Facts and Figures for Potential Investors

Contents
Market Size and Trends 5
> Some History on the Development of China's Insurance Sector 6 > Trends in Insurance Market Segments 7 > A Market in Adolescence: Outlook for Overall Development and Growth 8 > Market Breakdown by Product 9
Regulatory Environment 11
> Understanding Chinese Regulatory Strategy – A Key First Step in
Approaching the Market 11 > Regulations for and Restrictions on Both Domestic and Foreign Insurers 11 > Chinese Regulatory Strategy and Trends 12 > Regulatory Strategy and the WTO 14 > Working Capital Requirements for Insurance Company Branches and Sino-
Foreign Joint Ventures 15
Competitive Marketplace Structure 16
> Competitive Positions of Major Domestic and Foreign Players 16 > PICC's Dominance in the State-Owned Sector 17 > Key Life Market Statistics 18 > The Shanghai Market in 2000 19 > The Beijing Market in 2000 21 > Trends in Group vs. Individual Sales 21 > Differential Product Sales Growth Rates illustrate Market Trends 22 > Drastic Decline in Group Sales 23
Key Strategy Issues 24
> Market Strategies 24 > Product Strategies 24 > Pricing Strategies 26 > Distribution Strategies 26
Advantages and Disadvantages of Market Entry Alternatives for Foreign Firms 28
> Nonlife Branches 28 > Life Joint Ventures 28 > Minority Stakes in Chinese Life Insurers 28 > Substantial Non-Equity Contributions 29
Prospects for Market Development through 2005 30
> Restructuring and Strategic Initiatives by Domestic Companies 30 > Key Changes Impacting Foreign Companies 30
Potential Strategies for Market Development and Profitability for Foreign Companies 32
> Alternatives for Product Focus 32 > Alternatives for Market Focus 32 > Alternatives for Distribution 32 > Alternative Entity Structures or Approaches 32 > Key to Success: Taking a Creative and Strategic Approach 33
Executive Summary
>Whether for nonlife or life insurance sectors, the current market in China, as measured by premium revenues, is small, approximately on a par with Switzerland or Taiwan. However, it is reasonable to expect the market to grow some 12 percent annually over the next decade. This would result in a market roughly half the size of the 1999 French market.
>Currently, China's insurance market is dominated by a small number of large local companies, particularly legacies of PICC, the former state monopoly insurance (nonlife), China Life (life), and China Re (reinsurance). Two other firms, China Ping An and China Pacific, are major factors. In life insurance, only AIA has established a significant market share in Shanghai, the primary market for foreign competitors.
>Currently, foreign nonlife firms are obtaining branch licenses, but are restricted to operations in a few cities, and to insuring foreign invested enterprises. Foreign life companies may form only joint ventures (with 50 percent or less foreign equity) or take equity positions of less than 25 percent in Chinese firms. They are also restricted to certain localities. So far, China has been able to retain a monopoly position in reinsurance.
> Over the next five years, concurrent with China's accession to the WTO, the Chinese insurance market will be increasingly liberalized and open for foreign participants. Many more nonlife and life companies will be licensed to operate in China, and geographic and market restrictions will be largely eliminated.
>China has adopted a protective regulatory regime, under which limits are placed on product and price competition. Strategically, the China Insurance Regula-tory Commission (CIRC) aims to nurture the development of an insurance sector that is much stronger financially and more competitive domestically and internationally than at present. CIRC views the proper role of foreign insurance companies as that of assisting in this development.
>At present, there is a high degree of uniformity in product, market, distribution, and pricing strategies among companies in the insurance sector. This is largely a result of history and the regulatory environment. In the future, scope and demand will be sufficient to differentiate strategies.
>China's insurance market already resembles the West, with life premiums accoun-ting for some 65 percent of total premiums, and nonlife for some 35 percent.
>In the life segment, all companies have adopted an expensive agent sales model in major cities. This model has forced them to target the top income-earning segment of the market, which may limit growth potential. An effective model for reaching the middle-income market has not yet been developed.
>Currently, the most popular life insurance products are investment-linked and dividend policies that provide policy holders with a return on their investment.
These products were introduced in China in 1999 and should continue to attract
subscribers as investment and protection vehicles.
> At present, the life insurance sector plays a fairly passive and minor role in the capital markets and is not permitted to invest directly in the equities market. Over time, we can expect the life insurance sector to be permitted to play a more normal role as asset manager and institutional investor.
>Over the next few years, many new nonlife and life firms will be licensed in China. Foreign companies will find new ways to participate in the marketplace. Alliances – often with global scope – will offer benefits for some players.
>Financial and industrial group holding company structures will create new points of entry for some foreign firms.
>One of the keys to success will be to adopt a creative, pragmatic, and strategic approach to the market in the Chinese manner. Backward-looking, regulations-oriented approaches will leave companies behind the learning curve and the competition. Working together with local partners to achieve regulatory break-throughs or to create new ventures may be the most effective course.
Market Size and Trends
The immense size and commensurate opportunity of the China market belongs to the Foreign insurance approaching the realm of current business mythology. Chinese officials invariably try to impress Chinese market should base their outsiders with the huge potential of their marketplace. The business press, too – often planning on reality citing the work of consultants or echoing Chinese government announcements – can frequently be heard proclaiming the market's great potential and the huge signifi-cance of every new deregulation measure or license issued to a new foreign partici-pant.
Given the mythology and media hype, it is particularly important for foreign insu-rance companies approaching China to firmly ground their thinking and planning in reality. The starting point should be a simple question: How big is the Chinese mar-ket, really?
For most readers, the answer is likely to be "smaller than expected." China's insu-In 1999, total insurance premiums rance market today is comparatively small. In 1999, total insurance premiums in the in the Chinese market amounted to Chinese market, corresponding to US$ 16.8 billion, placed China at a level slightly US$ 16.8 billion above Sweden and below Taiwan in a global ranking. In 1999, the entire Chinese market, with 1.2 billion inhabitants, produced only about half the insurance premi-ums of tiny Switzerland, and would have accounted for only about 13 percent of the German market or 14 percent of the French market.