Insurance in China (Part III – Rebirth)

This is the last in a three-part series on insurance in China. The first introduced the arrival of insurance in Hong Kong and the second the adoption of insurance in mainland China. While the industry was more well-developed in terms of the number of firms and customer adoption by the 1930s than many might presume today, the progress was ultimately undone by the Second World War, the Chinese Civil War, and communism. Since the 1980s though, the insurance industry has revived and some of the largest companies in China today are its insurance firms.

PICC

The communist victory in China’s civil war killed off the country’s insurance industry. Through a few mergers, the old private industry was consolidated into the People’s Insurance Company of China (PICC) by 1953. The consolidation meant the number of branches and its workforce shrank. Then, this state-run insurer discontinued operations altogether after Mao’s Great Leap Forward. Small branches of the People’s Bank of China – one in Shanghai, one in Harbin, and later one in Guangzhou too – were all that remained of the insurance industry in the mid-1960s.

During the Cultural Revolution, this too ceased to exist. In a communist economy, there was little need for private insurance except perhaps in its interactions with the rest of the world and foreign trade. These few interactions drove what little insurance business there was, but this trade was shrinking. The People’s Insurance Company of China did resume operations in 1969 though only on a small scale.

Insurance was revitalized when market forces were partially liberated from control by the Communist Party in the 3^rd plenary session of the 11^th Central Committee, held in 1978. In the new era of ‘reform and opening up’ inaugured by that session, foreign trade and private enterprise were welcomed once more. PICC was greatly enlarged in the following years as Chinese insurance premium income reached ¥3 billion in 1985. PICC spun off its Hong Kong and Macau operations into a firm called China Taiping Insurance Holdings, inheriting the name of the old pre-communism insurance firm Tai Ping Insurance Company, one of the companies that had been amalgamated into PICC.

PICC was a simple insurer though, which is to be expected in a small industry with a single monopolistic provider. Prices were set by this single firm together with its regulator, the People’s Bank of China. Premiums were deposited in banks with no further investment management by PICC. Product variety was also very limited.

New Firms

In 1988, another insurer, the Ping An Insurance Company, was formed by entrepreneur Ma Mingzhe. He conceived it as an insurer for the Shekou industrial zone in a southern part of Shenzhen and this was the first private insurance company of post-1980 China. It would also, with time, become one of the largest in the world. After an investment made in 1994, it counted both Morgan Stanley and Goldman Sachs among its shareholders. Another insurer, China Pacific Insurance Company, launched in 1991. These were the first two notable big insurers after PICC.

Old Logo of Ping An Insurance Company

The new firms sought to complement the limited product variety of PICC. However, hurdles to adoption included the old ones discussed in prior posts in this series as well as some new ones. The public would need to be re-familiarized with insurance. Also, life insurance in particular needed to be tailored to local perspectives. A new challenge for the young firms was that a private insurer without state backing would need to compete with PICC in an industry where customers must place their trust in a firm that they know little about.

The chance to succeed was significant enough though to entice foreign firms, like American International Group (AIG), to return to China. In 1992, AIG became the first of these foreign firms to be licensed to operate in post-reform China; it was also the first life insurer. Shanghai was opened up to foreign firms as a test market. Eight foreign companies were granted licenses by 1997, increasing to twenty-two by 2002. By the end of the 1990s, twenty-four insurance companies, foreign and domestic, were active in China.

Growth

Alongside the growing number of firms was a tremendous growth in the size of the industry. In 1980, annual insurance premiums stood at under ¥500 million or only 0.1% of Chinese GDP. Life insurance made up virtually nothing of this small sum; that product had more-or-less disappeared completely. Yet, even this product would find consumer demand in the new China. Generally, the revival of insurance in the country was rapid. The Chinese economy was growing at an accelerating pace; GDP growth increased from 9% in 1982 to 15% in 1984. Insurance premiums in these years grew 32% and 52% respectively.

Premium revenue for the entire industry reached ¥3.3 billion in 1985. Life insurance was growing, making up ¥440 million of this. Insurance premiums stood at 1.0% of GDP by 1990 and, after years in which the industry was growing at 30% per annum or so, premium income reached ¥124.7 billion in 1999.

Life insurance was growing particularly quickly. In the new economic reality, the public could no longer rely on the state alone for economic security. Life expectancy was rising and the population was aging, supporting demand. Improving standards of living and accumulation of savings encouraged people to look into ways of preserving wealth. The prosperity also meant more people could afford to pay insurance premiums. As a sign of the transforming composition of insurance demand, consider that Ping An diversified into life insurance in 1994 and this had already become the biggest line of business for the company by 1997.

Across the entire industry too, life insurance premium volume overtook non-life premiums in 1997; and even more remarkable, by 2002, life insurance premiums stood at three times non-life premiums. Considering life insurance had struggled to take hold in China in the two centuries since the first insurance company was formed in the country, this was remarkable. Life insurance companies quickly built a sales-agent distribution structure with agents receiving commissions of as much as 40% of insurance premium paid. While in 1980, just 4,000 were employed in insurance; this industry-wide workforce grew to 150,000 by 1999. Making their sales pitch a lot easier were the high promised returns on life insurance policies – high relative to interest rates on savings in the banking system, which were falling.

In 1999, Ping An launched a variable life insurance policy which allowed ordinary savers to benefit from the strong stock market performance. To simplify, life insurance was appealing in China as an investment vehicle rather than for the pure insurance itself. Local insurers understood this better than foreign companies and dominated the market as a result. This was also a change from the past when local insurers struggled against foreign competition.

At the turn of the century, consumer insurance products like car insurance were growing particularly quickly. By 2003, insurance premiums reached ¥338 billion or 3.3% of GDP. Insurance company assets stood at ¥912 billion by year-end 2003. That year, the country’s largest life insurer, China Life, became the first Chinese insurance company to conduct an IPO for its shares. It was followed later that year by an IPO for the property and casualty insurance unit of PICC, the largest non-life insurer and the next year by Ping An Insurance Company which spanned both product categories.

By this time, all of the leading insurance companies in China were Chinese-owned. The largest firms were also delving into investment management, not unsurprising for insurance companies. PICC and China Life launched asset management businesses and Ping An even expanded into banking in the 2000s.

A Modern Industry

Insurance laws and regulations caught up to the transformed industry. A new regulator, the China Insurance Regulatory Commission, was formed in 1998 and insurance laws were amended in 2002 when China joined the World Trade Organization. Requirements on foreign insurers were relaxed slightly and China Re, the country’s formerly monopolistic reinsurer, was now required to face foreign competition. Laws were amended further in 2009 to enhance consumer protection.

In lockstep with their global peers, China’s insurers have had to invest in new technology. The country’s insurance companies have introduced new software and technology products. Just one example is a consumer healthcare software product introduced by Ping An in 2014 called ‘Ping An Good Doctor’. This and other business lines of Ping An have even given rise to entirely new companies which have raised capital on their own. These have become part of the stories of other industries in China.

Lesson

Insurance companies take risk from smaller firms since they are better able to bear them; so, when firms are state-owned, there is little need for commercial insurance in a communist economy. However, insurance is very important to private firms so it was inevitable that the insurance industry would grow in tandem with private economic activity.

That said, what emerged in China was not a reconstruction of the old industry. This was the start of a unique chapter in the history of insurance there because foreign firms played a secondary role to domestic ones. Just one result of this is that local companies found ways to redevelop life insurance into an appealing product in China, historically a challenge, by offering products tailored to local interests. As a result, for the first time, there is a significant ordinary consumer market for insurance in the country, supplementing demand for insurance from business.

More from the Tontine Coffee-House

Read the first and second parts of this series and about developments in insurance in recent decades, including insurance for terrorism risks and the restructuring of the Lloyd’s marketplace in the wake of large asbestos-related insurance claims. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.