Joy A. Schwartzman, FCAS Principal & Consulting Actuary Forbidden City, Beijing The Property – Casualty Insurance Market in China Casualty Actuaries of Greater New York – Spring Meeting 2004 China has been liberalizing access to its insurance market in the past two years following commitments under terms of its World Trade Organization (WTO) ascension (December 2001). 2 Outlook of Chinese insurance industry demonstrated when China’s two largest state-owned insurance companies listed on Hong Kong Stock Exchange China Life and PICC stocks were oversubscribed by 743 and 136 times, respectively! 3 Since 1978, China’s economy has boomed as a result of sweeping economic reforms. Source: China Statistical Yearbook, 1999. 4 China’s economy continues to grow rapidly, with a GDP real growth rate of 8% annually Property and Casualty insurance premiums have been growing at 13% per annum 2002 premiums 78B RMB ($9.4B), 0.7% of GDP China’s population of 1.3B is 4 times the US. 2002 US P&C premiums $370B, 3.5% of GDP 5 China Property & Casualty Insurance Market Local Companies Company 2002 Market Share PICC CPIC Property 70.5% 13.1% Ping An Property 10.6% Huatai Tianan Sinosure China United Da Zhong Yong An Sinosafe Total 1.0% 0.9% 0.7% 0.7% 0.7% 0.4% 0.4% 99.0% 6 Strategic Foreign Investors AIG (9.9%) None HSBC(10.0%) Morgan Stanley (6.8%) Goldman Sachs (6.8%) Dai-ichi (1%) ACE (22.1%) None None None None None None PICC first Chinese P&C company to go public (October 2003) Raised $693M with AIG taking 9.9% share Premiums continue to grow as the market grows But PICC market share is declining with smaller companies aggressively pursuing business by undercutting rates Accident period loss ratios have been on the rise On a calendar period basis, deteriorating loss ratios are masked by PRC GAAP accounting conventions 7 Foreign Insurers 2002 Market Share Company Current Operations AIU 0.35% Ming An 0.21% Tokio Marine & Fire Winterthur Samsung Royal & Sun Alliance PLC Mitsui Sumitomo BOC Chubb Insurance New entrants after 2002 Liberty Mutual Allianz HSBC Swiss Re ERC Munich Re 0.09% 0.04% 0.03% Shanghai Guangzhou Shenzhen Shenzhen Haikou Shanghai Shanghai Shanghai 0.03% Shanghai 0.03% 0.02% 0.01% Shanghai Shenzhen Shanghai 8 2002 Foreign Insurers (“FI’s”) < 1% share of market FI’s confined to Shanghai and few other provinces FI’s confined to policies for foreign companies operating in China FI’s limited to branch operations or 51% stake in joint-ventures 9 Beginning December 2003 FI’s can write insurance in most major provinces FI’s can set up 100% owned companies FI’s can write insurance for both foreign and Chinese companies for some lines of business 10 Family Construction & Liability 3.0% 5.7% Others 9.5% Commercial 15.7% Cargo 5.4% Motor & 3rd Party Liability 60.6% 2002 Gross Premiums by Line of Business 11 Profitability and Reserves All local companies reported profits in 2001 and 2002 on PRC GAAP basis However, PRC GAAP results mask true profitability PRC GAAP limits IBNR reserves to 4% of net claims paid This amount is generally inadequate UEPR calculated as 50% of written premium This is inadequate for small high growth companies PRC GAAP close to cash accounting which overstates profits for fast growing companies 12 Profitability and Reserves Change in the accounting treatment of reserves required Companies are just beginning to analyze reserves on an accident period basis Appropriate historical data has to be developed from scratch and does not reconcile to audited financials 13 Legal and Regulatory CIRC (China Insurance Regulatory Commission) is discussing requirements for an actuarial review of loss reserves – no timetable specified China law mandates that 20% of all premiums written are reinsured by China Re. This practice must cease within 4 years of WTO entry (by December 2005) New Traffic Law effective May 1, 2004 mandating compulsory third party insurance Insurance companies will have to submit rate filings Milliman appointed by CIRC to comment on rate filing system and review submitted filings Driving record being introduced as a rating variable in 2004 14 What’s Next? Fastest growing companies are undercutting rates to compete for market share and are not recognizing the true profitability of their business Foreign strategic partners who report profits using international accounting standards are imposing some discipline on local companies who seek capital for growth Elimination of China Re reinsurance monopoly appealing to worlds largest reinsurers Huge market growth is very appealing to outside investors – but current profitability may not be! 15