Insurance in China (Part I – Hong Kong)

Insuring property predates insurance on lives and within property insurance, ships were among the earliest things to be insured. They are large valuable assets subject to many risks and, when damaged at sea, are often lost in their entirety. The incentive to insure ships, and their cargoes, is very high. In Europe and in Asia, marine insurance was the first widely adopted form of insurance. Within China, it was in Hong Kong, Macau, and Guangzhou where the earliest insurance companies formed because those were port cities where European merchants accustomed to insurance were found in large numbers. Insurance would later spread from there to the rest of China. This is the first in a three-part series on China’s insurance industry.

Origins in South China

In Europe, overseas trade was a stimulant to insurance because marine insurance was the first insurance product underwritten at large scale, dating to at least the 14th century. Oceanic trade between Europe and Asia took off in the 16th century and in small corners of Asia, a European merchant community took root. In China, this community was centered on the southern cities of Macau and Guangzhou. Some of the foreign merchants there conducted trade, not between Asia and Europe, but within Asia. They bought insurance in Asia for journeys within that continent and then started selling insurance there too.

European merchants active in China attempted to acquire marine insurance more cheaply in Asia than could be obtained from insurers back in Europe. Because of the monopolies of various ‘East India’ trading companies on trade between Asia and Europe, other merchants active in intra-Asia trade were neglected and a lack of insurance became a profound challenge.

Initially, ad hoc partnerships were formed to provide insurance for particular journeys. For example, a syndicate of foreign merchants in Guangzhou formed to insure each other’s cargos at a value of up to 12,000 taels of silver; the tael was a unit of account equivalent in value to about 37 grams of silver. European merchants from India also joined these insurance syndicates. Still, the capacity to provide insurance by these groups was very limited; indeed 12,000 taels was nothing compared to what could be transported on some ships.

In 1805, the Canton Insurance Society was founded by British merchants in Macau as the first insurance group in China, owned by merchants based in Guangzhou, Calcutta, and Bombay. Still, this remained a somewhat informal syndicate in which members underwrote policies together. It was backed and managed by the trading companies which later became the Hong Kong based mercantile firms Dent & Co. and Jardine Matheson & Co. The early Hong Kong insurance industry served these foreign merchant firms regularly.

Dent and Jardine Matheson were not committed first and foremost to this particular insurance firm; rather, their primary desire was to make insurance more available in China generally, whatever the means. To that end, in addition to backing the Canton Insurance Society, these two trading companies also operated as local agents to European insurers and even in this respect, they cast a broad net. For example, Jardine Matheson & Co. acted as the local agent for six insurers and Dent & Co. for another four.

Dent & Co. even started a new company in 1835, the China Insurance Company, later renamed the Union Insurance Society of Canton. This company and the Canton Insurance Society moved to Hong Kong in 1842 after it became a British possession at the end of the First Opium War. British company law, implemented in Hong Kong through the Companies Ordinance of 1865, made it an appealing place to form and operate an insurance company in Asia. Canton Insurance converted from an insurance society to a company in 1872 and then a limited liability company in 1881. Union Insurance converted to a limited liability company the following year.

Property and Casualty

In Hong Kong, marine insurance was the first common insurance product and the largest line of business for a long while. Marine risks were great; even piracy remained a risk in the early-to-mid 19th century. Stimulating the need for marine insurance there, more and more of China’s trade was being funneled through Hong Kong; 14% of Mainland China’s exports went to Hong Kong in 1867 and this grew to 22.6% in 1877. The opening of the Suez Canal stimulated further trade. To serve the growing need, the capital of the marine insurance firms grew quickly. Valued based on the net assets of the company, shares in the Union Insurance Society of Canton had quintupled in book value by 1870.

Then fire insurance grew. Hong Kong Fire Insurance Company was formed by Jardine Matheson & Co. in 1868; it was the first dedicated fire insurer in China. The concept proved popular and very profitable. Profit margins and return on equity were both 50% and the company’s stock price rose 400% in the first few years. Imitators came and another British-owned Hong Kong firm, China Fire Insurance Co. Ltd., was founded in 1870.

Fire Insurance Mark of the Union Insurance Society of Canton (Source: The C.I.I. Collection of Foreign Fire Marks)

New insurance firms continued to outdo one another in capitalization. Hong Kong registered Yangtze Insurance Co. was set up to serve customers in mainland China, rather than Hong Kong, and it was founded with a paid-up capital of 417,880 taels in 1862. In 1865, another Hong Kong registered firm, British Traders’ Insurance Co. Ltd., was funded with a paid-up capital of 600,000 taels. Each of these offered marine insurance and British Traders’ Insurance sold fire and accident policies as well.

Life Insurance

Compared to other forms of insurance, life insurance was uncommon in China and Hong Kong. There was some entrepreneurial talent sunk in this part of the insurance industry though; Standard Life Assurance Co. launched operations in China in 1846 but it only sold life insurance to Europeans there and operations were small. Further developments in this business line came slowly. Canada’s Manufacturers Life Insurance Co. arrived in Hong Kong in 1897 and it was followed by Sun Life Assurance Co. of Canada, but overall, foreign interest in this Asian market was not high.

Local Interest

While initially formed by Europeans in China, the Hong Kong insurance industry was still largely ‘local’ in the sense of having few links to European insurance companies. They were independent if not necessarily of Chinese origin. That said, Union Insurance began accepting investment from Chinese sources in the 1830s. Yet, but for this notable exception, Chinese capital, managers, and clients were largely uninvolved in these firms until after the 1850s.

European-backed firms employed Chinese ‘compradors’, local merchants acting as agents, to sell insurance to Chinese clients. There were a few of these by the 1860s though insurance was just a part of their product portfolios; these merchants spent more time brokering other services, like banking, freight shipping, and trading goods. Chinese clients and employees of the insurance companies only became more common late in the 19th century. Eventually, the compradors that specialized in insurance went on to form insurance companies of their own.

A Hong Kong-registered firm established in 1871, Chinese Insurance Co., was partially funded with capital from Chinese investors and the company had two Chinese directors. There was also On Tai Insurance Company Limited, founded in 1877. It was backed by Li Sing (李陞), a successfully merchant and managed by entrepreneur Ho Amei (何亞美. On Tai Insurance was the first Chinese-owned and operated insurance company in Hong Kong. It was also the first Chinese-owned company formally incorporated under Hong Kong’s company law.

Ho Amei (Source: Victoria Public Record Office, Melbourne, Australia)

On Tai Insurance raised new capital as it grew. In doing so, the firm’s prospectus highlighted the target market – ship and cargo owners rejected by Western insurance companies. The company perceived a far larger potential market than the European firms served. Despite the overlooked market, it began to compete directly with Western firms as well. On Tai Insurance even expanded abroad, employing agents as far away as California, where there was a community of Chinese entrepreneurs to serve.

Notwithstanding On Tai Insurance, insurers focused on the local Chinese market were most notable in mainland China. In nearby Guangzhou, a local Chinese-run insurer called the Zhang Baoshun Company was formed in 1824 but relatively little is known about it. One of the first insurers for which much is known was the Shanghai Yihe Insurance Society, formed in 1865. There was also the Renhe Maritime Insurance Company formed in 1875 as a subsidiary of the China Merchants Steamship Navigation Company. It was followed by the Jehe Maritime and Fire Insurance Company in 1878. These firms were among the first insurance companies of a local Chinese origin. Their story would bring the history of Chinese insurance to the mainland.

Lesson

Hong Kong today is a financial center whose origin rests in trade. Even the story of insurance there encapsulates how trade seeds financial activities. In China, foreign financial innovations were brought there by merchants and trade. This fostered a large appetite for insurance, particularly marine insurance, as trade grew quickly.

The size of the insurance market encouraged specialization. Instead of merchants providing insurance, dedicated insurance firms would do so from now on. This was crucial to keeping Hong Kong relevant in insurance. These insurance firms, specializing in insurance generally rather than as an ancillary activity to trade, would more enthusiastically embrace new business lines outside marine insurance. They also extended these products beyond the port city itself, to mainland China.

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Read about the tea trade in 18th century Canton and the interactions of Chinese and Western merchants there. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.