Analyzing China’s Insurance Industry

James Maudslay

China’s economic figures always make the headlines. But, stories that focus purely on statistics, such as manufacturing exports, can miss the bigger picture. For example, China is already the world’s second largest economy and has more billionaires than the United States. What’s more, it is well on its way to being home to the world largest middle class.

One of the most dramatic results of these developments has been an explosion in the insurance industry. Demand for commercial, personal and property insurance is growing rapidly, a change that can only accelerate given the Chinese Government’s desire to transfer catastrophe risk away from itself and onto the insurance industry. In fact, business in the region is proving so promising that rumours continue to circulate about major insurers re-locating to the region – the UK’s largest insurance company, Prudential being the latest although, avoiding the new European Union Solvency II regulations is also influencing decision making.

Recently, I was invited by Fudan University to a panel discussion at its Insurance China 2015 conference. It was a perfect opportunity to discuss the Shanghai insurance market, and see where technology can address challenges and add value in this fast-growing part of the Chinese financial services industry.

The panel covered a lot of ground, but I’d like to highlight three main areas:

  • Insurance Regulation in China
  • Shanghai as an insurance hub
  • The move to interconnected digital insurance from China Life

Regulation

Like most insurance industries around the world, China is moving to shift its regulatory regime towards a more contemporary risk-based system. This is where the total risks of an insurer, from a business as well as operational perspective, are brought together to ensure a company’s solvency is maintained.

In China’s case, this is being achieved under the auspices CIRC, the China Insurance Regulatory Commission, and delivered via the “Ten New Rules” for insurance, but more importantly, via C-ROSS, or the China Risk Oriented Solvency System.

The real change delivered by these moves is that C-ROSS is now not only skills based (as before) but risk based, with finance and operations being part of the mix. The framework has been designed – by and for China – to allow for local standards. It also brings Chinese regulation into line with international market standards, thus permitting China to integrate with global industry.

In IT terms, this means that in common with other markets, it will ultimately make on-premise service provision more expensive to continue with, and as importantly lead to a substantial increase in the use of catastrophe and capital modelling across the Chinese insurance industry.

C-ROSS is being implemented from 2016 onwards.

Shanghai

As part of the conference, Shanghai’s intention to become a major insurance and re-insurance hub by 2020 was laid out. The launch of the “Ten New Rules” in 2014 and the opening of the International Insurance Centre, all backed by the CIRC, mean that the city is rapidly becoming the centre of the insurance industry in China, and perhaps beyond those borders into the wider region as well.

A few examples of this change include:

  • Shanghai now takes 31% of premium income for China
  • 60 firms now trade from Shanghai
  • Zurich has recently relocated from Beijing
  • AXA established its Asian innovation laboratory here
  • Shanghai is now a participant in IUMI, the International Union of Marine Insurance

To maintain this momentum, Shanghai is introducing preferential policies to increase insurance industry development including free-trade and special zones, as well as working to increase the status of the market using the International Financial Centre channels.

Finally, Shanghai is at pains to emphasise that risk management will be a cornerstone of the market development, through the development of reinsurance and marine capital requirements.

The Interconnected Digital Insurer

This presentation, delivered by Mr Zhaoyu BA, Deputy General Manager of Internal Sales at China Life, was very interesting as he discussed the use of multichannel product distribution and interconnection within and between insurance organisations.

Mr Ba pointed out that customers are the essence of omnichannel. Or, put simply what the customer wants, the customer gets. He added that, ideally, this would include the ability to commence a transaction using one channel, and to be able to switch mid-transaction to another channel in order to complete it. However, a reality-check reveals that to-date system efforts in this area have concentrated on CRM, but risk control and underwriting have largely been overlooked. To be truly effective, these areas must be given due consideration

Ba’s speech provided the industry proof that omni-channel service model really has arrived, and is being actively developed by insurers and used by policyholders.

Insuring the future

The event was of course much larger than the three areas highlighted above, but for me it was valuable to be in China for an initial look at their insurance market, and the direction it is taking.