China’s new insurance policy

Insurance has now been purchased

There are not too many areas in which China’s economy lags behind India’s. If quizzed, most people would immediately identify ‘software and outsourcing’ as industries where China lags. But they might find it tough to progress their list beyond that.

One lesser-known candidate is bancassurance. Since 2002, Indian banks have been able to sell insurance products, and according to the Hindu Business Line newspaper, almost a quarter of life insurance premiums are now generated through bank branches. Financial groups like Kotak Mahindra straddle both banking and insurance.

But that lead may be short-lived. A brace of deal announcements this week indicate that China may be about to embrace bancassurance in a big way too.

Analysts welcomed the news that Bank of Communications had got regulatory approval to buy a 51% stake in insurer China Life-CMG – picking up the stake from China Life. Simultaneously it emerged that Bank of Beijing will buy 50% of the insurance joint venture set up by Holland’s ING and Beijing Capital Group.

Taking the reverse tack, the nation’s second biggest insurer, Ping An – with assets of around Rmb750 billion – is in talks to buy Newbridge Capital’s 17% stake in Shenzhen Development Bank. If successful, it will use the bank’s 200 branches as a sales channel.

HSBC has also announced that China’s insurance regulator has given it approval to launch a jointly held insurer with Beijing-based National Trust Limited. The British banking group will hold 50% of the venture.

And yet cross-shareholdings and bank ownership of insurers remains a sensitive area. As Caijing magazine reports this is because the government worries about the disruption to the insurance industry if banks use their existing distribution channels to poach premium income from insurers. It might lead to lay-offs (the insurers employ large agency salesforces).

The regulators have also worried about whether the banks can deal with the related risk management issues; and whether bancassurance will concentrate too much risk in the banking sector. Given the international banking sector’s recent game of Russian Roulette (with near fatal consequences last September) concentration risk has been a leading concern for the Chinese central bank.

On the flipside, China’s banks have long been keen to mimic international competitors, and become financial supermarkets (HSBC, for example, derives 13% of its earnings from insurance).

Likewise, there is a recognition that insurance penetration in the country is low: insurance premiums only constitute 3.3% of GDP in China, versus 18% in the UK. Banks are the surest avenue for raising that percentage.

The regulators first toyed with the concept of bancassurance in a 2004 memo. But it wasn’t until January 2008 that the State Council gave its go-ahead to banks to buy stakes in insurers. Proposed deals by Bank of Communications, Bank of Beijing, ICBC and China Construction Bank were immediately sent to the regulator for approval, where they stayed for more than a year.

The decision to approve Bank of Communications and Bank of Beijing’s deals first suggests the regulator views them as pilot cases – they are considerably smaller banks than the behemoths ICBC and Construction Bank.

Industry experts reckon the policy change is a welcome one. China Insurance News reports that the fast growing insurance industry is short of capital and had been exploring the issuance of subordinated debt to make up the shortfall. “Capital injection by commercial banks is no doubt a better choice,” concludes the newspaper. “Cooperation with commercial banks will be popular with those insurance companies in need of increased capital.”

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