Transcript Spring Meeting 2004 - Casualty Actuarial Society

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
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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%
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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
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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
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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
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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
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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
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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
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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
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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!
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