The move by the Chinese government to eventually remove the cap on foreign investments in local insurers is credit positive for foreign life insurers operating in China because it will allow greater management autonomy. It will also benefit domestic life insurers as it encourages product diversity, which will address the current industry's weakness of over-reliance on short-term spread dependent products.
In an article in "Moody’s Sector Comment", released yesterday, Mr Frank Yuen, Assistant Vice President - Analyst, Financial Institutions Group, Moody's Investors Service Hong Kong, said that the current regulatory environment and the significantly underserved life insurance market, which has a compound annual growth rate of premium income of 22% over 2012-2016, will limit the potential negative impact from tougher competition.
Last Friday, China’s Ministry of Finance (MoF) announced that it would lift the foreign ownership limit on life insurers to 51% from 50% in three years and remove the limit entirely in five years. According to Vice Finance Minister Zhu Guangyao, the decision is part of China’s plan to open its financial sector, which includes banks, securities firms and asset managers, to foreign companies.
Growth of foreign life insurers has been constrained by limits on foreign ownership and branch expansion. There are 28 foreign insurers currently operating in China with only a 6.4% market share based on premium income for the first half of 2017. The opportunity to increase management control will enhance these companies’ growth and earnings.
Mr Yuen said: “We expect the increased foreign-insurer participation will promote the development of more sophisticated products with higher margins and more recurring premiums such as pensions, retirement planning and healthcare insurance, areas underserved by domestic insurers. Additionally, the new regime will provide foreign insurers opportunities to leverage the expertise they have gained in developed markets.”
Currently, some foreign insurers have limited their stakes in Chinese insurers to below 25% so that these joint ventures can be classified as domestic companies and thus avoid extra regulatory hurdles.
The development of high-margin protection products may not be a top priority at some joint ventures owing to domestic partners choosing to focus on mainstream, spread-dependent savings-type products to gain market share, notes the commentary. Furthermore, the limited expertise of domestic partners and different return expectations have created additional barriers to expansion plans, and in some cases have lengthened the decision time or capital injection plans aimed at funding growth at these joint ventures.