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Titel: Beijing Life Insurance Industry - An economic and social development perspective. Evaluation, issues and prospects
Richting: master of Management optie Business Studies Jaar: 2008
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Ik ga akkoord,
XXX, Xxxx
Datum: 5.11.2008
Beijing Life Insurance Industry - An economic and social development perspective
Evaluation, issues and prospects
Xxxx Xxx
promotor :
Xxxx. xx. Xxxxxxx XXXXXXX
co-promotor :
De xxxx Xxxxxx XXXX
Master Thesis Master of Management
Preface
This master thesis was submitted for obtaining the degree of master of management at the University of Hasselt in Belgium.
This thesis is a combination of my theoretical studies in Hasselt, a large amount of literature review and more than three years work experience in the life insurance industry in Beijing, China. Because of the limitation in time and financial support, it has been done mainly rely on empirical method and secondary data.
The readers of my thesis might find at some point that its content mainly focuses on secondary data rather than on my own analysis of facts and data. I want to express my apologies for this eventual weakness and hope readers can understand that the main reason for this is the difficulty of accessing and creating reliable primary data in China being most of the time in Belgium as a student. As a native Chinese with nearly four years working experience in this field, however, I certainly can give an analysis from my point of view. This has been complemented by interviews with a limited number of experts in the month of February 2008. However, future academic research and thesis in this field should be based more on indepth data and larger surveys rather than on more general knowledge and limited expert opinion. In this sense, my thesis lays the groundwork for further exploration. For all the analysis I made, all be supposed by trustworthy data, statistic model and cautious inspection rather than simple estimation.
Moreover, the readers can find that it is so difficult for me to find, choose, extract, and condense the rudimentary and crowded information, then deduce the conclusion. Sometimes statistic model was being applied to test results and forecast the future development potential on a subject that the data is scarce.
Although I am indeed the sole author of this thesis, I am by no means the sole contributor! So many people have contributed to my thesis, without their timely help, I can not finish this difficult task.
First and foremost, I would like to express my appreciation to my thesis supervisor, Professor Xxxxxx Xxxx, who has given me constructive supervision and valuable comments during this work. He devoted and sacrificed his personal time to improve my thesis, even in holiday; I never forget the feeling when I saw he replied my letter at the 6 o’clock in the morning. I am deeply grateful for his guidance, advice, encouragement, kindly help and his responsibility. To thank him in perpetuity for all that he had done for me, it is my great pleasure to have chance become his student.
I would like to give my special thanks to my previous colleagues, they provided lots of data and information for me, without them this thesis and my researches would not be possible.
And last but not least, we owe most of our thanks to our families, who have supported us with their love and passion.
Thank you very much!
Summary
Due to its large potential market and rapid growth rate, Chinese insurance industry has already became one of the most dynamic sectors in current economic structure and its healthy development has a close relationship with the economy and society. Obviously, after 27 years development, the Chinese insurance industry now enters a new phase of growth. At this moment, a thorough investigation of the development of Chinese insurance industry, through the perspective of economic and social development, is of great theoretical and practical importance.
Because China is so large and differences between regions are enormous, I have to focus on only a part of it, situated in a densely populated urban area. I thus focused our research scope on the capital, Beijing. As the capital and the center of economics and politics, Beijing is indeed representative for the life insurance market in China. Results can be used as guidance for other cities in China. The thesis focuses on the whole life insurance industry in Beijing, so it does mention the details for every insurance company separately.
This thesis is a combination of an historic overview, current analysis and future forecasting of the life insurance market in the Beijing area. The main objective of the thesis is to explore the available information and data, evaluate the current development status of the Beijing life insurance industry, find out its function and problems, evaluate its effectiveness and efficiency, discover the causes of observed problems and deduce potential opportunities. Finally I want to integrate these elements to conduct a quantitative study of future development of this market and make a qualitative assessment of the measures to be taken by both managers and government to keep the momentum going.
efficiency and shows a weak profit margin. To summary the research results, a SWOT analysis also be used to represent current status.
Table of Contents
Chapter 1 Introduction 1
1.1Background and research area 1
1.3 Objective of this thesis 6
1.4Research problem definition 6
1.5 Disposition 7
Chapter 2 Methodology 10
2.2.1 Limitation of primary data 12
2.2.2 Secondary data collection 13
2.3 The possible errors in the report 13
Chapter 3 Overview of Beijing life insurance industry 15
3.1Development Status 15
3.1.1. The insurance business has grown rapidly both in insurance companies and premium 15
3.1.2. The business indexes of the life insurance industry have increased very rapidly 19
3.1.3 The insurance compensation has increased rapidly 20
3.1.4. The insurance intermediate market system has been greatly improved 21
3.1.5. The life insurance structure has changed a lot since 2000 24
3.1.6. The legal framework has been changed and improved 25
3.2Characteristics of Development 26
Chapter 4 Overall assessment of the development of the life insurance industry in Beijing 28
4.1. The Life Insurance Industry Advances Economic Growth 28
4.1.1 Theoretical Analysis 28
4.1.1.1 Mechanism analysis of life insurance advances economic growth 28
4.1.1.2 Path analysis of life insurance advances economic growth 30
4.1.2 Descriptive Empirical Analysis 32
4.1.2.1. The life insurance industry in Beijing has a great positive attribution in reducing risk and allocating resource 32
4.1.2.2. The life insurance industry accelerates the capital market development and financial system reform 32
4.1.2.3. The life insurance industry optimizes the financing structure… 32
4.1.2.4. The life insurance industry increases employment 33
4.1.2.5. The life insurance industry increase GDP directly 33
4.1.3 Statistical Analysis Model 33
4.2. Life Insurance Industry Advances social development 35
4.2.1 Mechanism and path analysis 35
4.2.2 Descriptive empirical analysis 36
4.3 Standards for Evaluation 37
4.4.1. Insurance depth and insurance intensity 38
4.4.2. The position of insurance assets in the social security system 39
4.4.3. The position of insurance in the financial system 39
4.4.4. The internal structure of the financial system 39
4.4.5. The rationality of structure 40
4.4.6. The efficiency of insurance firms with regard to resource allocation 41
4.5 Conclusion of this chapter 43
Chapter 5 Analysis of the Problems and threatens facing the insurance Industry in Beijing 45
5.1. The influence industrywide common factors, blending with historical factors 45
5.1.1. Overemphasis of expansion in volume and heavy reliance on price competition 45
5.1.2. Shortage of human resources 47
5.1.4. Agent systems 50
5.1.5. The occurrence of fraud 51
5.2. The importance of specific factors in the Beijing life insurance industry 52
5.2.1. Product development problems 52
5.2.2. Constraints foreign insurance companies meet when entering the Beijing market…53
5.2.3. China insurance regulation committee (CIRC) 56
5.3. Specific factors external to the Beijing life insurance business 57
5.3.1. The financial market in China poses high risks and has an imbalanced structure, thus constraining development of the insurance business sector 57
5.3.2. Taxation issues 58
5.3.3. Awareness among customers of insurance systems and their opportunities 59
5.3.4. Inequality between rich people and poor people 60
Chapter 6 Development Prospect for the Beijing Life Insurance Industry 61
6.1Social factors influencing the insurance business 61
6.1.1. Continuous growth of the population 61
6.1.2 Appearance and growth of middle class people 63
6.1.3. The growth of the aging population in Beijing 63
6.1.5 Health insurance system changes 65
6.2Rapid Economic Growth 67
6.2.1. Anticipation of fast economic growth 67
6.2.3. Need for new investment channels 69
6.3 Changes in the law and government Policies 71
6.3.1. Changes in the authority of CIRC 71
6.3.2. Changes in the financial market 72
6.4 Product innovation and growth of insurance companies 73
6.4.2. The increase of the number of insurance companies in Beijing 74
6.5 Beijing 2008 Olympic Games 75
6.6 Natural disaster 75
Chapter 7 Medium Term Growth Potential of the Beijing Life Insurance Industry and Sector 77
7.1. The method using Statistical regression analysis 78
7.1.1. Construction of the statistical regression model 78
7.1.2. Prediction of the premium volume growth according to the regression model 80
7.2. Key Index Method 83
7.2.1. Collection of basic data 83
7.2.2. Forecasting GDP and population in the future 84
7.3. Summary of our predictions 86
Chapter 8 Conclusion and recommendations 88
Reference 93
List of tables 99
List of figures 100
Appendices
Chapter 1 Introduction
1.1 Background and research area
Since the implementation of reform and opening policies in 1978, China has achieved a real average annual growth rate of 9.8 %,( see table 11) which makes it one of the fastest growing economies in the world. From National Bureau of Statistics of China, GDP in 2007 was equal to 24,661.9 billion Yuan and grew 11.4% versus the previous year, constituting the fastest annual growth since 19941.
Table 11 China’s average annul real GDP growth
Source: National Bureau of Statistics of China
As one of the stabilizers of economic and social development and also one of the most important components of economic and financial system, the Chinese insurance industry has
1 National Bureau of Statistics of China, xxxx://xxx.xxxxx.xxx.xx
achieved tremendous development since 1980. Meantime, it has made a great positive contribution to reform, opening up and helping the modernization of China.
Actually, the “modern” insurance industry in China began in the middle of last century. The first Chinese insurance company, the People’s Insurance Company of China (PICC) was founded in 1949. However, due to Chinese special historical and political reasons, the Chinese government closed it in 1958. The Chinese insurance industry stopped its development until 1980. PICC resumed its operations only in 1980, taking advantage of its monopoly status and name recognition acquired in the beginning period. Since then, two another domestic insurance companies were established: Ping An and China Pacific, founded in 1988 and 1991 respectively. The Chinese insurance industry has since entered a period of rapid development.
Due to the rapid Chinese economic development, more open policies and its huge population, China is providing the most attractive insurance market for domestic enterprises and foreign investors in the world. All participants express a strong ambition to take a share of this “big insurance cake” in China. By the end of last year, there were 39 property insurance companies and 47 life insurance companies in mainland China.2 (See table 12)
Since the American insurance association Co. Ltd. (AIA) entered China in 1992, more and more international insurance companies have entered China, especially since China entered WTO in the end of 2001. Chinese authorities have gradually loosened the restrictions for foreign investment in the insurance industry. Furthermore, in 2004 all governmental limitations were canceled, thus encouraging rapid growth of foreign investment in the insurance industry. Currently, fourteen of the 39 property insurance companies and twenty five of 47 life insurance companies in China are domestic. The number of the foreign life insurance players on the market is thus already larger than the number of domestic insurance companies. 3 Moreover, there are hundreds of foreign insurance companies waiting for a license to operate in China.
2 National Bureau of Statistics of China, xxxx://xxx.xxxxx.xxx.xx
3 National Insurance Regulatory Committee ( CIRC) , xxxx://xxx.xxxx.xxx.xx
Table 12. The major insurance companies in China
Source: China’s insurance market The giant awakens
With the rapid increase of insurance companies, insurance premiums have experienced a rapid development since 1990 as well. Moreover, the growth became much faster since 2000.
In 2007, the national premium income had reached 703.58 billion Yuan, up 25% over the amount in 2006, and nearly 4 times of the amount in 20004. (See figure 11)
Figure11 Insurance premium income in China
80000000
70000000
60000000
Life premium income(10000 Yuan)
Property premium income (10000 Yuan)
50000000
40000000
30000000
20000000
10000000
0
0000 0000 0000 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: National Insurance Regulatory Committee, xxxx://xxx.xxxx.xxx.xx
Property insurance premium increased from 68.8 billion Yuan to RMB 199.7 billion Yuan during 20012007, an annual growth rate of 19.7 %; Comparing to property insurance, life insurance is growing faster. Life insurance premium increased from 128.8 billion Yuan to RMB 501.2 billion Yuan during 20012007, an annual growth rate of 24.5 %5. (See figure 1
2)
4 National Insurance Regulatory Committee ( CIRC) , xxxx://xxx.xxxx.xxx.xx
5 National Insurance Regulatory Committee ( CIRC) , xxxx://xxx.xxxx.xxx.xx
Figure 12: Life premium income 20012007
6000
5000
4000
5012
4132
3000
2000
1000
0
2669
3244
2074
2581
1288
2001 2002 2003
2004
Year
2005 2006 2007
100 million Yuan
Source: National Insurance Regulatory Committee, xxxx://xxx.xxxx.xxx.xx
Due to its large potential market and rapid growth rate, Chinese insurance industry has already became one of the most dynamic sectors in current economic structure and its healthy development has a close relationship with the economy and society. Obviously, after 27 years development, the Chinese insurance industry now enters a new phase of growth. At this moment, a thorough investigation of the development of Chinese insurance industry, through the perspective of economic and social development, is of great theoretical and practical importance. 6
This thesis only focuses on the Chinese life insurance industry, not only because life insurance industry has a larger market potential and faster growth rate than the property insurance market, but also because of the fact that if we want to give an indepth overview of both main components of the Chinese insurance market, this research would become too complex in terms of time and length. Thus we opted for indepth research of one market element only rather than staying with a general introduction of both components.
6 China insurance industry development research
Because China is so large and differences between regions are enormous, we also have to focus on only a part of it, situated in a densely populated urban area. We thus focused our research scope on the capital, Beijing. As the capital and the center of economics and politics, Beijing is indeed representative for the life insurance market in China. Results can be used as guidance for other cities in China.
The thesis focuses on the whole life insurance industry in Beijing, so it does mention the details for every insurance company separately.
1.5 Objective of this thesis
This thesis is a combination of an historic overview, current analysis and future forecasting of the life insurance market in the Beijing area. The main objective of the thesis is to explore the available information and data, evaluate the current development status of the Beijing life insurance industry, find out its function and problems, evaluate its effectiveness and efficiency, discover the causes of observed problems and deduce potential opportunities. Finally I want to integrate these elements to conduct a quantitative study of future development of this market and make a qualitative assessment of the measures to be taken by both managers and government to keep the momentum going.
1.6 Research problem definition
To achieve the objectives mentioned above, this thesis tries answering the following research questions:
1. What is the current status of the life insurance market in Beijing?
2. How does the life insurance industry influence economic development and maintain social stability?
3. What are the obstacles for the development of life insurance market in Beijing?
4. What are the opportunities and threats for further development?
5. What is the growth potential of Beijing life insurance industry ?
6. To which extent can it be achieved in the future?
7. Which preconditions have to be met to achieve this development?
In order to answer questions 1 and 2, I will give a comprehensive introduction into the Beijing life insurance industry, and then implement a more systematic assessment to find out the relationship between life insurance industry development and social and economic development. In this evaluation process, descriptive empirical analysis, theoretic analysis, and statistical analysis will be used.
For answering questions 3 and 4, I will try to find out potential causes for the observed problems in the Beijing life insurance industry investigating different aspects, including society, foreign investment, human resource and historical issues and so on.
As for the topic of forecasting future development (question 5), I will mainly try to predict development of the Beijing life insurance industry on the basis of economic and society prospective. Through a summary of all the opportunities and threats, I hope I can with some certainly say that the Beijing life insurance market will grow rapidly in the future.
The answer to questions 6 and 7 is based on the construction of a model, using quantitative statistical methods. I will try to construct some forecasting models based on current data, and predicting the near term development level in the future. Moreover, two different models will be constructed to reduce systematic and stochastic errors and enhance the accuracy.
Finally, for answer the last question, I will combine the data acquired to answer future development with the threats and opportunities stated previously to put forward recommendations for both managers and government. The flow chart of the question scheme is shown in figure 13.
Figure 13. The flow chart of the questions
Research problem
What is the current life insurance market status?
Assessment of development
How does the life insurance promote economic development and maintain social stability?
Assessment of development
What are the obstacles for the development of ife insurance industry?
Analysis the causes for current problems
What are the opportunities and threatens for development?
Find out development opportunities and threatens
How about the growth potential of Beijing life insurance industry?
Quantities analysis to get a development mode
To which extent can
it be achieved in the future
Quantities analysis to get a development mode
Which preconditions have to
be met to achieve this development
SWOT analysis, conclusion and recommendation
Research problem
What is the current life insurance market status?
How does the life insurance promote economic development and maintain social stability?
What are the obstacles for the development of ife insurance industry?
What are the opportunities and threatens for development?
How about the growth potential of Beijing life insurance industry?
To which extent can
it be achieved in the future
Quantities analysis to get a development mode
Which preconditions have to
be met to achieve this development
SWOT analysis, conclusion and recommendation
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1.5 Disposition
We structure our thesis into eight chapters (See figure 4).
In the chapter one, I will describe the general background and research area of the thesis; identify our research problems and purpose. Furthermore, the delimitation also will be given as well as disposition. Chapter two is mainly focused on the methodology, in which the methods that I am going to use will be discussed. In chapter three, I will give an overview of Beijing life insurance industry. Then I will perform a systematic assessment of insurance industry in Beijing in chapter four. The threats and opportunities for future development in Beijing life insurance industry will be discussed in chapters five and six. A quantitative
statistical analysis to predict medium–tolong term development potentials will be discussed in chapter seven. Finally, conclusions and recommendations will be presented in chapter eight.
Figure1 4 .Disposition of the thesis
Chapter three Overview of life insurance industry in Beijing
Chapter Seven MidtoLong Term Growth prediction
Chapter Six
Analysis on
opportunities
Chapter Five Analysis on Problems and threats
Chapter Four
Overall Assessment
Chapter Two
Methodology
Chapter One
Introduction
Chapter Eight Conclusion and Recommendations
Source: own
Chapter 2 Methodology
Choosing scientific and suitable methods is the primary requirement for academic research: no one can get correct answers and results based on wrong methodology. In this chapter, I will present the research methodology and research approaches used in this thesis as well as the data collection method adopted. This chapter will provide a clear idea to readers about how the research was carried through and why the chosen methodology and approach was preferred over others and implemented. In the last paragraph of this chapter, a summary of methodology will be indicated.
2.1 Research method
Three research methods can be used in this thesis. They are qualitative, quantitative, and mixedmethods approaches. I should choose the most appropriate one.
Qualitative research is a field of inquiry that crosscuts disciplines and subject matters. Qualitative researchers aim to acquire an indepth understanding and rely on reasons behind various aspects of behavior. Simply put, it investigates the why and how of decision making, not just what, where, and when. Hence, the need is for smaller but focused samples rather than large random samples, which qualitative research categorizes data into patterns as the primary basis for organizing and reporting results. Qualitative researchers typically rely on four methods for gathering information: (1) participation in the setting, (2) direct observation,
(3) in depth interviews, and (4) analysis of documents and materials. 7
Quantitative research is the systematic scientific investigation of quantitative properties and phenomena and their relationships. The objective of quantitative research is to classify features, count them, and construct statistical models or develop and employ mathematical models, theories and/or hypotheses pertaining in an attempt to explain what is observed. The
7 Xxxxxxxx, Xxxxxxxxx & Xxxxxxx, Xxxxxxxx X. (1998), Designing Qualitative Research
process of measurement is central to quantitative research because it provides the fundamental connection between empirical observation and mathematical expression of quantitative relationships.8
Multimethodology, or mixed methods research, is an integration approach of above two methods; which combines the collection and analysis of quantitative and qualitative data. 9
The Multimethodology, or mixed methods research method were used in this thesis. The reason for choosing them is that both quantitative research method and qualitative research method had to be used. When we want to evaluate the current life insurance market, we need indepth data, and thus qualitative methods have to be implemented. However, when we want to find out the relationship between life insurance and economic development or to predict the medium term market potential of the life insurance industry using a statistical model, quantitative research methods need to be applied.
2.2 Data collect methods
Data and information can be divided into two categories: primary data and secondary data. Primary data is the information collected for the first time; it means the data was collected by me on purpose for this research. To get the primary data, interviews surveys and questionnaires can be used. Primary data collection is necessary for some specific research questions, such as personal opinion about development. But it costs more money and time. Moreover, difficult answers and results can be got for the same questions represented different people’s idea.
The secondary data are the information and data that already exist. I do not need to collect directly, only need to collect them from books, articles, papers and so on. It is cheaper and more quickly available but I need to process them before it is useful.
8 Xxxxx & Xxxxxxxx (1994, p. 40). Qualitative Data Analysis
9 Xxxxxxxx, Xxxx (2004). Educational Research: Planning, Conducting, and Evaluating Quantitative and Qualitative Research.
2.2.1 Limitation of primary data
The readers of my thesis might find at some point that its content mainly focuses on secondary data rather than on my own analysis of facts and data. I want to express my apologies for this eventual weakness and hope readers can understand that the main reason for this is the difficulty of accessing and creating reliable primary data in China being most of the time in Belgium as a student. As a native Chinese with nearly four years working experience in this field, however, I certainly can give an analysis from my point of view. This has been complemented by interviews with a limited number of experts in the month of February 2008. However, future academic research and thesis in this field should be based more on indepth data and larger surveys rather than on more general knowledge and limited expert opinion. In this sense, my thesis lays the groundwork for further exploration.
Primary data mainly came from facetoface interviews with experts and experienced labors in life insurance field. These interviews were approximately two hours in length respectively, and were conducted in Beijing, Tianjin city, Shenyang city in Feb, 2008. As a complementary to these facetoface interviews, telephone consultations and online consultations also were used to reach the people I could not meet at that time. The contacted people all have long time experience and indepth sight of the Beijing life insurance field. Through the interviews with these people who came from different companies and a large amount of secondary data and information, the thesis attempts to bring diverse viewpoints together, and give a clearer insight into the Beijing life insurance industry. I thank those Interview respondents for their kindliness to provide me valuable information and data. My good private relationship with them helped in gathering the data. Their names, positions are listed in table 21.
Table 21 Interview respondents
Name | Company | Position |
Mrs. Xx xxxxxxxx | Xxxx Xx , Beijing | General manager in Beijing |
Mr. Xxxx xxxxxxx | Xxx Xxxx , Beijing | General manager in NorthEast district |
Xx. Xxx xxx | Xxxx Xx , Beijing | Marketing department manager |
Mr. Xxx xxxx xun | China life , Beijing | Marketing department manager assistant |
Mr. Xxxx xxxxxxx | China Pacific Insurance, Beijing | Training department supervisors |
Ms. Gao yan | AIA, Beijing | Health insurance department |
Ms. Dongzhaohui | AIA, Beijing | Pension and banking department |
Ms. Wangyu | ING, Beijing | Market department manager assistant |
Mrs. Xxx xxxxxxx | XXX , Beijing | Training department supervisors |
Ms. Xx xxxx | Xxx xxx, Beijing | Training department supervisors |
Mrs. .Xxx xxxx xx | XXXX, Beijing | Governmental officers |
Source: own.
Structured and nonstructured interview and conversation were all used to get more precise and extensive data and information, due to the personal relationship and their professional background, primary data collection was successfully executed. But because of the limitation in time, I could not get all the data that I needed from primary data collection sources.
2.2.2 Secondary data collection
The secondary data collection began in the first period of research, the end of last year, huge amounts of information and data came from books, journeys and the internet and statistics calculation was carefully executed to better understand the collected data. It is really hard to filter and choose useful data, at the same time. I also needed to check the accuracy of the information and hope I have been able to do so. On the purpose of increasing the accuracy, I mainly use the data from China statistical bureau, Chinese statistical yearbook and CIRC rather than from commercial insurance companies.
.2.3 The possible errors in the report
I tried to prevent mistakes as much as possible, but there are still some chances for errors occurring in this research process. The errors will mainly be due to the following sources:
• Time and financial limitations mainly when gathering primary data
• Errors in the gathered primary data and secondary data
• Translation mistakes from Chinese literature to English The methodology table summarizes this chapter (see table 22),
Research Method | Mixstructured method Both quantitative and qualitative analysis |
Data Collection primary data | Limited respondents |
Data collection secondary | Extensive |
Possible errors | Time limitation Financial limitation The primary and secondary data The translation mistakes from Chinese literature to English |
Source: own.
Chapter 3 Overview of Beijing life insurance industry
In order to give reader a clearer picture and gain better understanding of the Beijing life insurance industry and market, and also to lay the foundation for our research, an introduction of Beijing life insurance industry in all its aspects will be presented in this chapter.
Over the past 20 years, the Beijing area has achieved tremendous economic growth. A result of this economic growth, the Beijing insurance industry, especially has also witnessed the finest period of its development in the period from 2000 to 2007, both in life insurance industry and property insurance industry.
Many factors correlated to insurance can be used to prove this growth in insurance industry, such as bigger market scale, more insurance companies and more premiums as well as fiercer competition among the participants. I will present these factors one by one.
3.2Development Status
3.1.1. The insurance business has grown rapidly both in insurance companies and premium
With the opening of Beijing insurance market after China entered the WTO in 2001, and more specially, when the transition period agreed upon at the moment of WTO accession for insurance industry expired on December 21, 2004, the Beijing life insurance industry has entered a new era of overall development.
More and more investors from China and from foreign countries entered the market to establish new insurance companies or local branches. There were only 9 insurance companies in Beijing in 2000; five of these nine were life insurance companies, whereas at the end of 2007, 64 companies are currently working in the insurance sector and thirtysix of these 64 are active in the life insurance business10.(See figure 31)
Figure 31 The amount of Beijing insurance company
70
60
50
40
30
20
26
19
17
11
32
38
10
0
5
7
10
9
24
15
2000 2001 2002 2003 2004 2005 2006 2007
No.casulaty insurance company
Xx.Xxxx insurance company
4
5
4
5
Source: Beijing Insurance Regulatory Committee
Insurance business is one of the industries enjoying among the highest growth rates in the Beijing area. Total insurance premium income has grown by an average more than 30% annually since 2000. The total premium income in the Beijing area reached 49.81 billion Yuan in 2007, more than 5 times of the premium amount in 200011. (See figure 32)
1 0 0 m i l l i o n Y u a n
a n n u a l g r o w t h r a te
Figure 32 the amount of Beijing insurance premium
20002007 Beijing insurance industry premium
600
500
400
300
200
100
0
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
20.00%
40.00%
2000 2001 2002
premium( 100 million) 93.4 141.3 233
growth rate 1.80% 51.28% 64.90%
2003
282.5
21.24%
year
2004 2005 2006 2007
278.9 498.2 411.5 498.1
1.27% 78.63% 17.40% 21.04%
Source: Beijing Insurance Regulatory Committee
The reader will notice a steep increase in the 20042005 period compared to other years and what would look like a normal growth pattern. The reason is that one foreign insurance company, “Generali China Life Insurance CO, LTD”, which is the joint venture of the Italian
Generali Insurance Company and the China Petrol Company, gained one incredibly big life insurance contact by selling in 2004 a group life insurance contact to all the retired employees of China Petrol, valued at 20 billion Yuan.12 If one does not take this contact into account, the normal increase curve, showing a slowdown after 2002 and going up again normally starting 2004, can be shown (figure 33).
20002007 Beijing insurance industry premium
600
500
400
300
200
100
0
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
10.00%
2000 2001 2002
premium( 100 million) 93.4 141.3 233
growth rate 1.80% 51.28% 64.90%
2003
282.5
21.24%
year
2004 2005 2006 2007
278.9 298.2 411.5 498.1
1.27% 6.92% 37.99% 21.04%
100 m illi o n Y u an
an n u al g ro w th ra te
Figure 33 the amount of Beijing insurance premium (adjusted)
Source: Beijing Insurance Regulatory Committee
Because this thesis only focuses on the life insurance market in Beijing, I subtracted the property premium from the total insurance premium to obtain figure 34, which shows that the life insurance premium on its own was valued at 38.64 billion Yuan in 2007, thus representing nearly 75% of the total premium volume. Moreover it was nearly 6.3 times as big as the total life insurance premium in the area 2000.13
12 China insurance regulatory committee(CIRC)
13 China insurance regulatory committee(CIRC)
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
Life premium | 60.1 | 102.7 | 182.6 | 230.6 | 213 | 430.6 | 327.1 | 386.4 |
growth rate | 1.8% | 70.9% | 77.8% | 26.3% | 7.6% | 102.2% | 24.0% | 18.1% |
Figure 34 the amount of Beijing life insurance premium
500 120.0%
450
100.0%
400
80.0%
350
300
60.0%
250 40.0%
200
20.0%
150
0.0%
100
50
20.0%
0 40.0%
year
onemillionYuan
Source: Beijing Insurance Regulatory Committee
Based on the higher growth rate and the high percentage it represents in the insurance market, life insurance has much more market potential than property insurance. This is also the reason why we focus on the life insurance industry only.
If, just as before, we do not take the big life insurance contact of Generali China with China Petrol into account, the normal growth curve looks like figure 35, and the average growth rate was still very high (29.47%).
20002007 Beijing life insurance premium
450
90.0%
400
80.0%
350
70.0%
60.0%
300 50.0%
250 40.0%
200 30.0%
150 20.0%
10.0%
100
0.0%
50
10.0%
0
20.0%
2000
Life premium 60.1
growth rate 1.8%
2001 2002 2003 2004
102.7 182.6 230.6 213
70.9% 77.8% 26.3% 7.6%
year
2005 2006 2007
230.6 327.1 386.4
8.3% 41.8% 18.1%
onemillion Yuan
Figure 35 the amount of Beijing life insurance premium (adjusted)
Source: Beijing Insurance Regulatory Committee
3.1.2. The business indexes of the life insurance industry have increased very rapidly.
There are two very important indexes, life insurance density and life insurance depth, used to evaluate the development situation in life insurance industry.
Insurance density is defined as life insurance premium income divided through average living population. Insurance depth can be defined as life insurance premium income divided through local GDP.14Through the calculation, it is easily find that life insurance depth increased from
Figure36 Beijing life insurance depth
10.00%
5.00%
0.00%
2.44 in 2000 to 4.29 in 2007 and life insurance density increased from 440.7 Yuan in 2000 to 2366.2 Yuan in 2007. These two indexes thus show a remarkable growth in life insurance business in Beijing. 15(See figure 36, 37).
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||
Insurance depth | 2.44% | 3.64% | 5.83% | 6.38% | 4.97% | 6.32% | 4.24% | 4.29% | |||||||
Figure 37 Beijing life insurance density
3000.0
2000.0
1000.0
0.0
Source: Calculated myself according to the GDP data from National Bureau of Statistics
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||
Insurance density | 440.7 | 742.4 | 1283.0 | 1583.4 | 1426.9 | 2799.7 | 2068.9 | 2366.2 | |||||||
Source: Calculated myself according to the population data from National Bureau of Statistics
14 Beck A New Database on Financial Development and Structure, World bank, 1999
15 GDP and population data : National Bureau of Statistics China
Figure 38 20002007 Beijing GDP growth status
10000
5000
0
Readers will notice that the growth rate in life insurance depth was higher before 2005 than after 2005. The reason for this is that the denominator of this index (GDP) has changed much. Beijing invested billions of dollars to construct many stadiums for the Olympic Games and to reform and reconstruct old basic building, roads and metro lines to prepare for 2008, causing its local area GDP to increase dramatically from 2004 onward. (See figure 38).
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||
GDP (one million) | 2460 | 2817.6 | 3130 | 3612 | 4283.3 | 6814.5 | 7720.3 | 9006.2 | |||||
Source: National Bureau of Statistics China
3.1.3 The insurance compensation has increased rapidly.
The total insurance compensation increased from 2.37 billion Yuan in 2000 to 13.54 billion Yuan in 2007. It represented 27.2% of total premium income (see figure 39). For life insurance, the total compensation increased from 1.37 billion Yuan in 2000 to 8.57 billion Yuan in 2007, a nearly 9 fold increase, and this compensation represented 22.2% of the total life insurance premium income.16
Figure 39 20002007 Beijing life insurance compensation
One million Yuan
500
400
300
200
100
0
2000
Life insurance compensation 13.7
Life premium 60.1
2001 2002 2003 2004
15.7 22.8 20.8 21.1
102.7 182.6 230.6 213
2005 2006 2007
40.2 45.1 85.7
430.6 327.1 386.4
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
% in life insurance premium 22.8% 15.3% 12.5% 9.0% 9.9% 9.3% 13.8% 22.2%
Source: Beijing Insurance Regulatory Committee
16 Beijing Insurance Regulatory Committee
3.1.4. The insurance intermediate market system has been greatly improved.
Mature insurance normally has a complicated intermediate system, using different kinds of participants at different levels, such as insurance agency companies, insurance brokering companies, lossadjusting companies, concurrentinsurance agents and sales personnel. (See figure 14). The lossadjusting companies are mainly active in the property insurance business, so this thesis does not mention them specifically.
Figure 39 The insurance intermediate market system
Source: own
There were only 5 insurance agencies, 1 insurance brokering company in Beijing in 2000. At the end of 2007, among the life insurance intermediaries, 131 were agencies, 116 were brokerages and 34 were lossadjusting companies, 8416 were concurrentinsurance agents. The sales personnel of the whole industry amounted to 43,270.17 (See figure 310)
At beginning of the period, the premium income for life insurance industry mainly relied on sales personnel, but with the further development of the intermediary system, other segments started to provide important an contribution to the total premium income. Premium income from agencies and brokering for instance, which represented only, 21 million Yuan in 2000, a
17 Beijing insurance development research
mere 0.4% in total life insurance premium income, has increased more than 1000fold to 2.8 billion Yuan at the end of 2007. It represents 7.3% of the total premium income now. (See figure 311)18
Figure 310 The amount of insurance intermediate
300
250
200
150
100
50
0
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
No. of insurance intermediate
% of total life premium
2000
6
2001 2002 2003 2004 2005 2006 2007
10 24 100 184 227 255 281
0.4%
0.6%
0.9%
1.8%
2.6%
3.5%
7.2%
7.3%
Figure 311 premiums from insurance intermediates
Ten Thousand Yuan
300000
200000
100000
0
Life premium from brokering (Ten thousand)
Total life premium from Intermediate (ten thousand)
0 0
00000 00000 00000 121645 187984 213076
2109 6556.2 17145 40711 55421 149346 234767 280508
Source: Beijing insurance development research
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
Life premium from Agency (ten thousand) | 2109 | 6556.2 | 5867.2 | 14164 | 16181 | 27701 | 46783 | 67432 |
Source: Beijing insurance development research
The number of concurrentbusiness insurance agents grew from 3196 in 2000 to 8416 in 2007, and contributes 14.078 billion Yuan to the total premium income now, representing 36.4% of the total premium income. (See figure 312, 313)19
18 Beijing insurance development research
19 Beijing insurance development research
Figure 312 No. of concurrentbusiness insurance agencies
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
8416
7021
5867
5111
5036
4190
4235
3196
2000
2001
2002
2003
2004
2005
2006
2007
Source: Beijing insurance development research
igure 313 premiums from concurrentbusiness insurance agents
Hundred Million Yuan
150
100
50
0
2000 2001 2002 2003 2004 2005 2006 2007
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Premium from concurrent 30.22 45.78 60.72 106.96 98.76 92.99 109.46 140.78 Business insurance
Agents (hundred million)
% of total life premium 50.3% 44.6% 33.3% 46.4% 46.4% 21.6% 33.5% 36.4%
F
Source: Beijing insurance development research
Sales personnel amount increased rapidly before 2004. However, due to the problems in agents system, such as social prospective, insufficient experience, high turnover rate and increase of sales channels, the salary of agents did not grow in a stable way. From 2002 to 2004, the average salary of all agents went down to nearly 1500 Yuan/month from 2100 Yuan/month on 2000(see figure 314). After this period, the agent salary went back to normal levels and shows stable growth, at the same time, the amount of agents did not change much after 2004 either (see figure 314). In 2007 the total amount of sales personnel active in the Beijing life insurance sector is 43270.20
20 Beijing insurance development research
(Yuan)
Figure 314 Average agents' salary
3000
2500
2567
2255
2265
2348
2000
2100
1500
1478
1497
1562
1000
500
0
2000
2001
2002 2003
2004 2005
2006
2007
Source: Beijing insurance development research
Figure 315 No. of agent
70000
60000
50000
40000
30000
20000
10000
0
59081
43762
46330 41513 51243
43270
24500 28354
2000 2001 2002 2003 2004 2005 2006 2007
Source: Beijing insurance development research
3.1.5. The life insurance structure has changed a lot since 2000
Since 2000 new and different products have been launched on the Beijing life insurance market. Following this product development process, the composition of current life insurance market has changed dramatically over the past decade. The percentage of traditional insurance has decreased and while participating life insurance still represents the major part of the current market, after universal life insurance was launched on the market, more and more people began to choose this new multiple product. Figure 316 represents this alternation clearly.
Figure 316 the life insurance structure
100%
80%
60%
40%
20%
0%
Universal life insurance represents 17.1% of the market now while the percentage of participating life insurance declined from 73.4% to 68.7%. Traditional insurance has the smallest market share that is only 6.8%21.
2001 | 2002 | 2003 | 2004 | 2005 | 2007 | |
Traditional insurance | 43.3% | 24.7% | 18.6% | 19.1% | 17.2% | 6.8% |
Participating life insurance | 26.5% | 63.4% | 72.1% | 71.1% | 73.4% | 68.7% |
Investmentlinked insurance | 22.9% | 10.1% | 7.8% | 7.5% | 1.5% | 7.4% |
Universal life insurance | 7.2% | 1.8% | 1.5% | 2.3% | 7.9% | 17.1% |
Source: Beijing insurance development research
3.1.6. The legal framework has been changed and improved.
Along with the development of insurance industry, a new legal framework, regulations and authorities have been founded by the government. The “Insurance Law” was promulgated at the end of last century and amended in 2002 and the “Regulations on Administration of Foreigninvested Insurance Companies” was promulgated in 2001.
The China Insurance Regulatory Commission (the “CIRC”) was established on November 18, 1998, which was authorized by the State Council. It is responsible for conducting administration, supervision and regulation of the Chinese insurance market and ensuring the insurance industry operates stably in compliance with law. Its major responsibilities are enumerated following:
(1) The CIRC formulates policies, strategies regarding the development of the insurance industry and makes relevant rules for the insurance industry.
21 Beijing insurance development research
(2) It examines and approves the establishment of insurance companies and their branches, insurance relevant organizations.
(3) It examines and confirms the qualifications of the senior managerial personnel in all insurancerelated organizations; establishes the basic qualification standards for insurance practitioners.
(4) It examines and approves the clauses and premium rates of insurance lines related to the public interests.
(5) It supervises the solvency and market conduct of insurance companies according to law.
(6) It supervises the business operation of publicpolicyoriented insurance and statutory insurance.
(7) It conducts investigation into the irregular market actions and imposes penalties.
(8) It supervises overseas insurance organizations established by domestic insurance and noninsurance organizations according to law.
(9) It lays down standards for the information system, riskassessment, riskwarning and risk monitoring systems of the insurance industry in accordance with relevant regulations of the State.
(10) Other duties commissioned by the State Council.22
3.3 Characteristics of Development
Based on the data in the preceding paragraph, we can summarize the major characteristics of development of the Beijing life insurance market as follows. Six aspects are very important:
⮚ A new and more liberal legal framework has been established.
⮚ Total premium income has increased dramatically
⮚ The number of life insurance companies quickly increased as well, thus decreasing the concentration rate of the market
⮚ Competition on the market has become fiercer.
22 China Insurance Regulatory Commission
⮚ The innovation of products and distribution channels became one of the major determinants and characteristics of this rapid development.
⮚ The life insurance intermediate system has been greatly expanded and improved.
Chapter 4 Overall assessment of the development of the life insurance industry in Beijing
This chapter presents a systematic evaluation of the development of the life insurance industry in the Beijing. It starts with a theoretical and empirical analysis of the mechanisms through which life insurance promotes economic and social development in society. After that, some standards will also be used to assess the level of development of the life insurance industry from the perspective of economic and social development in Beijing
In this section, an analysis framework developed by Xxxxx and Santomero23 will be used to analyze the relationship between the degree of development of the life insurance industry and economic and social development in society. This framework mainly uses the functional point of view (see figure 41).
Figure 41 The processes of this analysis frame
Phenomenon, issue, event
Theoretical analysis
Descriptive Empirical analysis
Statistical test
Mechanism analysis
Path analysis
Source: The Theory of Financial Intermediation
4.1. The Life Insurance Industry Advances Economic Growth
4.1.4 Theoretical Analysis
4.1.1.1 Mechanism analysis of life insurance advances economic growth
23 Xxxxx and Xxxxxxxxx ,Xxx Theory of Financial Intermediation
Through following three mechanisms, life insurance advances economic development: it constitutes risk protection; it serves as a savings substitute and is an asset investment. Each of them is explained below.
⮚ Risk protection
Providing protection against risk and expense is the core function of life insurance. Through reduce the uncertainty and fluctuation, life insurance have position attribution to following aspects:
Firstly, insurance provide compensation for lost caused by natural disaster and accident, then promote the development of some business sectors, such as transformation, logistic and loan and so on.
Secondly, insurance can reduce people’s future uncertainty, then increase loan and consumption..
Thirdly, insurance provide protection for the individual’s high risk activity, and then promote the development of tourism and high risk business investment.
Although life insurance increases customers’ costs in shortterm, it increases economic efficiency and advances economic growth.
⮚ Saving substitute
Life insurance increases the choice options in the financial market, enriches investment channel, raises financial competition, and reduces market risk. On the other hand, based on its protective function, life insurance reduces preventive savings, encourages consumption, enlarges demand and thus advances economic growth.
⮚ Asset investment
Through the utilization of assets, insurance companies have already become one of the most important investors on the global capital market. Because of the longterm vision and contract terms in the insurance industry, insurance companies moreover provide long term investment and directly or indirectly pump huge amounts of money into the capital
market, while at the same time increasing competition in the financial market and thus enhancing market efficiency.
4.1.1.2 Path analysis of life insurance advances economic growth
Several theories support these phenomena and constitute a path analysis of life insurances’ influence on the advancement of economic growth. They are the “New theory of financial development” and the “Efficient Demand Theory”.
⮚ The New Theory of Financial Development is the theory endogenous growth. It explains the internal mechanism for the financial development advancing economic growth. 24This thesis quotes just one representative model, xxx Xxxxxx model 25to illuminate the relationship between life insurance industry and economic growth.
Xxx Xxxxxx model states that
g =Aσsδ 26
In which:
G is the economic growth rate, A is the capital output rate,
σ is the translation rate from savings to investment,
S is the total savings rate, and δ is the depreciation rate.
Life insurance industry advances economic growths mainly because its protective function encourages people to reduce preventive saving. This actions increases σ, and then increases g and advances economic growth.
24 Xxxx xxx, Construction of new theory of financial development and Chinese financial innovation of efficiency
25Pagano, Financial markets and growth: An overview
26 Xxx xxxxxx, New theory of economic development
⮚ The Efficient Demand Theory developed by the British economist Xxxxxx furthermore told us that:
GDP =C+I+G, 27
This signifies that
Gross Domestic Product = consumption + gross investment + government spending Assume the government spending do not change, the above equation changes to: GDP=C+I
Using growth rate (Δ) to replace above equation, then
Δ GDP= Δ C+ Δ I
As mentioned in the part of mechanism analysis, The life insurance industry can provide protection for people in health and income stability, reduce people’s risk awareness and risk aversion, and then reduce people’s preventive savings, increase consumption and gross investment, and then advanced economic development
These affects have to be viewed finally against the background of profound economic transition China is currently experiencing from planned economics to full market economics. In this light, the life insurance industry was established and developed to deepen the system change and speed the transition effectively.
▪ The following aspects are extremely important with respect to the transition phenomenon and render the insurance industry an extremely important role during the transition period:
• Life insurance industry is one of the necessary components of a market economy.
• Life insurance industry is one of the most important components of a market oriented financial system.
• The Insurance industry in general is an important component of every social security system as well.28
27 N,Xxxxxxx Xxxxxx, Principles of economics
28 China insurance industry research
4.1.5 Descriptive Empirical Analysis
4.1.2.1. The life insurance industry in Beijing has a great positive attribution in reducing risk and allocating resource.
The main analysis has already been mentioned in Chapter 3. We recapitulate the most important data. From the figure 34, we can find that total life insurance premium in 2007 was
38.64 billion Yuan, representing nearly 75% of total premium income. It was nearly 6.3 times as large as the total life insurance premium in 2000. The life insurance depth and density also increased continually. (See figure36, 37) Total compensation also increased from 1.37 billion Yuan in 2000 to 8.57 billion Yuan in 2007, it was nearly 9 fold the 2000 figure. Compensation represents 22.2% of total premium income. (See figure 39)
4.1.2.2. The life insurance industry accelerates the capital market development and financial system reform.
With the continuous increase of total premium, assets of life insurance companies have increased dramatically. More and more funds entered the Chinese and world capital markets and promoted market development, supported the reform of commercial banking and enhance the bond market in China. By the end of 2007, insurance assets represented 9% of total GDP in Beijing.29
4.1.2.3. The life insurance industry optimizes the financing structure.
At present, the finance market in Beijing mainly relies on the indirect financing like bank loans (90% of the financing market is represented by them). The direct financing market, such as the stock market and corporate bond market are only small scale and represent less than 10%30 of invested funds. This unbalanced financing structure is not only typical of the Beijing area, but is also present all over China.
29 Beijing insurance industry development research
30 China bond industry yearbook 2007
With more insurance assets entered the financing market, especially most of assets input to longterm bond, the financing structure will be improved.
4.1.2.4. The life insurance industry increases employment
The life insurance industry is humancapital intensive. In Beijing, the number of employees in the life insurance business is more than 46.000 in 2007 and represents 45% of total employment in the financial industry.31
4.1.2.5. The life insurance industry increase GDP directly
Obviously, as one kind of economic activity, life insurance industry increases GDP automatically.
4.1.6 Statistical Analysis Model
According to the previous analysis, we can make an assumption that the life insurance development level in Beijing is an important factor that can influence economic development. Statistically, this can be analyzed by a logistic regression equation:
Lngdp is natural logarithm of GDP in Beijing
Lnpre is natural logarithm of life insurance premium income in Beijing Epsilon is error term.
All the data came from China national statistic bureau and the CIRC. The Spss 13 programme was used to perform all the calculations.
Table 41 GDP and life insurance premium income in Beijing
Year | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 |
GDP (hundred million Yuan) | 2460 | 2817.6 | 3130 | 3612 | 4283.3 | 6814.5 | 7720.3 | 9006.2 |
31 Beijing insurance industry development research
Life premium (hundred million Yuan) | 60.1 | 102.7 | 182.6 | 230.6 | 213 | 230.6 | 327.1 | 386.4 |
Statistic results and interpretation of the correlation are:
Table 42 Correlation coefficient between GDP and premium income
GDP | PREMIUM | ||
Xxxxxxx Correlation | GDP | 1.000 | .862 |
PREMIUM | .862 | 1.000 | |
Sig. (1tailed) | GDP | . | .003 |
PREMIUM | .003 | . | |
The table shows there is a very strong correlation relationship between GDP and life insurance premium. The correlation coefficient is 0.862. The further statistical analysis provides us with the following model summary.
Model | R | R Square | Adjusted R Square | Sig. F Change |
.862(a) | .743 | .700 | .006. |
Coefficients(a) | ||||||
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
B | Std. Error | Beta | ||||
(Constant) | 4.734 | 0.887 | 5.341 | 0.002 | ||
PREMIUM | 0.700 | 0.168 | 0.862 | 4.165 | 0.006 | |
a. Dependent Variable: GDP | ||||||
From the above tables, we can find a less than 1% significant level. The regression equation existing between GDP and premium is:
Since R=0.862, R Square=0.743 and adjusted R square =0.7 and the Pvalue for the F test is 0.006, the result of statistical tests prove that the life insurance industry is an important factor of economic growth.
4.2. Life Insurance Industry Advances social development
4.2.1 Mechanism and path analysis
The current social development goal in china is constructing harmonious society. Undoubtedly, Life insurance industry in Beijing advances the building of a local harmonious society. The mechanism behind this is that the properties and characteristics of life insurance are inherently consistent with the goal of building a harmonious society.
The life insurance mechanism is a unity of compensation to damage and management of risk. The main function of life insurance is to remedy damage and keep the stability of living of the contractant party, which is the same as the goal of a harmonious society. Life insurance is thus a complementary part for the social security system as well. According to the insurance theory, the risk is indicated by a Pareto distribution (see figure 42). The meaning of figure is that individual, government and insurance companies all compensate the lost, for lost happened frequently but little damage level (from zero to L1 indicated in the figure), individual remedy himself, for the lost that happened in very low probability but caused heavy damage (from L2 to L3 indicated in the figure), government is responsible for remedying it. The life insurance remedies the medium lost with medium frequency (from L1 L2 in this figure).32
Figure 42 lost/ damage happen distribution
32 Risk theory –Actuary exam
Source: Risk theory –Actuary exam
⮚ The main characteristic of insurance is mutual assistance, which is consistent with the basic characteristic of harmonious society.
⮚ According to Xxxxxx'x hierarchy of needs (see figure 43), everyone has safety needs33; the core function of insurance is providing protection against risk. Thus insurance can satisfy people’s needs as a risk transfer method. It promotes the realization of harmonious society by giving people the chance to realise other needs than safety needs more easily.
Figure 43 Xxxxxx'x hierarchy of needs
Source: Xxxxxx Xxxxxx, Principle of marketing an Asian prospective
33 Xxxxxx Xxxxxx, Principle of marketing an Asian prospective
4.2.2 Descriptive empirical analysis
Undoubtedly life insurance plays an important role in Beijing’s social development. As mentioned in the chapter three and the first part of chapter 4, the compensation by Beijing life insurance industry has increased dramatically and continually remedied the people’s loss, promoting a more stable and healthy social development. In terms of economic compensation, the insurance industry has settled claims of 0.1354 billion Yuan in 2007, which is 27.4% higher than in 2003.
Moreover, the life insurance business also provides annual income, pension, and health insurance for the population. All these activities accelerate the increase of living standards. More and more people look to commercial insurance as an important approach to solve the problems of aging, health care and accidents. Some people also look to insurance as another kind of investment tool.
4.4 Standards for Evaluation
Through perfecting the social security system and thus assisting in social management, the life insurance business advances societies’ healthy development as well as supporting the creation of a more harmonious society. In this paragraph, some standards will be suggested and used to assess this contribution of the Beijing life insurance market to society. But first, an important distinction between growth and development of the insurance business should be emphasized. The growth of the insurance market can only be measured in terms of growth of premium and assets, whereas the insurance business development must be measured in terms of the life insurance market performance. In other words, insurance development focuses on quality, whereas insurance business growth focuses on quantity and scale or volume. In this section, we want to evaluate the life insurance industry’s development in Beijing mainly.
A few standards can be used to do this34:
34 China insurance industry research
⮚ Insurance depth and insurance intensity, which are special indexes in the insurance industry and common used in the international insurance market for indicating the industry’s development situation.
⮚ The position of insurance assets in the social security system. This index evaluates the relative position between commercial life insurance capital and social security capital and indicates the utility of commercial life insurance in protection people.
⮚ The position of insurance in the financial system of an area. This index indicates the position of insurance assets in the total of financial assets by comparison with the bank industry’s assets.
⮚ The efficiency of life insurance companies. This index measures the ratio between cost and benefit in the business process of life insurance companies and evaluates the sustainable development ability of these companies.
⮚ The rationality of structure and resource allocation. This index indicates the efficiency of resource allocation in the insurance industry and evaluates the rationality of the industry’s structure.
4.4.1. Insurance depth and insurance intensity
As mentioned in the last chapter, life insurance depth and life insurance density largely increased over the last eight years. Life insurance depth increased from 2.44 in 2000, to 4.29 in 2007 and life insurance density increased from 440.7 Yuan in 2000, to 2366.2 Yuan in 2007.
Although these two indexes have increased, comparing them to other developed areas in Asia and beyond indicates that they are still much lower. Detailed data are listed in figure 44.
Figure 44 comparison of insurance density and insurance depth
Depth
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Life insurance density
Life insurance depth (Dollar)
Beijing 2007
4.29%
338
Tokyo 2005
5.70%
2762.6
Hong Kong England Singapore
4500
4000
3500
3000
2500
2000
1500
10D0e0nsity 500
0
2005 2005 2005
9.10% 12.80% 7.60%
2190 3887.3 1630.6
Source: China insurance industry research/ Beijing insurance regulation committee
Unfortunately, data for these other four cities were only available till 2005, which makes the comparison somewhat difficult, but clearly indicated that the Beijing life insurance market is still lagging behind. There is a huge gap in life insurance development between Beijing and other developed countries.
4.4.2. The position of insurance assets in the social security system.
According to the statistical data from CIRC, the current proportion between life insurance compensation and social security fund payments in Beijing was nearly 9:100. This figure is also much lower than the world average level, which stands at 22:100 35
4.4.3. The position of insurance in the financial system.
From the point of view of assets compared to assets of the bank industry in Beijing, the position of life insurance grew slightly from 2.19 in 2000 to 4.29 in 200736. This still reflects the pattern of “a strong bank and weak life insurance market”. Any strong substitution effect was not visible. (See table 45)
Table 45 life insurance VS banking deposit | ||||||||
Year | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 |
Life premium (hundred million Yuan) | 60.1 | 102.7 | 182.6 | 230.6 | 213 | 430.6 | 327.1 | 386.4 |
35 China insurance regulation committee
36 Beijing statistical yearbook 20002007
bank deposit (hundred million Yuan) | 9705 | 12223.4 | 15392.7 | 18321.9 | 21625.9 | 28970 | 33793.3 | 37700.3 |
proportion | 0.62% | 0.84% | 1.19% | 1.26% | 0.98% | 1.49% | 0.97% | 1.02% |
Source: Beijing statistical yearbook 20002007
With regards to added value, the annual growth rate in life insurance industry in Beijing was nearly 34%, which is much larger than growth in GDP. However, as a proportion of added value in total GDP, the index in Beijing was much lower than the world average level. It only represented 0.34% of GDP.37 So the contribution of the Beijing life insurance industry is to the GDP is still low.
4.4.4. The internal structure of the financial system.
When we investigate the internal structure of the financial system, we also found that the added value of the life insurance industry only represented 8.5 % of the total system’s added value, comparing to an average level of nearly 30 % 38in many European countries. Beijing life insurance industry is still a very weak factor in the financial industry as a whole.
4.4.5. The rationality of structure.
The structure of life insurance industry in Beijing is not so good. This problem is due to two aspects: an unbalanced development between urban and rural areas and an unbalanced development between insurance companies and intermediates. We explain both of them.
Unbalanced development between urban and rural area
This problem was embodied by an unbalanced total premium, an unbalanced insurance depth, and an unbalanced compensation total. The rates of all these indexes from urban to rural areas still range around 6:1 in 2007.39.
Unbalanced development between insurance businesses and intermediates
37 Beijing statistical yearbook 20002007
38 Beijing statistical yearbook 20002007
39 Beijing insurance regulation committee
As we mentioned in the last part of the previous chapter, life insurance intermediates dramatically increased in total over the last few years. But there remain important problems.
4.4.6. The efficiency of insurance firms with regard to resource allocation.
This index focuses on the effectiveness and efficiency of insurance companies. It indicates the status of resource allocation in the life insurance companies. Currently, the limited resources have not necessarily been effectively allocated due to several affects, such as:
• Poor investment in research and development for new products;
• The different categories of distribution channels used;
• The poor internal cooperation and harmony based on the used information technology. We investigate each of these factors in the following paragraphs.
Poor investment in product research and development
Table 46 The percentage of R&D investment /total investment | |||||
R&D % | USA | UK | KOREA | JAPAN | BEIJNG |
4.36% | 3.15% | 3.33% | 4.00% | 1.12% | |
Source: Beijing insurance industry development research
In table 46, we can clearly observe that there is a big difference between financial investments in R&D in the life insurance sector in Beijing compared to some developed countries. Insurance companies in Beijing as of yet did not invest enough money in R&D. This leads to unsuitable products and development restrictions. A more indepth analysis of this particular problem will be presented in next chapter.
Categories of business and distribution channels
The different categories of insurance business and distribution channels are also determinants of the profit rate in the business. Unfortunately, because most insurance companies in Beijing have mainly been focused on the development in terms of scale and volume, they lost track of the profit objective. Consequently their profit was rather low, even sometimes negative. Table 47 indicates the profit margins of New China Life Insurance Company in Beijing as an example. It is representative of the sector, rather big in the life insurance business and ranks fifth in Beijing market.
Table47 profit margins of New China Life Insurance Company
PERSONAL INSURANCE | GROUP INSURANCE | ACCIDENT AND HEALTH INSURANCE | ||||
2005 | 2006 | 2005 | 2006 | 2005 | 2006 | |
NET PROFIT (MILLION YUAN) | 8503 | 10670 | 296 | 513 | 1172 | 1280 |
PREMIUM INCOME (MILLION YUAN) | 54909 | 68888 | 742 | 1267 | 10606 | 10867 |
PROFIT MARGIN (%) | 15.5 | 15.5 | 39.9 | 40.5 | 11.1 | 11.8 |
Source: primary data from consultation
From table 47, we can conclude that the profit margin for group insurance activities is negative, although it represents an essential part life insurance business and cannot simply be stopped as an activity. Insurance companies apparently face a dilemma when they have balance volume of activities and profit potential and have until now given priority to volume of business as a parameter.
The choice of distribution channels also influences the insurance companies’ profit margin. Table 48 shows for the same individual insurance company as in the precious example its profit margin when selecting among different distribution channels.
Table 48 PROFIT margin among different channels | |||
sales personnel | agency | concurrent-business insurance agent | |
PROFIT MARGIN(%) | 13.20% | -7.30% | 4.60% |
Source: primary data from consultation
Internal cooperation and harmony based on information technology
competitive capability of any company, now and certainly even more in the future. Most Chinese domestic insurance companies should thus enhance their information technology.
4.5. Conclusion of this chapter
Experts using a data envelope analysis (DEA) model to evaluate the productivity of commercial life insurance firms state that: “Low efficiency in resource allocation is a pervasive problem among Chinese insurance firms and this has led to a structural imbalance of the industry as well as various difficulties in operation”. 40 Due to the limitation of data, I could not perform any new indepth analysis of this phenomenon, but both the empirical data gathered and my real work experience show that the Beijing life insurance sector has yet to improve its productivity. In spite of its fast growth in terms of volume, the Beijing life insurance business sector plays only a limited role on macroeconomic level given its small contribution to GDP and has a very limited impact on the social security and financial system in China and Beijing more in particular, given its structural problems. In general, it shows a low degree of efficiency and a lackluster profit margin compared to other comparable cities in Asia and to more developed countries. As a result, in order to facilitate the development of the Beijing life insurance industry, focus should shift from scale effects and volume interest to efficiency of the industry and its operation.
40 xxx xxxxx, using DEA method to analyze China insurance industry efficiency
Chapter 5 Analysis of the Problems and threatens facing the insurance Industry in Beijing
5.1. The influence industrywide common factors, blending with historical factors
Life Insurance industry differs from manufacturing industry and other service industry in terms of the way of operation, the scope of business, product characteristics and so on. These differences constitute specific industry wide common factors. Among them I state technical characteristics of the insurance business, market structure, transaction cost structure and information asymmetry. All of these lead to problems in the industry. Moreover, these problems become more serious when these industrywide common factors are viewed in the perspective of the special historical background of the Beijing’s life insurance industry and are blended with it. Indeed, changes have only recently been happening in China and Beijing more specifically with regard to the insurance business.
The problems caused by the composite effects of historical factors and industrywide specific factors in the life insurance industry are fourfold: a likely overemphasis of expansion in volume, a willingness to rely heavily on price competition, a poor reputation and poor operating efficiency .
5.1.1. Overemphasis of expansion in volume and heavy reliance on price competition
By analyzing the historical background of this industry and the resulting imperfection in the current market structure, I can identify some special factors which have contributed to the problems mentioned in the previous chapter.
As already mentioned in the introduction and in chapters 1 and 2, the history of Beijing’s life insurance short is relatively short, only 27 years to be precise. In the beginning, only one insurance company was allowed to operate in the market and enjoyed a full monopoly. Moreover, during this initial period, this state owned company took large advantage of government assistance and preference. All these factors refrained other insurance companies from entering the market. Even now, the market concentration rate is still very high. The three biggest companies represent more than 75% of the total market41, which it is not supportive of a more competitive attitude and does not stimulate improvements in efficiency.
New participants entering the market can only sell the products allowed by the CIRC, which are identical to the ones promoted by the longer established big three companies. If they want to take a larger share of the market, the only option available to them is to compete outright with the big players by using price incentives as market tool, which finally leads to a very hostile competitive environment. The nearly exclusive use of this strategy by the insurance sector not only caused a considerable drop in insurance companies’ profit margins, it also damaged its reputation seriously.
By overemphasizing expansion in volume to the detriment of others, another problem emerged. Since the industry has only limited resources, volume expansion is limited to the fastest possible growth allowed by the weakest link the insurance service process: capital or human capability. The lack of experienced human capital and resources currently poses the most important problem in this respect and is due to the short history of the industry, which did not have sufficient time to invest in better and enough human capabilities Most insurance companies cannot satisfy the requirements of market development or in trying to do so anyway cause quality problems, aggravating the poor image of the life insurance sector and deteriorating the operating efficiency. We will take this point further in the next paragraph.
41 Beijing insurance industry development research
5.1.2. Shortage of human resources.
One of the disadvantages the life insurance industry faces in Beijing is a short supply of skilled workforce.
Although the Beijing insurance market comprises 52.137 staff, it accounts for nearly 40% of the total number of employees working in financial enterprises. More than 90 percent of them are sells personnel, and only 3,87542 are working for insurance companies directly. In spite of this it is very difficult for insurance companies to find qualified people to carry out the job. Taking this into account with the intensive growth in market demand and the fierce price competition going on, this huge shortage in workforce supply is not going to stop soon. Human resources are thus a critical concern to the whole life insurance sector in Beijing. The most pressing issues are the recruiting and training of competent staff and of staff working in the various distribution channels.
The supply of competent staff is indeed lagging far behind the rapid development of the life insurance market in Beijing. Professional knowledge and experience is very scarce. Two aspects can be described shedding more light on this phenomenon.
First, there are 509 managers among the 3,875 jobs in insurance companies, representing 14 percent. Only 2372 employees directly work in services and administrative departments (64 percent of the total) and a mere 22 percent (825 people) work in the professional and technical field 43(see figure 51).
42 Beijing insurance industry development research
43 Beijing insurance industry development research
Figure 51 component of inside job
22%
14%
64%
Services and administrative Manage
Professional and technical
.
Source: Beijing insurance industry development research
Secondly, of the total of 825 real professionals, only 19 people work in the product development sector, 9 are actuaries, 433 people work in underwriting and claim settlement and only 308 are trainers. Moreover, there are only 106 people responsible for information technology (see figure 52). Obviously, there is insufficient professional and technical staff leading to ineffectiveness and inefficiency. This is aggravated by the small number of trainers, leading to a large backlog of staff willing to be trained, but not capable of following the necessary training programs. 44
Figure52 Component of professional and technical workers
Product development, 19
Information
Technology, 106 Actuary, 9
Trainer, 308
Underwriting and Claim settlement, 433
Source: Beijing insurance industry development research
44 Beijing insurance industry development research
The result of this situation can be summarized in the following table 51, listing the major consequences of this insufficiency in experience, skills and training.
Table 51 the major consequences of this insufficiency in experience, skills and training
Category | No. of staff | Resulting Problems |
product development | 19 | without enough product development ability, only can copy existing products no matter whether it is suitable or not |
actuary | 9 | without enough risk management capability, the company will operate in a higher risk and unstable environment |
underwriting and claim settlement | 433 | The company will operate again in a higher risk situation and will not be able to provide service and compensation on time. Claim settlement moreover is understaffed, leading to a bad image with complaining customers who are already very unsatisfied. |
trainer | 308 | The salespeople cannot receive enough training, which will lead to a high turnover ratio. |
information technology | 106 | There are no advanced information management systems and knowledge management systems in many companies, thus limiting improvements and product development in the system. |
Source: own
Due to the lack of competent staff, each life insurance company attempts to acquire capable employees. An attractive salary, a higher position in the hierarchy and training abroad are the methods used predominantly to encourage people to enter a company. Furthermore, since the government regulations became less stringent since 2004, competition for human resource
capital has become fiercer: some foreign companies normally offer extremely high commissions and higher salaries to increase the number of their agents and employees as fast as possible and to hire the best people available on the market.
Given this situation, the turnover rate of staff was very high in last few years. It stands at nearly 25%, increasing competition in the race to hire competent people and meanwhile also disturbing the development and operation normal business processes. One personal example illustrates this situation amply: of the 20 people I used to know as colleagues at Ping An insurance, in last five years, only four people did not change jobs and four of them changed more than twice.
5.1.4. Agent systems
As mentioned before, one of the biggest differences between the Beijing life insurance business and the sector in other developed countries is the agent system. The system was introduced by AIA and developed very well in Beijing and the rest of China. Since many new companies were established, they had to hire a huge network of agents in order to sell insurance policies or contracts. Obviously, most of the success of the current life insurance industry in Beijing can be attributed to this agent system, but the system also caused many problems and restricted further development of the sector.
First of all, this system is very costly to many insurance companies, not only in terms of money, but also in terms of the necessity to train this new labor force, the difficulty and complexity of managing them and so on. If the insurance companies could focus more on the quality of their products and product development, they could provide the market with much better and more adapted services.
Second, there are fewer requirements for insurance companies to hire new agents than proper staff. Thus very often, the competence of these agents cannot be guaranteed. In addition, due to lack of training, some of the agents lack essential professional knowledge and skills and do not know how very well how to introduce and sell standards products, let alone specific ones. Sometimes agents thus cause misunderstandings between customers and companies.
Furthermore, in their eager to earning a living (based on commissions), some, though only a few of these agents, tend to cheat customers, providing them with illusive information. Of course this behavior can seriously harm the reputation of the life insurance companies and sector as a whole.
Thirdly, due to inefficient knowledge and experience, the turnover rate of agents is also very high. By the end of 2006, the agents having at least 6 years of experience only represented 10 percent of the total. The percentage of agents working more than one year for the same employer is only 22%. 45This very high turnover rate seriously disturbs the market and causes a further decline in the image of professional life insurance companies in Beijing.
Finally, for the new foreign insurance companies entering the market, it is necessary to choose the best local partners, who can build a viable and well performing network of agents. For them this is a prerequisite to become competitive with local companies. Based on their experience they are better in hiring and training the best networks, thus increasing the likelihood of local insurance companies facing even more problems in their agent networks.
5.1.5. The occurrence of fraud
Reliability is the cornerstone underlying the development of any industry, particularly the insurance industry. Suppliers as well as customers on the market should both pay attention to the longterm effect of unreliability. However, fraud by policy makers has caused losses to insurance companies and fraud in sales channels has caused loss to the insured customers recently. This problem mainly originates from the imbalance between information insurance companies possess and insured customers’ posses. When fraud happens, the reputation of the business is seriously damaged and the development of the insurance sector is slowed down for a longer period because of the fading trust by customers in the system.
The above mentioned poor image of agents seriously xxxxx the reputation of the sector in the society at large. Their unprofessional behavior, inefficient knowledge and skills, as well as
45 primary information from survey
their tendency to rely on fraudulent statements to customers are not common, but still considered to be widespread by the industry and its customers.
Not everything offers such a bleak outlook nevertheless. In general, problems in the speed with which compensation is provided to customers, with efficiency and transparency of the system and with regulations have been addressed intelligently in the interest of protecting consumers in China thus sustaining a healthy and rapid growth of the insurance industry.
5.2. The importance of specific factors in the Beijing life insurance industry
I will summarize some of Beijing–specific factors aggravating the problems previously mentioned as being predominantly present in the Beijing life insurance industry and also aggravated by them. They are: problems in product development, problems encountered by foreign companies entering the market and the regulatory influence of the CIRC.
5.2.1. Product development problems
The main problem in product development in services in general and in the life insurance business in particular is that very often the costs of innovation are spend by individual companies, whereas the benefits are shared publicly. This is amongst others due to the fact that new products cannot be patented in a service environment as they are intangible in nature and due to the poor protection of knowledge based rights all over the world. The motivation to create really new products is thus very low.46
At present, more than 100 different life insurance products are offered on the Beijing market, but customers still seem to have a limited choice. At first glance, this seems very illogical indeed, but since many companies only offer very similar products and do not want to invest heavily in new product development, it is true nevertheless. Moreover, when new products are offered, in many cases they are just copies of existing contracts offered in foreign countries. This does not necessarily take the difference between the Beijing area and other countries into
46 Xxxx Xxxxxx, Xx. (1995). Why Satisfied Customers Defect
account. Furthermore, most companies only copy those products that are selling better, and make little change to them when launching their equivalent.
Each time a company creates something really new and launches it on the market; others copy it immediately at nearly no cost at all. Moreover, the latter companies can rewrite or change something in the basic contract and thus improve the product slightly by just integrating elements they learn from the initial market response. This brings even more extra benefits to the latter companies at nearly no cost at all, while the innovating company just has to spend more to learn from their initial experience, thus incurring an even larger research cost. It is rather unfair but unavoidable and diminishes the motivation to develop new products. This problem largely limits the development of the life insurance industry at large.
Another objective reason limiting the efficiency of the research and development process exists. It is true that research and development of insurance products needs a lot of empirical and statistical data, interpreted by staff capable of creating information systems and data (professional actuaries and computer specialists), which are scarce on the Beijing market.
The competition among life insurance companies thus is not primarily focused on the product and service quality, but mainly on aggressive price and premium competition, leading to an even larger scarcity in funds to develop new products. This is a vicious negative cycle!
5.2.2. Constraints foreign insurance companies meet when entering the Beijing market. There exists an important conflict within Chinese economic life and the insurance market in particular between on the one hand promoting competition and on the other hand protecting the local industry.
The Beijing life insurance market certainly has a huge development potential and promises a healthy profit margin to foreign insurance companies, consequently they certainly would like to enter this market and take a share of this “big insurance cake”. But ever since the start of the opening of the market to them, foreign insurance companies in China have been facing a lot of regulation in nearly all of their business aspects and operations. Thus they cannot freely
compete with domestic insurance companies: the restrictions imposed on them do not put them in a fair competitive position. This situation limits their initial enthusiasm and curtails development opportunities in the sector.
Since China has entered WTO in 2001, protectionist mechanisms have been relaxed little by little. However, there are still more barriers for foreign insurance companies than in other sectors of industry. For instance, the foreign companies must be operating at least 30 years in their home countries. Moreover, they cannot enter the Beijing market when their financial structure shows a 100 % foreign capital ownership, the only exception to this rule being AIA, the first foreign company that invested in the Beijing insurance market. In 1999, the Chinese government changed policies on the basis of this example and now imposes foreign investors in the insurance business to form a joint venture with a Chinese partner. This is of course a good policy to protect Chinese insurance companies and to promote the growth of domestic insurance companies, but at the same time, it causes more restriction on foreign insurance companies.
The Chinese government acknowledges this problem by stating that:
“There are still many factors that frighten foreign insurance companies to enter China including branch/subbranch establishment procedures, capitalization requirements, the Chinese pension system, health insurance underwriting policies, and limited rulemaking transparency. All foreign companies encourage the China Insurance Regulatory Commission (CIRC) and relevant authorities to resolve these remaining issues.”47
This white paper states a number of restrictions foreign investors in the insurance business face when entering the Chinese market. The authors specifically cite the following two: consecutive branch approvals and capitalization requirements.
The consecutive branch approvals
Foreign insurance companies’ branch approvals have always been made consecutively by Chinese authorities. In general, one approval is normally one per year, in spite of applications
47 WHITE PAPER 2006 • AmCham-China
to establish different branches at he same moment. This policy seriously curtails the growth potential of foreign insurance companies in Beijing and in China in general. Compared to foreign insurance companies, the domestic ones easily receive permission to build a network of several branches at the same moment.
Capitalization requirements
Before China entered the WTO, the capitalization requirements for foreign insurance companies were very stringent. After 2004, standards were somewhat revised however. Currently the capitalization requirements for the initial establishment of a foreign life insurance company in Beijing stand at RMB 200 million (a reduction from the previously required RMB 500 million). For separate branches the requirements were lowered in 2004 from RMB 50 million to RMB 20 million.48
Obviously, these reductions of capital requirements relaxed the limitations imposed on foreign life insurance companies somewhat, but the current requirements is still a lot higher than in other developed countries. Moreover, the experience from other countries proves that high capitalization requirements serve little to and are inefficient in ensuring financial stability and solvency of the business. Finally, they are highly unfair to potential new entrants, thus endangering future development of the Beijing life insurance market.
All the above mentioned problems do not only put the foreign insurance companies in an unfair competitive position, they also reduce their competence by further limiting their right to freely develop suitable products for the market. Furthermore, the inconsistent treatment between foreign and domestic insurance companies in fact violates WTO rules on the treatment of foreign companies, a set of rules to which China has committed itself as a nation when entering the WTO.49
.
48 China insurance regulation committee
49 WHITE PAPER 2006 • AmCham-China
5.2.4. China insurance regulation committee (CIRC)
CIRC’s position itself on the Chinese insurance market does not make this situation any better at all. In fact, CIRC is serving both as custodian of the industry and as regulator at the same time.
In the start-up period, the life insurance industry in Beijing behaved like an “immature child”: it badly needed “parental guidance from authorities”50 to nurture its healthy and swift growth. At that time, many policies and regulations had to be established to achieve this objective. They were remarkably successful. Since then, the requirements of adjustment in policies and control have completely changed due to the rapid growth of the life insurance industry. Currently, the regulator’s responsibilities should predominantly lie in the correction of some market failures. Control is largely redundant, but has not changed drastically from the start-up period. This leads to restrictions in development.
Serving both as the custodian of the industry as well as a regulator, CIRC faces some problems. As a department of government, it hopes that the industry develops fast, but it cannot the guarantee its performance and efficiency. This aggravates the above mentioned problem of emphasis on volume at the cost of sacrificing profit margins and good reputation. It wants to protect domestic insurance companies, but knows that their efficiency can only be improved by increased competition. It wants to keep insurance assets safe but cannot provide enough return on investment to insurance companies due to its stiff regulation. CIRC is clearly doing a very difficult job balancing the management of risks with the generation of protection to domestic companies (and thus again generating new risks).
It is a complicated task to improve its performance when faced with opportunities of new development. Obviously, the original policies of supervision cannot nurture an environment positive to new developments. It is necessary for CIRC to change its direction and manage the promotion of the life insurance businesses’ growth better and more intensely. As the insurance regulator, the current goal of CIRC to enhance its regulatory regime is not sufficient
50 Mark V.T. Xxxxxxxx, Xxxx Xx, China’s insurance market- The giant awakens
and rather inadequate to meet the challenges of a dynamic and competitive marketplace. There is still a long way to go for CIRC.
5.3. Specific factors external to the Beijing life insurance business.
In this section, I identify several external factors that may have imposed constraints on the growth of Beijing life insurance industry.
5.3.5. The financial market in China poses high risks and has an imbalanced structure, thus constraining development of the insurance business sector.
The premium volume collected by insurance companies actually serves to provide policyholders with protection, compensation and annuity. All these payments are based on profit those companies realize from their investments. At present, insurance companies are confronted with big challenges to do so. There is a lack of suitable investment channels, and it is difficult for insurance companies to earn enough money because of the price competition on the market (mentioned before). CIRC moreover requires insurance companies to deposit most of their money into bank deposits to keep investments safe, but the result of this policy is that insurance companies can only get little interest. Even when CIRC loosened this requirement in 2005, insurance companies still faced a severe shortage of potential assets, specifically in long term investment. This is visible in figure 53
Figure 53 the term of bonds
7.5%
3.3%
5.5%
29.2%
4.5%
50.0%
Less than 1 year 1-3 year
3-5 year
5-7 year
7-10 year
More than 10 years
Source: China bond market yearbook 2007
Due to the structure of the long-term assets of life insurance companies, the best investment tool for insurance companies at the moment are bonds, but there are not enough long–term bonds available in China. Only 7.5% of these bonds represent investments with a lifespan of over 10 years51. Moreover, it is forbidden for insurance company to invest in foreign bond and foreign capital market. The lack of investment channels thus seriously damages to the profit margins of insurance companies.
5.3.6. Taxation issues
The taxation policy of the Chinese government also impacts the demand and supply structure of the market for insurance products and its support of the industry.
At the moment, the Chinese governments’ taxation of both employers and employees’ pensions badly influences the implementation of pension systems.52 This stands in contrast to fact that the premium of life insurance allowances is tax-free in other developed countries. The development of the private pension systems in China still needs further authorities’ support.
Currently, in the commercial sector, pensions provided offered by employers to employees have already become a strategy to hire the most competent employees, since it provides them with additional, employer-sponsored retirement income without supplementary costs nor assistance from the state. More and more companies have begun using this method in their process of engaging and keeping the most experienced workers. The development of such a “commercial (private)” pension system also offers growth opportunities for the life insurance industry. As Beijing is one of the more rapidly developing cities in China and the market for employees has become competitive, this private pension system is particularly interesting for the Beijing’s business sector. But, as previously mentioned, taxation systems still obstruct the development of this system.
51 China bond market yearbook 2007
52 primary information from survey
A more favorable tax environment would give customers the incentive to purchase more insurance services. Actually, from a societal point of view, a “commercial” life insurance package covering health and old age issues would be very complementary to the existing social welfare system in China. It would be good to government in keeping costs of the welfare system down and to social stability as well. This is all the more true since the current Chinese social welfare system cannot satisfy all the needs of people. If customers would perceive insurance as a well performing savings product with protective characteristics for their old age, they would be willing to subscribe more insurance policies.
5.3.7. Awareness among customers of insurance systems and their opportunities.
Although the life insurance business exists for more than 25 years now in Beijing, some potential customers still do not understand its importance and characteristics. From a sociological perspective, Beijing’s special social structure has a large impact on demand and supply of insurance services, as well as on the social psychology and traditional ideology of social groups and individuals in Chinese society.
As a communist country, the Chinese government does not put emphasis on insurance systems since the party came to power in 1949. The communist party and government believe “everyone has to work and then get everything for free”. The first Chinese government thus closed all insurance companies and started to provide “free healthcare” to the people and looked after the aging people as well.
No matter how great and advanced this idea seemed, it was ill suited for the China of the fifties with weak economic growth and a large population. This system could only provide in a very low protective level to the people and was not always able to maintain its lowest level from 1956-1978.
In 1980, the life insurance system became more market oriented again, and at the same time, the kind of “free healthcare” and “free care for aging people” began to fade away gradually. However, the consequence of the existence of such a free system between 1949 and 1980, is
“unawareness and unacquaintance of a whole generation of Chinese with insurance services” Many Chinese still do not understand the concept and value of life insurance nowadays and they still prefer saving all their money in bank accounts to prepare for the education of their children, the purchase of a house, and their needs when they start aging. They do not understand nor believe that life insurance can achieve identical or even better results as saving, and even when they do believe it, it is still difficult to change habits easily. This will still be the case for many years without special efforts in “selling” the idea of life insurance to the public. Consequently, the current social structure in China and Beijing in particular has fundamental negative implications to the mid-and-long term growth of the Beijing life insurance industry. This effect will be prolonged in the near future, but it will diminish over time.
5.3.8. Inequality between rich people and poor people
A big gap exists in China between rich and poor people. Wealth distribution is very imbalanced in China. GINI Index is used to measure the income inequality, from 1978 to 2004; the GINI Index has already increased from 0.16 to 0.46853. Moreover, income equality is still increasing. A very large inequality in income exists between rich and poor people in Beijing. Many people are still living in poverty, and there are big also a lot of people only working to support a basic living standard. Based on current growth models in Beijing, this problem cannot be solved in the immediate future and it will still exist for a sustained period of time.
For these poor people, life insurance is still not only a relatively new concept. They also have no clear idea of its benefits. Moreover, even when they understand the benefits, life insurance is not their primary need either. They have to use their income for daily expenses. In other words, they cannot afford life insurance, unless their income would substantially increase.
53 The abstract of China statistics (2005)
Chapter 6 Development Prospect for the Beijing Life Insurance Industry
Undoubtedly, Beijing will keep growing economically at a rapid rate due to globalization, industrialization, urbanization, better education standards, technology reformation and social transformation. Moreover, as the city hosting the 2008 Olympic Games innumerable economic benefits will accrue to Beijing. In this chapter, I will carefully discuss these macro- economic opportunities for the life insurance business in Beijing.
In recent years, the life insurance industry has continually grown in the annual rate of more than 30% in Beijing. Moreover, this growth continues to be fueled by Beijing’s rapid economic expansion, by changing demographics, social welfare reforms and by a more supportive regulatory framework.54The life insurance market in Beijing is large; it grows rapidly and offers plenty of opportunities to all the insurance companies. This chapter will discuss these opportunities from the prospective of an environment being in rapid change due to economic and social development.
6.3 Social factors influencing the insurance business.
6.1.2. Continuous growth of the population
The continuous growth of the population will provide a large opportunity for the life insurance business as the market will grow in volume. But when talking about population in Beijing, one thing we should notice is that there are two terms “Registered permanent residence” and “residential population”. This is a specific Chinese characteristic. The difference is the following: “Registered permanent residence” refers to people who got a legal identity card to stay in Beijing , whereas “residential population” refers to people staying more than a half year in Beijing for working, studying or some other purposes and who do not possess a local identity card. Bearing these two terms in mind, readers can more easily
54China’s insurance market –the giant awakens
understand the current population situation in Beijing and will not be confused about the reasons why population increases so fast in Beijing. Most literatures only focus on the first category.
“Registered permanent residence” did not increase so fast in Beijing. Annual growth only stands at 1.31% in 2007. But the growth rate in residential population was much higher than that. It stood at 3.29% in 2007. According to demographic data, the total “residential population” in Beijing is more than 16.33 million, nearly 1.5 times of the Belgian population, “Registered permanent residence” was only 12.13 million.55 (See figure61).
Figure 61 population change in Beijing
Ten thousand
2000
1500
1000
500
0
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Registered permanent Residence
Residential population
Growth rate of registered Permanent residence
Growth rate of residential Population
2000
1108
2001 2002 2003 2004 2005 2006 2007
1121 1136 1149 1163 1181 1198 1213
1364
1383
1423
1456
1493
1538
1581
1.12% 1.17%
1.41% 1.10%
1.23% 1.53% 1.43%
1633
1.31%
1.42% 1.44%
2.88% 2.33%
2.49% 3.03% 2.80%
3.29%
Source: Beijing statistical yearbook 20002007
As the capital of China, Beijing attracts millions people to work. The preparation of the Olympic Games in 2008 needed millions of workers, also on extraneous people (see figure 6 2) .According to the Chinese definition, these people are “residential population” rather than “Registered permanent residence”. But the “residential population” is also potential customers for life insurance products.
55 Beijing statistical yearbook 2000-2007
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
Extraneous population | 256.1 | 262.8 | 286.9 | 307.6 | 329.8 | 357.3 | 383.4 | 419.7 |
Figure 62 extraneous population increase from 20002007
Million 450
400
350
300
250
200
150
100
50
0
Source: Beijing statistical yearbook 20002007
The relationship between population, its growth and life insurance premium can be statistically investigated. The correlation coefficient between population and life insurance premium is 0.907 (pvalue =0.0018). Thus the correlation is very strong.
6.1.2 Appearance and growth of middle class people
As the political and economic center in China, Beijing offers more potential development opportunities and relatively higher salaries. As a consequence, Beijing has a very rapidly growing middle-class. The middle-class society, which did not exist before, is composed of higher-education and higher-income people. They need better protection of their income and more specific health insurance schemes. Furthermore, they like to invest their money in lucrative investments much more than in bank savings, as many other people do in China. Generally, insurance is viewed by them as an interesting investment option. As this middle class keeps growing in Beijing and constitutes the main segment of the market targeted by life insurance companies in the future, demand for life insurance products is expected to keep growing as well.
6.1.3 The growth of the aging population in Beijing.
Due to the one-child policy and significant improvements in living standards, China’s aging problem becomes more serious than in many other countries of the world. In 2000, the old age population (65+) represented 6.96% of the total population. Many countries have entered the stage of a society before, but the speed with which this happens in China is much faster than elsewhere. The average growth in aging population on world level is 2.5 % on world level, according to UN estimates, whereas in China it will be 3.3%.56(See figure 63)
Figure 63 age distribution in China
Source: Xxxxx Xxxxxx, the Ageing Society of China and the role of the Actuarial Profession
Moreover, the situation is more serious in some major cities like Beijing than in China as a whole. The aging population represented 8, 4 % of the population of Beijing in 2000; it was 8.9% in 2001 and 10.4% in 2002. If this growth rate continues, it will be nearly 25% in 2020.57
Obviously, Beijing did not prepare well for this problem. The government cannot provide enough pension and health care for 5 million people under current social security regulations and social welfare policy, which gives a wide covering at a rather low level. Moreover, this system only is implemented for urban people. People living in the countryside of Beijing cannot enjoy the same advantages when they grow old. They must rely on their own savings and on their family much more. People living individually do not have the support of their
56 Xxxx Xxxxxxx, Speedy Aging in China：Its Problems＆Policy
57 China national committee on aging
children and care which habitual families enjoy at home. A normal Chinese family pattern consists of a 4-2-1 structure, meaning that the composition is 4 grandparents, 2 parents, 1 child.
The importance of life insurance systems is clearer in view of this development, certainly in the Beijing areas. Individual households and aging people clearly represent an interesting segment as well.
Due to the modern health services and significant improvements in the living standard, Chinese people live longer than before. At the end of 2005, the Chinese insurance business started implementing a new mortality table. The new life mortality table is derived from 100 million life insurance contracts owned by six big insurance companies from 2000 till 2003 (see table 61). This table indicates that life expectancy grew significantly since 2000.
Table 61 China life mortality table
Source: 1993 China life mortality table and 2003 China life mortality table
Comparing to these data to 1993, indicates that Chinese men live 4.8 years longer now and women live 4.7 years longer. For insurance companies it is a fact that the longer people live, the more pension and health care they need, the bigger potential market will be.
6.1.5 Health insurance system changes
The Chinese government began implementing the “Basic Medical Insurance” system58 at the end of last century. Basic medical insurance consists of two parts: “daily cost account” and “co-insurance systems”. Urban employers pay extra money for their employees to fund a cost account monthly, on the other side, employees also need to save extra money into this cost account monthly. Currently, employees pay 4% of their monthly salary and employers pay the 8%. Day-to-day health costs are paid from this account.
If employees get seriously ill, the co-insurance system begins to use. Nearly 80% of the specific expenses will be paid by the co-insurance system however. This system is financed and managed by local or provincial authorities; the rest is paid by employees themselves. Figure 64 basic medical insurance system
Source: China's basic medical insurance system covers 221 million people
Basic medical insurance provides a very basic health protection for urban employees, just like its name indicates. It also has many limitations in expenses for medicine, medical devices, surgical methods and material and so on. It also does not pay for Computed tomography (CT), magnetic resonance（MRI）, CDI/CDF and other advanced medical examinations. In one word, Basic medical insurance does not pay for any expensive cost, no matter how well the clinical effect is.
58 China's basic medical insurance system covers 221 mln people, xxxx://xxx.xxxxxxxxx.xx/
According to the WHO, China’s health care ranking is 144 out of 190 countries59, and it is really difficult for common Chinese people to pay for the very expensive medical costs. Under these circumstances, health insurance has already become the most important insurance market in China. With more than 4 million of “floating” population in Beijing, who urgently want to find some protection for their health risks, the prospect for the health insurance market in Beijing is bright.
6.2 Rapid Economic Growth
6.2.3. Anticipation of fast economic growth
1000
800
600
400
200
0
As mentioned before, the level of development of the insurance industry is ultimately determined by the level of economic development and the level of consumer recognition. The growth of Beijing life insurance industry closely relates to the increase in economic because the high economic growth will increase the income of the insured and thus increase the demand for life insurance service. The healthy, quick increase in economic is the foundation of the growth of life insurance. The correlation relationship also can be found in figure 65 .it clearly shows that the volume of life insurance premium increases with the growth of GDP. Figure65 life insurance premium increases with the growth of GDP
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
GDP( billion Yuan) | 246 | 281.76 | 313 | 361.2 | 428.33 | 681.45 | 772.03 | 900.62 |
Life premium( hundren million Yuan) | 60.1 | 102.7 | 182.6 | 230.6 | 213 | 430.6 | 327.1 | 386.4 |
Source: Beijing statistical yearbook 2000-2007
59 WHO website
Undoubtedly, this trend in economic growth will not stop in the near future. According to current economic predictions, the economy in Beijing will maintain high growth figures for at least the next 20 years, which will provide guarantee strong growth in the life insurance business as well.
According to a survey of all the insurance companies, they expect the Beijing life insurance market to continuously grow in the future, in concordance with growth of GDP in China.60
As a consequence of the above mentioned economic growth, life of people in Beijing has changed dramatically. The people’s living standards have been improving and disposable income increased, while the percentage of expenditure for basic living costs in total personal expenditure has decreased considerably in all income categories. Xxxxx'x Coefficient was used to present this fact, (see figure 66). From 2000 to 2007, the average disposable income of people in Beijing nearly doubled and Xxxxx'x Coefficient decreased constantly.
2.5
2
1.5
1
0.5
0
Figure 66 Engel's Coefficient and individual income
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |
Disposable income | 1.0349 | 1.1578 | 1.2464 | 1.3883 | 1.56378 | 1.7653 | 1.9978 | 2.1989 |
Xxxxx'x Coefficient | 0.363 | 0.362 | 0.338 | 0.327 | 0.322 | 0.318 | 0.308 | 0.306 |
Source :beijing statical yearbook 20002007
60 Nian-Xxxx Xxxx, Chinese Insurance Market: Opportunities and Alternatives
Figure 67 20002007 Beijing saving and life insurance premium | ||||||||||
400 300 200 100 0 | ||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||
Life premium (hundred Million) | 60.1 | 102.7 | 182.6 | 230.6 | 213 | 230.6 | 327.1 | 386.4 | ||
Saving (ten billion) | 29.23 | 35.36 | 43.9 | 52.94 | 61.22 | 83.16 | 86.3 | 91.5 | ||
500
At the same time, we also see that bank savings have also increased dramatically. Figure6-8 shows this phenomenon. Due to the fact that insurance can be considered as an alternative to bank savings, one can expect that more and more money will eventually be invested in life insurance funds in the future. This is shown clearly in the figure and statistical correlation tests also show the correlation existing between savings and life insurance premium. The correlation coefficient between them is 0.921（Pvalue=0.001）.
To some extent, life insurance is a “luxury” product: customers must have enough money to be able to afford it. The more money people own, the more they think about safeguarding their savings and the interest they can get on investments. Both theoretical approaches and experiences from other countries’ life insurance industries show that when people’s average income levels are high enough, there will be a tremendous impact on the life insurance industry. 61 According to the growth levels in Beijing, this further development can be expected soon in Beijing, maybe just in 5-10 years.
6.2.3. Need for new investment channels
As mentioned before, people’s disposable income in Beijing has increased dramatically, which leads them to think about how to use their money wisely. For common people in Beijing, there are only limited investment options to choose from. People still like to save money in bank accounts and sometimes invest in the stock market. Compared to the above
61 China Life Insurance Industry Development Report, 2007
mentioned 12% investment rate in life insurance business in other developed countries, at present, the proportion of investments in life insurance is only 7% in Beijing. Nearly 93% of the financial assets of residents are thus deposited in banks or invested in stocks.62
But the results of investments in these two investment channels are not necessarily good, interest rates of bank decreasing continuously. Currently, the interest rate for a one year deposit stands only 4.3 %. Moreover, government tax stands at 20% on interests. Finally, the real interest rate is only 3.4 %, 63which cannot satisfy many customers forever.
On the other hand, although the stock market exists since 15 years in China, it is not as well developed as in other developed countries. People cannot earn money as these markets are still very instable, most stock prices are overvalued, corruption and business based on internal knowledge are very common. Moreover, a transparent and scientifically based stock market system was still not established in China. The political factor still heavily influences the stock market and big investors control the development of the stock market. Moreover, the immature Chinese stock market can not follow the international market transition, this cause more fluctuation in the market. This problem became more seriously in last 12 months. The stock markets’ index changed dramatically, and millions of people lost much their investment. (See figure 6-9).
Figure 68 stock market index in China (from Jan, 09, 08 to May, 23, 08)
62 Beijing insurance industry development research
63 China Bank
Source: xxxx://xxxxxxx.xxxx.xxx.xx.
Due to low revenues from investments in both bank accounts and stocks, more and more people are beginning to look for alternatives and to switch their investments from traditional investment channels to the life insurance sector, a phenomenon that will be strengthened in the future when the underlying reasons do not change fundamentally.
6.3 Changes in the law and government Policies
6.3.1. Changes in the authority of CIRC
.
Some changes have already been made to the strategy followed by the CIRC since 2006. Previously we have already explained the role of CIRC, in this section we will describe the major regulatory measures taken by it since 2006. The information source is the website of CIRC. (http:// xxx.xxxx.xxx.xx)
I. Measures to Boost the Insurance Industry. 64
Adhering to the marketoriented principle, the CIRC has adopted a series of policies and measures to accelerate development of the industry and has made breakthroughs in tackling problems and removing obstacles endangering the development of the insurance industry.
(1) Improving the Market Access Mechanism
(2) Broadening Insurance Fund Management Channels
(3) Increasing Financing Channels of Insurance Companies
(4) Pushing forward Administrative Reform
II. Measures to Strengthen Risk Prevention
The CIRC considers risk prevention as a project of systematic engineering and tries to build 5 lines of defense against risks, namely, internal control as the basis, supervision of solvency
64 CIRC, http:// xxx.xxxx.xxx.xx
and adequacy as the core, onsite inspection as an important means, fund management regulation as a key link and insurance security funds as a protective screen.
(1) Strengthening Internal Management
(2) Strengthening Supervision of Solvency Adequacy
(3) Reinforcing Onsite Inspection
(4) Strengthening Supervision of Fund Management
(5) Establishing and Improving Insurance Security Fund System
All insurance companies look forward to the relaxation of regulation as one of the most important changes in last few years. The desire to increase the number and diversity of investment channels and the willingness to accept stronger competition for new domestic companies both present a big opportunity and incentive for foreign insurance partners.
6.3.3. Changes in the financial market
▪ allowing insurance companies to invest in AArated (or better rated) corporate bonds and increasing the acceptable limit to 20% of the company’s assets
▪ proposing that the State Council (China’s governing body) allows insurance companies to invest in major infrastructure projects
▪ Studying the feasibility of allowing insurance companies to invest in the overseas market, despite the foreign exchange risk. There is also concern about funds being drained out of the domestic market and the impact off foreign exchange controls.
▪ Allowing the list of insurance companies to invest in the stock market, so that they can draw funds form the stock market. 65
The pace of development is remarkable. A major change occurred when three big domestic insurance companies (PICC, Ping An and China Pacific), were listed on the Chinese, Hong Kong and New York Stock exchange. It is the beginning of the financing of domestic insurance by other financial resources from both China and the global financial market. Moreover, there are a few companies waiting for further approval.
These regulatory changes will relax restrictions considerably and permit life insurance companies to actively use more investment opportunities. They enhance the ability of life insurance companies to earn more money and will have a positive impact on investment performance. Insurance companies will also be capable of to focusing more on long-term investment methods and opportunities.
6.4 Product innovation and growth of insurance companies
Both factors are specific and influence growth on the Chinese life insurance market.
With the development of the life insurance products, currently, beside of his protection function, life insurance also can harness savings, facilitate efficient use of capital funds, and therefore act as a new kind of financial tool.66
Currently, the life insurance industry in Beijing offers a wide variety of products which range from basic protection to investment tools. Besides got protection from the traditional
65 Mark V.T. Xxxxxxxx, Xxxx Xx, China’s insurance market- The giant awakens—restate CIRC’s policies
66 Xxxxxxx Xxx, Universal Life Insurance - A Tool For Wealth Management
insurance, the customers share the profit of insurance company and gain much more flexibility, such as to increase or decrease coverage, to choose premium payment, or to achieve high economic return when insurance company gain in investment and operation. So the Investment-Linked Insurance and Equity-linked Insurance is good tool for both protection and investment. Meantime, the insurance industry also changes his position from “product seller|” to “financial planner”. Moreover, the income from insurance is tax free in China, which gives incentive for customer to buy this new product.67
From the aspect of social development, this new product also caters for the need of people. With the enhancement of living level and health science, the predict life is longer. At this situation, people need to prepare for his agedness, and insurance industry also need to provide the protection for people’s wealth after retirement. The new product satisfies both insurance companies and customers, which both gives survival return and mortality charge68
6.4.2. The increase of the number of insurance companies in Beijing
Due to its the huge population and rapid economic and social development, China has already become one of the most attractive markets in the world, also for life insurance. Beijing takes a particular place in this market and as we have previously mentioned the number of insurance companies and the volume of insurance premium have dramatically increased. Growth prospects are immense and stand an estimated 20 % over the next couple of years. Many domestic and foreign insurance companies are already present on the market and many more wait approval of their entry. With more players on the market, the market will also become more dynamic as new products will be developed and thus new customers interested. The structure of a more open market always creates growth opportunities by the openness itself. 69
67 Xxxxxxx Xxx, Universal Life Insurance - A Tool For Wealth Management
68 Xxxxxxxx X, Variable Universal Life (VUL)
69 Xxxxxx Xxxxx, xxx xxxxxx, China insurance market review
6.5 Beijing 2008 Olympic Games
Finally, one very important factor temporarily has great influence on the prospects of the insurance market in the Beijing area. As host city of the Olympic Games, many new projects in building and renovation of the city have been undertaken and a lot of workers temporarily reside in the area. They will not all leave the city later and thus present potential customers. Moreover the Games will increase the GDP of the area substantially in 2008 and probably later as well although at a lower level. In this section the influence of this specific factor on the insurance market is described in flowing aspects:
1. The budget for 2008 Olympics games is 20 million dollars70, it will directly increase insurance companies’ margin income.
2. Based on the research of Liu Jinsheng71, Olympic game can directly promote local insurance market long-term development through increasing insurance awareness and enhance economic development.
3. Olympic game promotes international communication and brings more open international environment and more foreign investment, and then promotes insurance development.
4. Olympic game promotes the perfection of regulation and policies, provides good opportunity for insurance industry regulation system.
6.6 Natural disaster
On 12,May ,2008, eight-magnitudes earthquake happened in Sichuan province, China, and caused serious people casualty and property damage, nearly half of China all perceived the earthquake in different magnitude at the same time, including Beijing city.
70 China Olympic Committee
71 Olympic economic and Olympic insurance
This serious natural disaster and results awaked people’s insurance awareness. Based on the information provided by my original colleagues, the sales status of life insurance increased largely in last 10 days, was nearly 2.5 times 72than average level.
72 primary data from consultant
Chapter 7 Medium Term Growth Potential of the Beijing Life Insurance Industry and Sector
From the previous chapters we can conclude that the insurance business in Beijing is booming and has bright future growth prospects because of many different factors. But how fast will this market grow? A quantitative research model will be applied in this chapter to predict the growth of the life insurance sector in Beijing in the next five years. A few statistical models for prediction can be constructed to achieve this goal: they will be presented and an evaluation of previous equivalent research will also be performed.
When constructing a statistical method to predict the life insurance industry growth in Beijing in the next five years, many influencing factors must be taken into account.
These factors can be subdivided into three categories:
• economic factors, including GDP, average income, interest rate, CPI index and so on;
• social factors, including insurance awareness, educational level, government policies and the social security system and so on; and
• Supply in the insurance business, including the number of insurance companies, the types of products and services offered, the pricing system and competitive situation of the market.
The influence of insurance supply will not be discussed in this chapter. I will try to predict the future development of the industry mainly from the point of view of premium volume.
Normally, two approaches can be used to analyze the potential development of premium volume in the insurance: a method using a statistical regression model73 and the key index method74. I will implement both of them to analyze the potential of the Beijing life insurance industry.
7.1. The method using Statistical regression analysis
73 Xxx xxx ,China insurance industry development status and premium development prediction
74 Xxx xxxxxxx , Chinese insurance development perspective analysis,
xx xxxxx, the change of insurance depth and insurance density and the prediction of China insurance market
In this section I first develop a regression model in two consecutive stages and then try to implement it in predicting future growth of the life insurance sector in Beijing.
7.1.1. Construction of the statistical regression model
For this analysis, I use data published by the Beijing Insurance Regulatory Committee and Bureau of Statistics of Beijing as shown in table 71. The unit of measurement used for GDP and life premium volume is hundred million Yuan, the unit used for income is Yuan, for population it is 1000 people, and for the CPI index and interest it is %.
Table71 Relevant statistical index from 1994 to 2007 in Beijing
Year | GDP | Life premium | population | income | index | interest |
1988 | 410.22 | 0.55 | 1001.2 | 1436.9 | 120.4 | 7.56 |
1989 | 455.96 | 0.85 | 1021.2 | 1597.1 | 117.2 | 10.89 |
1990 | 500.82 | 1.13 | 1032.2 | 1787.1 | 105.4 | 10.02 |
1991 | 598.89 | 1.37 | 1039.5 | 2040.4 | 111.9 | 7.92 |
1992 | 709.1 | 2.64 | 1044.9 | 2363.7 | 109.9 | 7.56 |
1993 | 863.53 | 3.41 | 1051.2 | 3296 | 119 | 9.26 |
1994 | 1084.03 | 4.57 | 1061.8 | 4731.2 | 124 | 10.98 |
1995 | 1394.89 | 8.66 | 1070.3 | 5868.4 | 117.3 | 10.98 |
1996 | 1615.73 | 21.23 | 1077.7 | 6885.5 | 111.6 | 9.36 |
1997 | 1810.09 | 61.56 | 1085.5 | 7813.1 | 105.3 | 7.17 |
1998 | 2011.31 | 60.19 | 1091.5 | 8472 | 102.9 | 5.15 |
1999 | 2169.7 | 60.9 | 1099.8 | 9183 | 100.6 | 3.02 |
2000 | 2460 | 60.1 | 1363.6 | 10349 | 103.5 | 2.25 |
2001 | 2817.6 | 102.7 | 1383.3 | 11578 | 103.1 | 2.25 |
2002 | 3130 | 182.6 | 1423.2 | 12464 | 98.2 | 2.03 |
2003 | 3612 | 230.6 | 1456.4 | 13883 | 100.2 | 1.98 |
2004 | 4283.3 | 213 | 1492.7 | 15637.8 | 103 | 2.25 |
2005 | 6814.5 | 230.6 | 1538 | 17653 | 104.2 | 2.25 |
2006 | 7720.3 | 327.1 | 1581 | 19978 | 105.9 | 2.52 |
2007 | 9006.2 | 386.4 | 1633 | 21989 | 108.6 | 3.46 |
For the reason of difference source, the big difference in population between 1999 and 2000.
Source: Beijing Insurance Regulatory Committee and Bureau of Statistics of Beijing
In order to improve the stability of samples, the natural logarithm of each of the data variables was used to construct the regression model. The software used in constructing the model is SPSS 13.
The structure of the model we wanted to test is as follows:
Lm (formula) =
Life insurance premium income ~ Gdp + Pop + Inc + Ind + Int + ε)
In which:
Pop is population (1000 people),
GDP is gross domestic production (hundred million Yuan), Inc is personal income (Yuan),
Ind is CPI Index (%), Int is interest rate (%),
Life insurance premium income (hundred million Yuan)
First, get natural logarithm of each of the data, and then construct regression model The results of the SPSS analysis using the table above are as follows:
Table 72 Coefficients(a) of full model | ||||||
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
B | Std. Error | Beta | ||||
1 | (Constant) | 12.127 | 8.836 | 1.372 | 0.192 | |
INDEX | -5.677 | 1.432 | -0.173 | -3.963 | 0.001 | |
INCOME | 1.950 | 0.411 | 0.780 | 4.745 | 0.000 | |
POP | -0.211 | 1.226 | -0.017 | -0.172 | 0.866 | |
GDP | 0.267 | 0.472 | 0.113 | 0.565 | 0.581 | |
INTEREST | -0.008 | 0.245 | -0.002 | -0.031 | 0.976 | |
a. Dependent Variable: PRE | ||||||
The result shows that only income and CPI index are significant variables in the regression, so I constructed a simpler model using these two variables only in a second stage. The structure of the regression model thus becomes:
Lm (formula = Life insurance premium income ~ Inc + Ind + ε) (the same units and same definition as above equation)
The results of the SPSS 13 analysis are as follows:
Table 73 Coefficients(a) of model | ||||||
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
B | Std. Error | Beta | ||||
1 | (Constant) | 9.820 | 4.745 | 2.070 | 0.054 | |
INDEX | -5.554 | 0.925 | -0.169 | -6.006 | 0.000 | |
INCOME | 2.203 | 0.070 | 0.881 | 31.355 | 0.000 | |
a. Dependent Variable: PRE | ||||||
Table 7.4 Model Summary | |||||
Model | R | R Square | Adjusted R Square | ||
F Change | Sig. F Change | ||||
1 | .996(a) | 0.992 | 0.991 | 1,036.946 | 0.000 |
a. Predictors: (Constant), INCOME, INDEX | |||||
From above statistical result, I got the following regression model:
Ln (life premium) = 9.82 5.554 Ln(index)+2.203 Ln(income)
This formula shows that the life insurance premium volume is positively correlated with income and negatively correlated with the CPI- index.
7.1.2. Prediction of the premium volume growth according to the regression model
At first, we should investigate the CPI index and income more closely. CPI index increased very fast in last three years and caused instability in society because it leads to a substantial reduction in real term living standards of the people. The central government is consecrating more attention to it and strives to control the increase. The objective is to attain a reasonable level of 4% in this year. However, taking other factors such as enforcement problem, economic transition, and nearly natural disaster and so on into account, we suppose the index will stay around 5% in next five years.
With regard to the income level, through research about it over the last five years, I can state that the average annual growth rate stand at 12%. It is reasonable to assume that this figure will be representative for the annual growth rate in next five years as well because based on the previous data, the average growth rate in last ten year is 12.1%, at the same time, and it is undoubtedly that people’s income will increase with the economic development, as mention in above chapter.
Using these figures as input for the equation obtained by the regression analysis, leads to the following results (see table 75 and figure 71) .
Figure 71 Life premium prediction
100 million Yua1n400
1200
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200
0
Table 75 predict result of premium income
Year | Income | CPI Index | Life premium |
2008 | 24187.90 | 105.00 | 496.77 |
2009 | 28057.96 | 106.05 | 651.86 |
2010 | 32547.24 | 107.11 | 855.37 |
2011 | 35801.96 | 108.18 | 998.48 |
2012 | 41530.28 | 109.26 | 1310.21 |
2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
Life premium | 102.7 | 182.6 | 230.6 | 213 | 230.6 | 327.1 | 386.4 | 496.77 | 651.86 | 855.37 | 998.48 | 1310.2 |
The average growth rate is predicted to be around 27.8 %, which is a little less than the average growth rate over the last 10 years, which was 30%. But this figure is probably more realistic and will be easier to be realized in the future. It also shows that the overheating of the Chinese economy will somewhat be alleviated after 2008.
This result can be compared to several macro-economic research studies performed in China and using statistical regression as well.75 Their results are somewhat higher as mine. The Beijing insurance Regulatory Committee for instance concluded in 2005 that the premium volume in 2005, 2006 and 2007 should be respectively 40.1, 45.9, and 52.7 billion Yuan76 on the basis of these models. These data are much higher than the real figures.
The origin of the deviations between the macro-economic models and our regression model stems from the selection of different variables for the regression model. Most researchers suppose that GDP is the most important factor to the Beijing life insurance industry, and did not consider income as a factor. This creates a huge difference since millions of Yuan have been invested over the last years in huge city construction projects as a preparation of the 2008 Olympics. The growth of GDP is thus probably overvalued for future years. In our model the income is used as a variable, which is more logical: there is no direct or dramatic impact of the one-off Olympic project on it. On the contrary, increase income did not increase as fast as GDP in the pre-Olympic period so that in spite of the huge GDP growth, people still cannot easily afford insurance. Other researchers have built a model based on world average insurance curves like the ones mentioned by Liuwei77, but the problem of this method, is that it does not take differences between Beijing and other areas of the world into account. This also causes an overestimate in premium volume prediction. For these reasons we believe that our results, though lower than others, are more realistic and predict future development somewhat better.
Undoubtedly , there are also some shortages in the regression model I constructed, such as the use of natural logarithms, which is based on the assumption that the growth rate between income, index and life premium follows a linear regression. This is certainly suitable for short and medium-term predictions and in some special period, but it is not always consistent with the development over a longer-term period. But it can at lest be used to give a more realistic idea of future development of the life insurance industry in Beijing.
75 Xxx xxxxxxx , Chinese insurance development perspective analysis, china insurance development research
76 Beijing insurance industry development research
77 Xxx xxx ,China insurance industry development status and premium development prediction
7.2. Key Index Method
This method tries to predict the growth rate of premium volume through the utilization of two key indexes, insurance depth and insurance density, along with the forecasted value of future GDP and population growth.
The calculation mechanism is the following:
Insurance depth = Life Insurance Premium Volume/ GDP;
Thus it should be that:
Forecasted Life Insurance Premium Volume = Insurance depth*Forecasted GDP Insurance density = Life Insurance Premium Volume/ Population;
Thus it should be that:
Forecasted Life Insurance Premium Volume = Insurance density * Forecasted Population
7.2.1. Collection of basic data
Table 76 shows the development of the different variables used in those equations in Beijing since 2000.
Table 76 Relevant data from 2000 to 2007 | ||||||||
Year | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 |
GDP in 100 million Yuan | 2460.00 | 2817.60 | 3130.00 | 3612.00 | 4283.30 | 6814.50 | 7720.30 | 9006.20 |
Life premium in 100 million Yuan | 60.10 | 102.70 | 182.60 | 230.60 | 213.00 | 230.60 | 327.10 | 386.40 |
population in 1000 | 1363.60 | 1383.30 | 1423.20 | 1456.40 | 1492.70 | 1538.00 | 1581.00 | 1633.00 |
insurance depth | 2.44% | 3.64% | 5.83% | 6.38% | 4.97% | 6.32% | 4.24% | 4.29% |
insurance density | 440.75 | 742.43 | 1283.02 | 1583.36 | 1426.94 | 1499.35 | 2068.94 | 2366.20 |
Growth rate of these two indexes | ||||||||
growth rate of insurance depth | 49.19% | 60.05% | 9.43% | - 22.11% | 27.07% | - 32.95% | 1.26% | |
growth rate insurance density | 68.45% | 72.81% | 23.41% | -9.88% | 5.07% | 37.99% | 14.37% | |
average growth rate of insurance depth | 13.14% | |||||||
average growth | 30.32% | |||||||
rate insurance density
Source: Beijing Insurance Regulatory Committee and Bureau of Statistics of Beijing
According to the average growth rate in insurance depth and insurance density since 2000, we can easily predict the future values of these two indexes. (See table 77)
Table 77 Prediction of two indexes for the next five years | |||||
2008 | 2009 | 2010 | 2011 | 2012 | |
insurance depth | 4.85% | 5.49% | 6.21% | 7.03% | 7.95% |
insurance density | 3083.57 | 4018.44 | 5236.74 | 6824.39 | 8893.39 |
7.2.2. Forecasting GDP and population in the future
The average GDP growth rate was nearly 20% over the last seven years. Since this is extremely fast and the organization of the Olympics with all its construction projects in infrastructure and logistics contributed largely to it, I do not think this growth will continue in the near future at the same level.
When focus on the data from 1995 to 2004, on the purpose of reducing the influence by Olympic game, the average growth rate in that period was 12.49%, on the other hand, the average GDP growth in whole China is nearly 8% in last twenty years. As the capital and the central of economics, 10% looks like a more realistic and achievable objective for growth in GDP the next five years in Beijing. Maybe it has deviation in prediction, but it try to provide some useful guidance for the life insurance industry development in Beijing.
Over the last 7 years, population in Beijing grew with 384.9 thousand. Since population regulation (one child policy) is not likely to change in the next couple of years, I assume that the increase in population will continue at the same level in the next five years.
Integrating these data into the formulas mentioned in the previous paragraph, results in the following tables (see table 78. 79 and figure 72,73), using life insurance depth and life insurance density respectively:
Using life insurance depth the table looks as follows:
100 million Yuan
1400.00
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Figure 72 Life premium
Table 78 using insurance depth to predict premium income
Year | GDP | Insurance depth | Life premium |
2008 | 9906.82 | 4.85% | 480.88 |
2009 | 10897.50 | 5.49% | 598.45 |
2010 | 11987.25 | 6.21% | 744.77 |
2011 | 13185.98 | 7.03% | 926.87 |
2012 | 14504.58 | 7.95% | 1153.50 |
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
Life premium | 60.10 | 102.70 | 182.60 | 230.60 | 213.00 | 230.60 | 327.10 | 386.40 | 480.88 | 598.45 | 744.77 | 926.87 | 1153.5 |
The average predicted growth rate of life insurance premium volume is 24% following this key index.
Using life insurance density the table looks as follows:
Table 79 using insurance density to predict premium income
Year | Population | Insurance density | Life premium |
2008 | 1671.49 | 3083.57 | 515.41 |
2009 | 1709.97 | 4018.44 | 687.14 |
2010 | 1748.46 | 5236.74 | 915.62 |
2011 | 1786.94 | 6824.39 | 1219.48 |
2012 | 1825.43 | 8893.39 | 1623.42 |
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
Life premium | 60.10 | 102.70 | 182.60 | 230.60 | 213.00 | 230.60 | 327.10 | 386.40 | 515.41 | 687.14 | 915.62 | 1219.4 | 1623.4 |
100 million
Xxxx
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Figure 73 Life premium
The predicted average growth rate is then 33 %.
7.3. Summary of our predictions
In Summary, we have forecasted growth of life insurance premium volume in three different ways. The different results we obtained are listed below in table 710 and Figure 74 .
Table 710 summaries of prediction results
Year | Life premium volume according to the insurance depth method | Life premium volume according to the statistic regression method | Life premium volume according to the insurance density method |
2008 | 480.88 | 496.77 | 515.41 |
2009 | 598.45 | 651.86 | 687.14 |
2010 | 744.77 | 855.37 | 915.62 |
2011 | 926.87 | 998.48 | 1219.48 |
2012 | 1153.50 | 1310.21 | 1623.42 |
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2008 2009 2010 2011 2012
Life premium
(Insurance depth method)
Life premium (statistic Method)
Life premium (insurance Density method)
1800.00
Figure 74 Comparison of three methods
100 million Yuan
Thus the forecasted growth rates of life insurance premium in Beijing range from 24 % to 33
%, with 28 % as the result of the third method. All three methods, using both linear regression and linear equation, lead to rather similar results depicting the future growth of life insurance premium volume in Beijing. Although the results are clearly differing from other economic predictions mentioned before, their similarity renders more confidence to the results we have obtained. Thus we think these predictions are fairly reliable and trustworthy, in spite of the limitations of the methods used, which mentioned in paragraph 7.1.2. And of which the assumption that economic growth follows a linear path is probably the most difficult one to defend.
Chapter 8 Conclusion and recommendations
We try to enumerate all these factors in a SWOT-table below. A SWOT-table lists factors influencing the future development of a company, a product or an industry by subdividing them in both external opportunities and threats and internal weaknesses and strengths.78 The SWOT-analysis in this case is mentioned in table81.
Table 81 SWOT analysis of the Beijing life insurance market
• Continuous high annual growth of GDP • Large and growing population in the Beijing area • Insurance depth and density are still lower than in comparable developed regions of the world • Gradual opening up of the market in line with the transition to a more market oriented economy • Hosting city of 2008 Olympic Game • Natural disaster increase people’s | • Imbalanced income structure (large difference between poor and rich people) • Unawareness of people of the advantages of life insurance savings and investments • Imbalanced structure of the financial market (limited possibilities to invest in different financial products, at home in China as well as abroad) • Stringent regulation for the entrance of foreign insurance companies (capital requirements, limitation of |
78 Xxxxxxxx,Xxxxxx X ,simplified strategic planning : A No-nonsense guide for busy people who want results fast
insurance awareness • New products development, in health, pension and other sectors • High educational people continually go to Beijing • Middle-class people increase • Society translation to aging society • With the SOA and CFA exams hold in China, more people get actuarial and financial knowledge • High salary offered for some technical position encourage more people enter life insurance industry • | simultaneous opening of different branches…) • Unclear role of CIRC • Unfavorable taxation system • China communist party’s orientation • Shanghai and Tianjin become the central of economics • fierce competition from foreign insurance companies and more underground insurance contacts • high financial risk in outside investment • same category participant product from bank industrial |
• Industry is 30 years after partial liberalization of the market embedded in social and economic life • People have become gradually aware of the necessity to complement social security and health care systems with private life insurance • Some Insurances has become obligation for employees and employers • A large amount of experienced staff • More than 40,000 sales personnel’s can direct sale life insurance products to their families and friends | • Focus on scale • Price competition • Most products are standard products and little sophisticated • Little focus on the development of more sophisticated products and services • Incomplete asset management • Xxxx of trained, staff Without systematic training and professional knowledge, sometimes fraud happen • Insufficient salaries for sale personnel , thus high turn-over of staff |