized companies.”
Manulife-Sinochem
will launch its group insurance line in Shanghai, Guangzhou, Beijing and Ningbo
and will roll them out at a later time in the other cities in which it has
operations (Foshan, Dongguan and, soon, Hangzhou and Nanjing).
The
company conducted extensive market research to design its first line of
products, which it has named Classic, Premier, and Elite. Designed to meet the
basic protection needs of small-to-medium sized companies, the Classic package
consists of accidental death and dismemberment and accidental hospitalization
coverage. The Premier package adds life insurance to the mix, while the Elite
package offers a much wider range of protections, including hospitalization
income and critical illness coverage.
Manulife-Sinochem
will offer its group customers a wide variety of services, including online
inquiries, employee benefit seminars, and various VIP club activities. Client
also will enjoy a number of value-added health management services, such as
online health profiles, discounted health checks, major disease forecasts, and
health consultation through a third-party healthcare management company.
“We
understand that in the fast-paced Chinese business environment, providing
employees peace of mind is an important part of an employer’s business,”
says James Lin, general manager of Manulife-Sinochem. “Manulife as a whole is
placing great emphasis on the expansion of its
China
operations, and as part of this strategy we plan to build our group and future
corporate pension business into significant lines of business for
Manulife-Sinochem.”
They’re
not the only one. Among the companies just given licenses to sell
group life, health and pensions products are AVIVA-COFCO, CITIC
Prudential, Generali China Life, Heng An Standard Life, ING Capital Life, and
ING Pacific Antai Life.
Fund
Report
New
acquisitions, branch office expansion and group licenses are just the tip of the
iceberg with respect to new opportunities in
China
.
At
the moment, all eyes are watching the country’s nascent fund management
sector. Why? First,
Beijing
has begun to relax the regulations governing its six-year-old, US$ 40 billion
mutual fund industry. It also wants domestic banks to set up fund management
companies to diversify income, to develop the country’s capital markets, to
compete more effectively against global financial groups such as Citigroup and
HSBC Holdings, and to spur better use of household savings, which, at present,
stand at an astonishing US$ 1.7 trillion. In addition, assets in
China
’s insurance industry had grown to RMB 1.185 trillion (US$ 143 billion) by
year-end 2004, according to the CIRC. And China’s aging population and high
dependency ratio under the country’s one-child policy as well as the
country’s ongoing state-owned enterprise (SOE) reform, which will cause many
people who once worked for the state to lose their pension benefits, will fuel a
growing need for pension fund providers.
Generally
speaking,
China
is racing to shore up its banks before the sector is fully opened to foreign
competition at the end of 2006. It has, for example, injected US$ 60 billion
into Bank of China,
China
Construction Bank, and Industrial & Commercial Bank of
China
, encouraging them to find strategic investors to help improve operating
standards and risk controls.
The
first banks the government chose to set up fund units were China Construction
Bank, Bank of Communications, and Industrial and Commercial Bank of
China
, which quickly found foreign partners.
In
August, China Construction Bank entered into a joint venture agreement with
Principal Financial to establish a fund management company that will be
headquartered in
Beijing
. CCB, a major lender, will own 65 percent of the 200 million yuan (US$ 24.75
million) company, which will be called CCB-Principal Asset Management Company.
Principal Financial, a leading
U.S.
insurer with a growing international presence, will hold 25 percent and China
Huadian Group, a power company, will hold the remaining 10 percent.
“This
is an extraordinary opportunity to enter the rapidly growing Chinese mutual fund
market,” says Rex Auyeung, Principal International’s senior vice president
for
Asia
operations. “The market doubled to almost US$ 40 billion in assets under
management in 2004 and is expected to reach US$ 60 billion by 2008. In spite of
this growth, mutual funds represent less than two percent of
China
’s gross domestic product (GDP), while bank deposits by individuals represent
an astonishing 88 percent. With a 44 percent savings rate, a growing
middle-income population and few investment alternatives other than bank
deposits available to the Chinese public, we expect mutual funds will be in high
demand for the foreseeable future.”
American
International Group (AIG), JP Morgan and Switzer-land’s USB concur. Over the
summer, all three received permission to boost their stakes in their joint
venture fund management companies to the maximum 49 percent.
Among
the mutual fund tie-ups forged this year are:
Schroders Plc., China International Marine Containers (Group), and Bank
of Communications,
China
’s fifth-largest lender, who launched a US$ 25 million venture in August and
aim to raise more than three billion yuan with their first fund product.
Credit Suisse First Boston (CSFB), China Ocean Shipping, and Industrial
and Commercial Bank of China (ICBC), the country’s top lender, which started
selling its first fund products in late July.
Credit Agricole and Agricultural Bank of China (ABC), the smallest of the
country’s “big four” state banks, who are in talks to start a fund
management venture.
Morgan, Allianz AG, Merrill Lynch, ING Groep NV, Societe Generale,
Deutsche Bank AG, Fortis, and Bank of Montreal all have forged partnerships to
sell mutual funds to the Chinese.
Now
that foreign financial services companies have been given a green light to enter
China
’s fund management industry, look for an even more substantial increase in the
number of players and funds launched.
Bank
Note
What’s
next for
China
? Savvy players are positioning themselves for the full opening of the
country’s banking sector, which will happen at the end of 2006 as part of
China
’s WTO commitments. At present, foreign ownership of a domestic bank is capped
at 20 percent for a single foreign investor and 25 percent for multiple foreign
investors.
China
has some 100 commercial
city banks, many of which are looking for foreign investors. One reason is that
the China Banking Regulatory Commission (CBRC), the country’s banking
watchdog, has asked them to increase their capital adequacy ratio to eight
percent by the end of 2006. At the end of last year, the combined ratio of city
commercial banks was 1.36 percent, according to Jonathan Anderson, head of UBS’
Asia-Pacific Economics, and the banks are burdened with significant bad debt.
Foreign
insurers and bankers, of course, are looking for ways to make inroads into
China
’s growing financial services market. Purchasing a stake in a local-national
bank is one way to do just that.
Citgroup
led the way when it secured a 4.6 percent stake in Shanghai Pudong Development
Bank in 2003.
HSBC
and Newbridge were next. In late 2004, HSBC purchased a 19.9 percent stake in
Bank of Communications (BoComm), while
U.S.
equity fund Newbridge purchased a controlling 17.89 percent in Shenzhen
Development Bank, becoming the first foreign investor to win control of a
mainland Chinese lender.
In
March of this year, ING Groep NV (
Netherlands
) purchased a 19.9 percent stake in the Bank of Beijing.
In
April, Commonwealth Bank of
Australia
bought a 19.9 percent stake in Hangzhou City Commercial Bank. Late last year,
CBA purchased 11 percent of Ji’nan City Commercial Bank.
In
June, Bank of America (U.S.) purchased a nine percent stake in China
Construction Bank.
In
August, Temasek Holdings,
Singapore
’s state investment agency, purchased a ten percent stake in Bank of China.
Temasek, which picked up a five percent stake in Minsheng Banking Corp. in
January, is also negotiating to buy a 10 percent stake in China Construction
Bank Finally, as global rivals accelerate an investment push, word on the street
is that Citigroup is thinking about raising its 4.6 percent stake in Pudong
Development Bank to 20 percent, while USB considers investing US$ 500 million in
Bank of China.
Other
companies are establishing bancassurance ties to local-national banks and/or
strengthening existing ties.
Two
major deals closed this month. First, a consortium consisting of Royal Bank of
Scotland
, Merrill Lynch and
Hong Kong
tycoon Li Ka-shing purchased a 10 percent stake in Bank of China, the
country’s second-largest bank. Then, U.S. investment bank Goldman Sachs,
insurer Allianz AG (Germany) and American Express purchased a 10 percent stake
in Industrial and Commercial Bank of China (ICBC); one of China’s “big
four” banks, ICBC is the country’s largest, as measured by asset size.
Heating
Up
Another
Asian market that’s heating up is
India
.
Last
year, the Indian government increased the 26 percent cap on foreign holding for
Indian insurance joint ventures to 49 percent. In addition,
India
’s booming economy is producing an upswing in the number of mass affluent
citizens. According to Datamonitor, affluent wealth in
India
has grown at a rate of almost 18 percent during the past five years, with
affluent individuals totaling 618,000 at the end of 2003. Datamonitor analysts
believe the country’s large skilled population and robust domestic stock
market will result in one million individuals having a collective wealth of more
than US$ 2 billion by 2008. And, according to a just-published report by
Dublin-based Research and Markets, only 20 percent of
India
’s total insurable population has life insurance coverage.
Since
1999, when the government opened the insurance sector, foreign investments of Rs.
8.7 billion have poured into the Indian market and 21 private companies have
been granted licenses (see sidebar,
India: Huge Potential,
below).
Innovative
products, smart marketing and aggressive distribution have enabled fledgling
private insurance companies to sign up Indian customers faster than anyone
expected, according to report authors, who say that Indians, who had
traditionally seen life insurance as a tax saving device, are now turning to the
private sector and snapping up new insurance products.
During
fiscal year 2004-2005, the country’s life insurance industry grew an
impressive 36 percent, with premium income from new business topping Rs. 253
billion. By selling 2.4 billion new policies during that timeframe, state-owned
behemoth Life Insurance Corporation of India (LIC) clocked close to 22 percent
growth. Private players grew 129 percent, taking in Rs. 55.57 billion during
fiscal year 2004-2005, compared to Rs. 24.29 billion during fiscal year
2003-2004.
Though
its total volume increased, LIC’s market share dropped from 87 to 78 percent,
while that of the private insurers rose from 13 to 22 percent. It appears that
trend will continue, as the figures for the first two months of fiscal year
2005-2006 indicate that LIC’s market share has dropped to 75 percent, while
that of private insurers has grown to 25 percent.
These
trends are improving business prospects for both domestic and foreign players,
who are capitalizing on them.
One
of these is Principal Financial Group, which is working to launch the
country’s first agent-less life insurance company in partnership with Punjab
National Bank, Vijaya Bank and the Berger Group. The company plans to sell only
group and corporate life insurance policies. At present, Principal Financial’s
Indian operations consist of Principal Asset Management, which sells long-term
investment plans and mutual funds and distributes its products through Punjab
National Bank and Vijaya Bank, as well as via other financial services
distributors, major private banks and the Indian Post Office. Principal
Financial first entered
India
in September 2000 through a joint venture with the Industrial Development Bank
in India (IDBI). In 2003, Principal Financial purchased IDBI’s 50 percent
stake in IDBI-PRINCIPAL Asset Management Company Limited and entered into a
joint venture with Punjab National Bank and Vijaya Bank.
Although
virtually all of this year’s breaking industry news involved
China
, look for another market—the ASEAN—to become increasingly attractive.
The
Association of Southeast Asia Nations (ASEAN) was established in 1967 by
Indonesia
,
Malaysia
, the
Philippines
,
Singapore
and
Thailand
. Today, 10 countries—these plus
Brunei
,
Cambodia
,
Laos
,
Vietnam
and
Myanmar
(
Burma
)—belong. Last October, member countries laid out a road map for economic
integration and global trade liberalization of the region. Each must comply, on
a staggered schedule, with the trade liberalization and fully integrate with the
ASEAN Free Trade Area (AFTA) by 2012. Also, by 2020, the ASEAN plans to reach
its goal of full integration. The ASEAN Economic Community (AEC) will have a
single production base and a free flow of investments, goods and services,
including insurance.
As
always, Resource
will keep you
abreast of developments in these—and other—international markets as they
emerge. Good luck as you chart your course.
SIDEBAR
China
:
Expanding
Opportunity
During
the past year,
China
made good on a number of its WTO promises, doubling the stake domestic and foreign
investors may take in Chinese insurers, relaxing geographical restrictions,
opening the group insurance sector, and allowing the creation of insurance asset
management companies. Since January, many companies have capitalized on the new
opportunities:
AEGON-CNOOC
AIG-Huatai
Fund Management Company
Allianz
Dazhong Life
AVIVA-COFCO
Axa
Asia Pacific
China
Life
China
Pacific Life
China
Re Asset Management Company Limited (CRAMC)
CIGNA
& CMC Life
CITIC
Prudential
Generali
China
Life
Great
Eastern-Chongqing
Land
Haier
New York
Life
Heng
An Standard Life
ING
Capital Life
ING
Pacific Antai Life
Manulife-Sinochem
Life
New
China
Life
People’s
Insurance of
China
Corporate Life (PICC Life)
Ping
An
Principal
Financial
Samsung
Air
China
Life
Sino-U.S.
MetLife
Sun
Life Everbright
Union
Life Insurance
SIDEBAR:
India
:
Huge Potential
Some
two dozen insurers are flourishing in
India
, where the number of mass affluent citizens is growing and the government has
increased the 26 percent cap on foreign holding for insurance joint ventures to
49 percent:
LIFE
INSURERS
Public
Sector
Life
Insurance Corporation
of
India
(LIC)
Private
Sector
Allianz
Bajaj Life
Birla
Sun Life
HDFC
Standard Life
ICICI
Prudential Life
ING
Vysya Life
Max
New York
Life
MetLife
Insurance
Om
Kotak Mahindra Life
SBI
Life
TATA
AIG Life
AMP
Sanmar Assurance
Dabur
CGU Life
GENERAL
INSURERS
Public
Sector
National
Insurance
New
India
Assurance
Oriental
Insurance
United
India
Insurance
Private
Sector
Bajaj
Allianz
ICICI
Lombard
IFFCO-Tokio
Reliance
Royal
Sundaram
Alliance
TATA
AIG General Insurance
Cholamandalam
Export
Credit Guarantee Corp.
HDFC
Chubb
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