The Insurance Industry of Shanghai

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Chapter 4
The Insurance Industry of Shanghai

1. Development of Shanghai’s Insurance Industry since China Started Reform and Opening-up

2. The Current State and Development Prospects of Shanghai’s Insurance Industry

3. The Development of Foreign-Funded Insurance Companies

Shanghai is the birthplace of China’s insurance industry and also the first pilot city for the opening-up of the insurance market in China. Since China initiated economic reforms and opening-up, Shanghai’s insurance industry has developed by leaps and bounds, making great contributions to economic development and social progress.

1. Development of Shanghai’s Insurance Industry since China Started Reform and Opening-up

China began to enter a new period of socioeconomic development after the Third Plenary Session of the 11th CPC Central Committee which called for a shift of focus to economic development. In April 1979, the State Council made a major decision to resume the development of the insurance sector gradually. On November 19, 1979, the national insurance working conference was held in Beijing. The conference discussed the resumption of domestic insurance business after a suspension of 20 years. It also elaborated the major role and position of insurance in national economy and fully demonstrated the necessity and urgency of resuming the domestic insurance business and developing the overseas insurance business. The conference heralded a new stage of development for the insurance industry in China.

After the founding of the People’s Republic of China in 1949, Shanghai’s insurance industry experienced ups and downs just as other cities in the country. However, its domestic insurance business survived for nearly ten years, despite the nationwide suspension in 1959, and its overseas insurance business never ceased. Even during the turmoil of the Cultural Revolution, more than 100,000 insurance policies linked China to the rest of the world. China’s insurance business took some shares in the international market and made great contributions in earning non-trade foreign exchange income for the country. It also accumulated some experience in underwriting, adjustment, and recovery. Therefore, the People’s Insurance Company of China (PICC) held that Shanghai boasted a good concentration of professionals, and hoped that the domestic insurance business would be first restarted in Shanghai on a pilot basis.

Beginning January 1, 1980, the Shanghai branch of the PICC, and its affiliated district and county institutions, officially resumed the domestic insurance business. In the first year, five types of insurance—corporate property insurance, family property insurance, domestic cargo transportation insurance, domestic hull insurance, and auto insurance—were handled with a premium income of RMB 35.42 million, surpassing the record of RMB 29.11 million in 1965. The smooth progress in the resumption of the domestic insurance business in Shanghai paved the way for the all-round resumption of the domestic insurance business across the country.

After the 1980s, four major categories of insurance emerged in Shanghai’s insurance industry: property insurance, life insurance, liability insurance, and credit and bond insurance. During the 1980s, the Shanghai branch of the PICC was basically the sole insurer in Shanghai. In November 1987, the Shanghai branch of the Bank of Communications took the lead in setting up an insurance division, breaking the 30-year monopoly of the Shanghai branch of the PICC. Then, in April 1991, the China Pacific Insurance Company, controlled by the Bank of Communications, was incorporated. In November 1993, with the approval of the PBOC, the China Ping An Insurance Company, headquartered in Shenzhen, set up a branch in Shanghai. In 1992, Shanghai approved the founding of the American International Group, which included the American International Assurance Company and AIU Insurance Company. It was the first foreign-funded insurance company set up in China since 1949. In 1994, a second foreign-funded insurance company, the Japanese Tokyo Maritime Fire Insurance Corporation, started business in Shanghai. Not long after that, Shanghai also approved two regional insurance companies, the Tian’an Insurance Company and Dazhong Insurance Company With the promulgation and implementation of the Insurance Law of the PRC and further reforms, the PICC and China Pacific Insurance Company operated property insurance and life insurance separately, and established a self-disciplinary organization.

Marketing methods of insurance companies have also changed from relying on company employees or agencies to using multiple channels including life insurance marketing by sales representatives. A variety of insurance products aimed at well-defined clients were offered, and both the management and service were greatly improved. After over 20 years of efforts, a market pattern featuring an coexistence of Chinese, Chinese-foreign joint ventures, and foreign-funded insurance companies, fair competition, and common development have emerged in Shanghai’s insurance market.

2. The Current State and Development Prospects of Shanghai’s Insurance Industry

2.1 Current State

2.1.1 A steady increase of market players

By the end of 2005, Shanghai had 67 insurance companies and three insurance asset management companies, including 28 property insurance companies, 30 life insurance companies, two pension insurance companies, three health insurance companies, three reinsurance companies, and one insurance group corporation. There were altogether 157 insurance intermediaries, 76 insurance agencies (including six branches), 28 loss adjusters (including six branches), and 53 insurance brokerages (including 19 branches).

2.1.2 Rapid growth of premium income

In 2005, the Shanghai insurance industry earned a total premium income of RMB 33.362 billion, accounting for 6.77% of the total of China and ranking No. 4. Shanghai takes a leading position with an insurance penetration of 3.66% and a density of RMB 2,452.

In 2005, the premium income from property insurance amounted to RMB 8.786 billion, up 18.24%, accounting for 26.34% of the total.

Table 4.1 Insurance penetration and density of Shanghai and China (2000–2005) (RMB %)
 Insurance PenetrationDensityInsurance PenetrationDensity
Table 4.2 Ranking of Shanghai’s premium income in China in 2005 (RMB 100 mil.)
  Premium Income Property Insurance Life Insurance
2Jiangsu437.344.92% 297.4913.82%2339.842.73%
 China4,931.2814.04% 1,282.7413.06% 3,648.5414.38%

The premium income from life insurance amounted to RMB 1.425 billion, up 5.02%, accounting for 64.22% of the total. Also, the premium income from health insurance amounted to RMB 2.351 billion, up 8.95% and accounting for 7.05% of the total, and the premium income from accident insurance amounted to RMB 0.8 billion, surging 18.59%, accounting for 2.40% of the total.

2.1.3 Compensations and payouts

In 2005, Shanghai’s insurance companies paid out in total RMB 8.746 billion in claim settlements, an increase of RMB 1.649 billion from 2004, representing a growth of 23.23%. Out of this, RMB 4.726 billion was paid out for property insurance, an increase of 38.83% over 2004; RMB 3.187 billion was paid out for life insurance, a growth of 6.38% from 2004; RMB 0.690 billion was paid out for health insurance, with a growth of 20.34%; and RMB 143 million was paid out for accident insurance, representing a growth of 15.56% from the previous year.

2.1.4 Assets of legal entities

By the end of 2005, the total assets of legal insurance entities in the Shanghai area registered RMB 202.446 billion, an increase of 42.67% over the previous year. The assets of the Pacific Insurance Group stood at RMB 156.201 billion, representing an increase of 34.57% over the previous year. The total assets of legal insurance entities in the Shanghai area added up to RMB 358.647 billion, accounting for 23.55% of the total for the country.

2.2 Development Features

The rapid development of Shanghai’s insurance industry since the late 1970s has fostered the economic and social development of Shanghai and China and played an exemplary role in boosting the insurance sector of China.

2.2.1 High level of development

In 2005, the premium income of Shanghai’s insurance market accounted for 6.77% of the total of China, and its market share ranked the fourth. Shanghai’s insurance sector has become one of the effective points of fast growth in Shanghai’s economy. Shanghai’s insurance density is RMB 2,452, based on its registered population, ranking high among all provinces and cities of China.

2.2.2 High degree of opening-up

As the first city in China to open its insurance sector to the outside world, Shanghai has received investments by foreign-funded insurance companies from more than ten countries and regions with a wide scope of business. Their business volume accounts for about 15% of the total, and the foreign-funded intermediaries and reinsurance institutions also conduct their business in Shanghai. Shanghai has become a bridgehead for introducing overseas insurance capital into the Chinese insurance market.

2.2.3 Significant improvements in business operation and management

With the further deepening of the reform of insurance systems and mechanisms, the ability of Shanghai’s insurance sector to operate business and control risks has been incessantly enhanced. The operating efficiency of Shanghai’s insurance companies is much better than the average of the whole country. Compared with their Chinese counterparts, local branches of regional insurance companies enjoy higher operating efficiency. In terms of service, each company has generally set up and improved its customer-centered business and service systems.

2.2.4 Diversified insurance coverage

Shanghai’s insurance market sells several hundred kinds of insurance products, such as short-term, long-term, domestic, or foreign policies to cover property, life, and many other aspects. The insurance industry’s business line is complete with a wide coverage, catering to the needs of different social groups. New products keep emerging and some products have filled in the gaps of the domestic market. For example, property insurance companies have developed various types of professional liability insurance, such as lawyer liability insurance, accountant liability insurance, and architect liability insurance. Additionally, life insurance companies have launched a great number of group insurance products.

2.2.5 Enhanced public awareness of insurance

In view of the people’s increasing insurance needs, all levels of the government and enterprises have shifted various economic risks by purchasing insurance. The voice of the public for simplifying the insurance clauses is becoming louder, which shows a wide acceptance and deep understanding of insurance among the public.

2.3 A Shift of Operational and Managerial Concepts

2.3.1 A shift from extensive to intensive and unified management

A major trend of modern operations and management theory is that corporate organizational structure evolves from pyramid management with decentralized decision-making centers to flattened management with relatively concentrated decision-making centers, thanks to advanced information and quick services. The advantages of this structure lie in the rise of the operating efficiency, the reduction of corporate demand for professionals, and the prevention of risks. Insurance companies are enterprises that run risks with currency, and the efficient concentrated management of risks is in great need.

Upon entering the Chinese market, foreign-funded insurance companies in Shanghai began to carry out strictly concentrated management systems. Product development and use of funds are managed by product development and fund application committees, or are examined and approved by the upper-level company. Both underwriting and adjustment have been separated and a strict authorization system has been implemented. Meanwhile, internal and external auditing has been conducted either irregularly or regularly. For example, the Shanghai branch of the AIU Insurance Company adopted a rectangular system that separates administrative management from business management. Business departments that recheck insurance and indemnity shall be responsible to the regional head office in Hong Kong, which assesses the performance of each type of insurance and makes decisions on the coverage and ceding on each type of insurance. Even the general manager of a branch has no power to undertake insurance. This rectangular management system integrating vertical business leadership with parallel administrative leadership can avoid interference with business operations by non-professionals and the overdependence on the management of local branches by business departments.

Unlike the foreign-funded insurance companies, the Chinese insurance companies generally adopted an extensive management method that delegated power to the lower level in the initial period, easily giving rise to a lot of operational risks. For example, branches of some Chinese insurance companies handled high-interest types of insurance without permission, acted as guarantors illegally, and undertook insurance in excess of the quota without adoption of any ceding measures. As a result, the management was out of control and NPLs were generated unduly. With a series of major risks brought to light, China’s insurance companies gradually realized that such an extensive management was not conducive to further growth. They started to adopt the intensive unified management, making full use of networking technology and bringing insurance risks under better control.

2.3.2 Investment shifting from traditional production factors to modern production factors

According to statistics, IT expenditure has accounted for 10%–20% of the total cost of foreign insurance companies, and 2%–3% of their total premium income. From 1990 to 2000, the IT cost of foreign insurance companies in the world rose at an annual rate of 13%. IT has become a major factor for an insurance company to deal with competition and maintain rapid and sustainable development. At the same time, it has also become an integral part of operating cost. The application of call centers, customer relation management tools (CRM), management information systems (MIS), and e-commerce has exerted a profound effect upon the development of international insurance industry. Foreign-funded insurance companies in Shanghai generally invest heavily in modern production factors like IT. For example, since the American International Assurance Company went into operation, the company has updated its hardware equipment regularly and computers are replaced every three to four years. Also, investments have been made to improve the working environment and safety facilities of the computer department, and software development has been encouraged. At present, employees of the computer department account for 20% of the total working staff.

The Chinese insurance companies have taken a different approach. They see insurance as a capital-, technology-, and labor-intensive enterprise, and therefore they always develop insurance business by following the path of expansion of capital leading to an increase of fixed assets, an addition of outlets, and an expansion of labor. As the IT-based knowledge economy becomes a critical new production factor, knowledge productivity will be a more important criterion for efficiency than labor productivity. Thus corporate personnel training and informed investment have become a major driver of development. The application of high-technology, such as remote billing, network insurance, e-commerce, and new electronic payment methods are emerging constantly, which will bring about a revolutionary change to the traditional insurance industry in terms of operational concepts and methods.

In recent years, Chinese insurance companies in Shanghai have generally abandoned the mode of business expansion characterized by increasing outlets and labor intensity, and have sought to improve their operations, management, and service by the application of IT. For example, the Shanghai branch of the Pacific Insurance Company has invested a sum of RMB 2.5–3.0 million in computers since 1994, and established a three-layer computerization plan comprising insurance data processing, comprehensive management control, and auxiliary decision support. This investment has greatly boosted the corporate business development and improvement of operations and management.

2.3.3 A shift from premium to efficiency

In Shanghai’s insurance market, most of the foreign-funded insurance companies stress that market expansion and insurance undertaking must be predicated on the maximization of corporate profit. As a result, management by all-round budget control and profit orientation is carried out universally. For instance, the AIU Insurance Company, except for its branches being regarded as profit centers for performance assessment, set up six secondary profit centers within the company in terms of property insurance, the insurance of works, liability insurance, cargo insurance, private property insurance, and special financial insurance according to the unified arrangement by the head office. These centers are separately assessed by their performance, covering the premium income, reinsurance receipts and payment, indemnity payments, and related expenses. Meanwhile, the financial department compares the actual and expected operations of each profit center with the budget in combination of all-round budget control, disclose difference, and compile a liability report for each profit center so that the latter may adopt appropriate measures promptly. By these methods, the profit-oriented operating concept can be effectively practiced, and all departments of the company can know their operating goals. Additionally, problems in the business operations of each department can be found, liability clarified, and appropriate measures adopted in time.

In contrast, Chinese insurance companies used to take the premium income as the core of assessment with little understanding of the cost concept. For some time, the insurance regulatory organization also regarded the premium income as a most important basis for the increase of business outlets. As a result, there have emerged several problems such as the business size being valued over quality, the spreading of the life insurance rate, high commission charges and return premiums, and low rates. All these can all be attributed to the failure to carry out the profit-oriented assessment system, establish an effective early warning system for risks, and adopt the cost method of all-round budget control. With the growth of joint-stock enterprises in China, such Chinese insurance companies as Pacific Insurance and Ping An have taken the lead in setting up the profit-oriented assessment system, tightening the all-round budget control system.

2.3.4 A shift from the product-centered to market-oriented concept

The market concept adopted by foreign-funded insurance companies emphasizes market demand and services. Potential demand is found through market segmentation. For example, the Federal Insurance Corporation conducts a market appraisal each year to formulate a business development plan. Then its product advantages and service functions are publicized through various product briefings, symposia, and risk appraisal promotion fairs. At the same time, with customers’ increasing demand for insurance products, insurance companies are also required to continuously expand their products with advanced technology. In addition, risk control, financial management, and investment portfolios are widely used. Foreign-funded companies generally highlight the provision of all-round services. For instance, the Shanghai branch of the AIU Insurance Company increased the real value of its insurance business by implementing a blanket policy, which helped it gain more market share and customers.

Despite the advantages of the market-orientated concept, Chinese insurance companies have long neglected differentiated market demands, and have always focused on some traditional types of insurance. Competition in some markets is fierce with reduced profit margin, while at the same time insurance applicants cannot find products that suit their needs. A good example is that up till now, the auto insurance in Shanghai still takes up over 50% of the whole property insurance. Over the past few years, however, as the competition in Shanghai’s insurance market has become fiercer day by day, Chinese insurance companies have also made some efforts to change this condition. For example, the property insurance companies have developed some products, such as lawyer liability insurance, accountant liability insurance, and architect liability insurance in line with the market needs and also designed some comprehensive family insurance products, such as family property, decoration design, and third party liability. The life insurance companies also launched numerous types of group insurance products.

3. The Development of Foreign-Funded Insurance Companies

In September 1992, with the approval of the PBOC, the American International Assurance Company set up a branch in Shanghai, marking the opening-up of China’s insurance market on a trial basis. The presence of foreign-funded insurance companies has introduced advanced risk control expertise, operating concepts, and marketing methods, broken the original monopolized market pattern, promoted competition, standardized the market, increased the insurance awareness of urban residents, trained a group of insurance professionals, and played a vital role in boosting the growth of Shanghai’s insurance market.

3.1 The Process of Opening-up of Shanghai’s Insurance Market

First is the preparatory stage, which extended from 1980 to 1992. With China’s further economic reform and opening-up, some foreign insurance companies were allowed to set up their representative offices in Shanghai. Their main functions were to link their parent companies to the Chinese insurance industry, coordinate the business relationship between their parent companies and the Chinese insurance companies, survey and investigate the Chinese insurance market, train personnel for insurance companies, and support insurance and education undertakings. Representative offices of foreign-funded insurance companies enhanced the exchange between the Chinese insurance industry and the world through these activities, and also expanded the influence of their parent companies in China, laying a solid foundation for their further presence in China.

Second is the pilot stage, which lasted from 1992 to China’s accession to the WTO. After the State Council selected Shanghai as the pilot city for opening up the Chinese insurance sector to the world, the American International Assurance Company became the first foreign insurance company to obtain an insurance business license. The number of foreign institutions operating in Shanghai had been increasing with each passing year and the competition in the market had become fiercer. The Chinese counterparts refused to yield and joined the competition. Foreign-funded insurance companies developed quite steadily in Shanghai and in the last one or two years took up over 15% of the market with desirable results. During this pilot period, the business line and geographical restrictions were imposed on foreign insurers.

Third is the stage of all-round opening-up, which started with China’s WTO accession. China’s insurance sector was opened in an all-round way from November 2005. Shanghai’s insurance sector is now participating in the international cooperation. Legal examination, approval, and supervision are prerequisites for market operation. Therefore, before opening up the market, the PBOC formulated The Interim Measures of Shanghai for the Administration of Foreign-funded Insurance Institutions in July 1992 to ensure orderly market regulation.

The Measures absorbed some experiences of developing countries in Southeast Asia, with reference to international common practices, and took into full consideration a company’s record of consecutive profit-making, asset size, and operating strategies in examining and approving the entry of foreign insurance companies into the Chinese insurance market. With respect to the management of fund utilization, proportional supervision and control were adopted to address different asset risks. This is the beginning of standardized management by administration and supervision according to law in the Chinese insurance sector. Therefore, at the pilot stage of opening up Shanghai’s insurance sector, The Measures were implemented for the supervision of foreign-funded insurance institutions, becoming a milestone in the efforts to manage the opening-up of the insurance sector by law.

3.2 Fair Competition and Joint Development of Chinese and Foreign Insurance Companies

In 2005, the premium income of foreign insurance companies in Shanghai came to RMB 5.822 billion with a market share of 17.45%, of which foreign property insurance companies earned a premium income of RMB 0.99 billion with a market share of 2.99% and foreign life insurance companies obtained a premium income of RMB 4.82 billion with a market share of 14.46%.

The changing market shares of Chinese and foreign insurance companies indicate that foreign insurance companies have become a major force in Shanghai’s insurance market.

The competition between Chinese and foreign insurance companies has gone through five phases:

The first phase: 1992–1995. As foreign insurance companies, such as the American International Assurance Company (AIA) and Tokyo Maritime, started business in Shanghai successively, the market share of foreign insurance companies rose rapidly from 0.51% in 1993 to 9.35% in late 1995. This was because AIA took the lead in introducing the agent marketing method, and Tokyo Maritime won over a large number of Japanese enterprises in Shanghai. The impact of foreign-funded insurance companies on Shanghai’s insurance market was strongly felt. At the same time, the arrival of foreign-funded companies had also brought in a breath of fresh air, breaking the original monopolized market.

The second phase: 1995–1997. The Chinese insurance companies adopted the marketing method of using life insurance agents and gradually established a set of marketing training and management systems. However, Chinese insurance companies launched some types of insurance based on high preset interest rate due to their lack of experiences, while foreign insurance companies enjoyed no remarkable advantages in competition by implementing strict and scientific management and internal control systems. The Chinese insurance companies gained some advantage in competition for the time being, but the situation did not last long. Their market share expanded, but hidden dangers remained.

Table 4.3 A structural contrast of Chinese and foreign insurance companies in premium income
 PercentageGrowth rate Percentage Percentage
Chinese property insurance23.91%18.75%Premium of Chinese insurance companies100.00%Premium of life insurance100.00%
Chinese life insurance58.64%1.02%Of which: property insurance28.97%Of which: Chinese insurance companies80.21%
Total 5.58%Life insurance71.03%Foreign insurance companies19.79%
Foreign property insurance2.99%22.87%Premium of foreign insurance companies100.00%Premium of property insurance100.00%
Foreign life insurance14.46%28.02%Of which: property insurance17.12%Of which: Chinese insurance companies88.90%
Total100.00%27.11%Life insurance82.88%Foreign insurance companies11.10%

The third phase: 1998–2000 . The decreased bank interest rate reduced the preset interest rate below 2.5%, greatly impacting the traditional savings-oriented products. Chinese insurance companies lost their price advantage. The competition in this period found expression mainly in management, service, and innovation, and the market share of foreign insurance companies rose again to 13.92% at the end of 2000. Chinese insurance companies gradually recognized the importance of comprehensive competition and began to sharpen their competitive edge through improved business operations and fresh products.

The fourth phase: 2001–2003. At the end of 1999, the market share of Chinese insurance companies increased quickly as they launched many new products, such as those on personal dividends and personal investment. Also, the reform of social security system in Shanghai prompted Chinese insurance companies to take full advantage of the restrictive policy on foreign insurers in developing all-purpose life and group investment insurance, as well as group all-purpose insurance. By the end of 2003, the market share of foreign insurance companies dropped to 12.89%.

The fifth phase: 2004 to present. Since 2004, with the slowdown in the life insurance business, and the downturn of dividend and bank insurance of Chinese insurance companies, foreign insurance companies have experienced a steady rise. With the expiration of WTO-based industry protection, more and more foreign insurance companies have joined the competition in Shanghai’s insurance market. By the end of 2005, the market share of foreign insurance companies in Shanghai had increased to 17.45%.

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The Insurance Industry of Shanghai

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The Insurance Industry of Shanghai