China is considering opening its mandatory third party liability automobile insurance (MTPL) market to foreign insurers, hoping experienced Western players will bring better pricing and underwriting practices to the country’s young, fast-growing market.
When attending the U.S.-China Strategic and Economic Dialogue Summit in May last year, Chinese Vice Premier Wang Qishan had already agreed to actively study and push forward the opening of China’s MTPL market. However, the timeline of this opening process remained unclear. Last Tuesday, during his meeting with U.S. Vice President Joe Biden, Chinese Vice President Xi Jinping brought up the issue again, sending a clearer signal of impending reform in the country’s auto insurance sector.
Currently in China, foreign insurance companies are allowed to sell auto insurance but are prohibited from selling MTPL. Since most drivers tend to choose the same insurer for both optional and compulsory coverage, China’s restriction “has effectively blocked foreign firms” from the country’s entire auto insurance market, said the American Chamber of Commerce (AmCham) in China.
Liberty Mutual (LM), one of the most active foreign players in China’s auto insurance sector, is presently serving 73,000 drivers in Chongqing, Beijing and Zhejiang. Its size of clientele is minor, if taking into consideration the facts that 18 million new vehicles were registered in China in 2010, and owners of all motor vehicles are required to participate in MTPL according to the country’s MTPL Provisions promulgated in 2006.
In fact, despite China’s huge growth potential, foreign participation in the country’s whole property and casualty insurance market has been the lowest in Asia, standing at a minimal share of 1.1 percent over the last few years, says a PricewaterhouseCoopers (PWC) survey published in December 2011.
Differing from Chinese companies in other industries that usually welcome national protectionism, domestic insurers are not necessarily happy with such a market with limited competition. Due to the high claims ratio and the implementation of government-tailored premium rates which have been decreasing of late, the 33 Chinese insurers suffered a total operation loss of RMB7.2 billion from the MTPL business they ran in 2010, according to the China Insurance Regulatory Commission (CIRC).
Opening up the MTPL market to foreign investors “is certainly good news” for local companies, said Li Wenbing, a Beijing-based analyst at BOCOM International, a subsidiary of the Bank of Communications engaged in the investment banking and securities business. “Just breaking even in the mandatory business will be a huge boost to profitability.”
It is hoped that, with the entry of foreign companies, the Chinese regulators will loosen their controls on MTPL tariffs. Presently, the CIRC determines the premium rates and fixes the limit on repairs. It also stipulates that MTPL covers claims on no-fault basis and allows no discounts on premiums. As a result, domestic MTPL carriers disincentivized by little price competition and significant annual losses have tightened their insurance policies and shown less willingness to provide mandatory coverage for all types of drivers.
Foreign investors’ participation in the market may help address the existing problems, said AmCham China. Western auto insurers with decades of experience in data processing, underwriting and pricing will bring the standard practices in mature markets and improve the performance of MTPL as well as the whole auto insurance market. Increasing the foreign presence will also provide consumers with more choices and help expand MTPL coverage across the country.
However, foreign insurance firms may still face substantial challenges if they are to tap the Chinese MTPL market. A participant in the PWC survey said foreign insurers’ limited (or non-existent) networks could impact their performance negatively, in spite of the advanced products and supporting technology they have to offer.
A European insurer responding to the survey also pointed out that high commissions and risk management could be major difficulties when entering the Chinese auto insurance market.
With regards to the opening up of the MTPL market, Jackson Tang, CEO of U.S.-based Liberty Insurance, believes it will still take some time.
“…Regulators need time to work on management rules and stipulate which sort of foreign insurers will be qualified to be in that business. Meanwhile, foreign non-life insurers also need to time to introduce new products and obtain approvals from insurance regulators,” Tang said.
Dezan Shira & Associates specialise in foreign direct investment in China, and maintain accountants in Shanghai, Beijing and other major cities.
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