China worth risk for foreign insurers

Price comparison websites

Buying or taking substantial stakes in domestic insurers is easier said than done. Fewer are available, with many already in equity partnership with foreign insurers.

However, there are still more than a handful of mid-sized insurers without foreign partners, and some existing partnerships are not going well. Some foreign insurers may choose to exit within the next few years.

As insurance price liberalization continues, the case for price comparison websites or online brokers increases, and this provides a new entry model. Here, however, the need to build a brand presence is even more important than for a traditional insurer, and as this will take time, I would expect these to start emerging fairly rapidly.

While building a brand will consume capital, this entry model requires far less regulatory capital, approvals and scrutiny.

Innovative cooperation

The bank and motor-dealer channels, the largest third-party channels in life and property insurance respectively, are not growing as fast as before, and are even contracting in some areas. They no longer offer foreign insurers a quick route to growth. And as distribution is undergoing a re-think, further cooperation is needed.

With online distribution, foreign insurers can overcome their distribution disadvantage to an extent, but they still need to acquire underwriting licenses province by province, and gaining them is a slow process, even for Chinese insurers. As noted, purely online operations seem to offer a way through this expansion conundrum, at least in the short term.

To get greater and faster distribution coverage, foreign insurers could partner up with smaller domestic insurers and re-consider their online strategy.

A foreign company could also cooperate with a small domestic insurer that has underwriting licenses in complementary provinces, roll out their online expertise for that partner and share profits via quota share arrangements or other non-equity agreements.

In China, you need to understand the system and play it. Unfortunately, most foreign insurers are rigid and traditional in their thinking and will only entertain Western business models, and so cannot succeed. This perhaps helps explain why all the foreign insurers together only have just above 1 percent of the property and casualty market, and 4 percent of the life market.

Now is the time for foreign insurers operating in China to double their development efforts to embrace the market opportunity, to diverge from Western business models via innovation, and to compete where the large domestic incumbents will find it hard to penetrate.

There are still opportunities for insurers with treasure chests to get into the market.

In my opinion, the dynamics for success in the China market have never been better

The author is head of Insurance Consulting at KPMG China. The views do not necessarily reflect those of China Daily.