Doing Business in China – The Life Insurance Sector

Doing Business in China – The Life Insurance Sector

Jochen A. Haug

PRESENTATION TO:

LAW 889 – China and Globalization

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Project Objectives

• Introduction to the Life Insurance Business• Going abroad - China as an Emerging Market• Legal Framework• Business Strategies• Case Study: Allianz Group• Key Lessons

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Life Insurance Business in China: Overview

China - Emerging Market

Legal Framework

Business Strategies

Key Lessons

Life Insurance Business

Case Study

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• Provision: Payment of a sum of money upon the death of the insured

• Can be used as means of investment or saving

• Attractive for MNC life insurers to enter emerging markets– Universal product based on common human need– Fast growing industry in most emerging markets – with

changing regulations favoring increased foreign ownership– Home markets are mature, saturated and highly

competitive

• Succeeding in this areas requires adaptation to different cultures– Differing cultural mindset towards insurance across nations– Need to adapt local face to appeal to the local consumer– Need to overcome legal and regulatory obstacles

Definition

Global Status Quo

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Example: Market Analysis Germany

• Population of Germany: 82 M• Number of Life Insurance Contracts: 95 M

• Number of Players in the Market: 35• Market Share of Top 5 Players: 33 %

Allianz

AachenMünchener

Hamburg-Mannheimer

R+V Lebensversicherungs

Deutscher Herold

Others

15.2%4.7%4.7%4.5%

4.0%66.9%

Allianz

AachenMünchener

Hamburg-Mannheimer

R+V Lebensversicherungs

Deutscher Herold

Others

15.2%4.7%4.7%4.5%

4.0%66.9%

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Legal Framework

Business Strategies

Key Lessons


Case Study

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Market Analysis China I

• Population of China: 1.297 B• Real GDP Annual Growth Rate since 1980 :8-10 %• Insurance Industry Growth Rate since 1990: 30 %

(p.a.)• Market Opening: 1990s• Number of Players in the Market: 35• Market Share of the Top 3 Players: > 90 %

(China Life Insurance, PICC, Ping An Insurance Group)

___________Sources: CIRC; Watson Wyatt Survey 2005; McKinsey Report 2005; World Bank 2005

Market sharesDomestic Insurers: 97.4 %Foreign Insurers: 2.6 %

(5-10 % in coastal cities)

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Market Analysis China II

• China is already World’s Top 8 Life Insurance Market

• Life Insurance Penetration Rate: 2.14 %

• Life Insurance Premiums 2004: 39.88 B $– 13 Domestic players: 38.82 B $– 22 Foreign players: 1.05 B $

• Expected to reach premiums in 2008: 100 B $

• Growth Rate Life Insurance 2004 > 2005: 12.3 %(huge household-savings rate) (40 %)

• Increase Premium Income 2004 > 2005– Domestic Insurers: 3.7 %– Foreign Insurers: 356.1 %

___________Sources: CIRC; Watson Wyatt Survey 2005; McKinsey Report 2005

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Competitive Advantages

• huge national sales network• access to whole market since starting• well established brands• experienced management teams• responsiveness to market• local knowledge and local relationships• strategy tailored to given geography• access to government financial support

• deep industry expertise• more professional sales force• brand image

Local Players

Foreign MNC

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Legal Framework

Business Strategies

Key Lessons


Case Study

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Market Opening in China: The Early Stage

• Government allowed foreign insurance companies the opening of “Representative Offices” (no business conduct at all)

• 1992: First license issued to AIG for life insurance (Shanghai only)

• Few more licenses issued for Shanghai, Guangzhou, Shenzhen only

• 1998: Establishment of the China Insurance Regulatory Commission

• Very limited role of foreign firms in the national market

1980s

1990s

Consequence

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Market Opening China: WTO Accession 2001

• Almost all restrictions on foreign insurance companies lifted• 2001: No numerical limitations any more• 2003: Opening of 12 additional cities

Beijing, Chengdu, Dalian, Chongqing, Shenzhen, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan, Tianjin

• 2004: All geographical restrictions lifted• 2004 – 2006: Phasing out of limitations on the scope of

business

• No complete lift of ownership restrictions in insurance industry• Life Insurance: - 50 % foreign ownership ceiling (no

increase)• Non Life Insurance: - 51 % equity share limit

- Wholly foreign owned entities from 2003

Gradual Phase Out

Remaining Restrictions

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Legal Framework

Business Strategies

Key Lessons


Case Study

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Business Strategies for China I

• Why going to China:Export platform - Access to Market – Competitor Defense Learning Source – Capabilities (Labor Force)

• Form of market entry (level of control / legal framework)• Long run strategy: Adequate time horizon for profitability

• Understand mindset of culture towards business / insurance

• Realize responsibility, interest, limited authority of various bodies

• PR in terms of China’s political sensitivities and goals• Establish “one face to China”

• China is not one single market:1.3 B people - totally different geographies – 205 languages

Before Market Entry

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Business Strategies for China II

• Limited by Regulation JV may be the only option

• Contractual Joint Venture• Pro: Lower initial investment, immediate access: local know-how,

face• Con: Reduced control (IPR), potential of strategic conflicts (“same

bed, different dreams”), expansion only with new agreement

• Equity Joint Venture• Pro: Cost sharing, provided: site, labor, initial capital, “guanxi”• Con: Risk of strategic conflicts, veto of local partner, narrow

business licenses, legacy issues, complex interest

• Wholly Foreign Owned Entity• Pro: Control (Management & Technology), hire labor force de

novo• Con: Bearing all upfront costs, lack of a domestic ally

Mode of Market Entry

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Business Strategies for China III

• Adapt business to the local environment (local face and language)

• Important to be perceived as a local brand

• First Mover Advantage - Success by tying up with local partners

• Innovative business model, customized products and relationship focus can help to gain market share against dominant local players

• Good relations to local government are critical: Personal relations (“guanxi”) more important than contracts (not enforceable)

• No entanglement with corruption (Code of Conduct)

After Market Entry

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Legal Framework

Business Strategies

Key Lessons


Case Study

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Case Study: Allianz in China I

• 1917: Allianz set up first operations in China (providing insurance coverage to industrial and commercial clients in coastal

cities)

• 1979: Reinsurance Agreement with the People’s Insurance Company of China (PICC)

• 1994: Representative Offices in Beijing, Shanghai and Guangzhou

• 1998: Joint Venture with Dazhong (strong local player in non-life insurance business in Shanghai) for life insurance business

• 2003: Establishment of Allianz Insurance Company Guangzhou Branch (first non life business)

• 2006: Stock Acquisition (2.5 %) of Industrial and Commercial Bank of China (ICBC – Top 3 in China) for 1 Billion US$ (sales channel)

• 2006: Re-name of JV into Allianz China Life Insurance

• Since 2000: Strong promotion for public awareness: Donations, Training programs for local graduates,

Sponsoring

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Allianz in China: Marketing

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Case Study: Allianz in China II

– C - Joint Venture: Allianz Dazhong Life Insurance (Shanghai)– Wholly owned property branch: Allianz Insurance

(Guangzhou)– Stake acquisition: ICBC

Each entry following respective regulation limits

– Be local: Using local image and promotion (Chinese Culture)– Offering all products and websites in Chinese and English– IP Protection (training JV partner ↔ potential competitor)– Good relationship with local government most important– Personal relations (“guanxi”) more important than contracts

(enforcement issue)

Mode of Entry

Key Factors

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Case Study: Allianz in China III

• Total Premium Income Allianz Life 2005: 36.2 M $• Increase 2004 > 2005: 41.6

%

• Business Sites:Shanghai, Beijing, Guangzhou, Hong Kong

• Total Premium Income 2006 Q 1: 25.27 M $• Expected Premium Income 2006 Total: 101 M

$• Increase 2005 > 2006: 186 %

• Expansion expected:Zhejiang Province, Sichuan Province

Status Quo

Future Perspectives

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Legal Framework

Business Strategies

Key Lessons


Case Study

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Key Recommendations

• China offers huge chances for business as well as many risks• Need for a long term strategy• Need for a tailor made China strategy (adapt to local

environment)• Playing in regulated markets• Importance of PR and relations to the government and officials• Protect IP and rely more on personal relationships than on

contracts

• Provision of clear regulations• More market opening – competition improves also own players• Increase legal enforcement and the court system• Provision of better IP protection

For Multinational Corporations

For Chinese Government

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Key Lessons

1 Mature and Saturated Home Markets → Going Abroad

2 China: Emerging Market with huge Potential (Globalization)

3 China: Regulation Framework

4 China: Business Strategies and Risk Management

5 Case Study: Allianz Life Insurance China – so far a Success Story

6 Recommendations for MNC and China

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Q & A

Documents

Doing Business in China – The Life Insurance Sector