The plan, announced by CIRC, targets annual premium reaching RMB3 trillion (approx $500bn) by 2015; total assets reaching RMB10 trillion (at a CAGR of 15%); a penetration rate of 5%; and, an insurance density of RMB2,100 per capita. It also outlines a range of measures to broaden and diversify the sector, such as stimulating intermediary markets and improving ALM.

“There is a concerted effort in the new five year plan to increase the insurance penetration rate - doubling it from the levels of today,” according to Greta Mikelonis, a Principal and Consulting Director with Mercer in Shanghai. “In addition it focuses on specialization and the government is putting support behind insurers who specialize in one of more areas - for example, health insurance, retirement insurance or motor insurance, etc. with the intent of providing a broader spectrum of risk protection to consumers.

“Finally, the industry is being encouraged to integrate and support social programs through multiple channels including public pension or even the support and development of the hospital system which is a broader social scope than previously mentioned.”

Along with headline growth targets, the CIRC guidelines call for reforms in seven important areas.

    Diversify market players: support state-owned capital, private capital, and foreign capital investing in insurance companies; encourage the development of pension, health, liabilities, auto, and agricultural insurance companies; support qualified insurance groups or companies to develop comprehensive financial business; support public listing of qualified insurers

    Continue optimizing business structures - Promote long-term saving type and risk protection type insurance and develop investment insurance products; optimize automobile insurance; promote marketization of premium rates; optimize sales channels

    Optimize asset-liability management - support investment in endowment entities, healthcare institutions, automobile service companies; adjust investment policies in a timely fashion to stabilize and improve investment return; encourage investment in real estate, unlisted companies, and strategic emerging industries; encourage asset management product innovation

    Participate in the social security system - develop EA business, promote personal income tax deferred pension insurance trial program

    Reform state-owned insurers - reform China Export Credit Insurance Company, promote listing of PICC Group and China Re Group, reform China Life Group

    Develop intermediary markets

    Encourage qualified small and mid-sized insurers to set up AMCs

While implementation difficulties will inevitably arise, the broad-based plan suggests the regulator is aware of current industry weaknesses and has the desire address these moving forward.

“The plan sets insurers the challenges of more intense competition, product restructuring and improved asset allocation. But the opportunities are that the sector will be more open to investors,  we will see an expansion into alternative investments, the development of pension insurance, and the emergence of insurance-based financial groups,” according to Lillian Zhu, an insurance market analyst with Z-Ben Advisers.

Mercer’s Mikelonis also foresees significant changes to industry structure. “With the aggressive growth targets, insurers who are well positioned to excel in these growing areas have many opportunities for expansion - however, with increased supervision there will likely be insurers who exit certain risk categories or change focus due to the myriad of opportunities.”

The plan will also allow Hong Kong insurers to set up branches on the mainland and invest in their mainland counterparts. This move relates to efforts to enhance financial market integration between the PRC and the SAR generally. Hong Kong insurers can help increase competition on the mainland, and will also be able to allocate assets raised from RMB insurance policies on the onshore inter-bank bond market, another space which will receive strong government support to 2015.

HK insurers may proceed cautiously, however, according to Mikelonis. “For the group benefits space, this will be a challenge as insurers enter mainland markets because of the different underlying social programs and thus different underlying risk profiles. In addition, due to China’s vast size it will require immediate geographic expansion which will require upfront investment which must be considered carefully.” 

Overall, the plan gives a boost to the mainland’s insurance sector, which has endured a mixed year to date. Sticky domestic inflation and a series of interest rate hikes meant insurers have realised negative real returns on investments an life insurance policies have lost relative attraction. Property and automobile sales have cooled and the government has also imposed stricter regulations on bancassurance business.

First half reports showed total assets reached RMB5.75tr, an increase of 7.1% from the beginning of 2011, a rate significantly slower than 2010’s 24% growth. Premiums reached RMB806bn, up 13% on the year, and insurers realized net profit of RMB48.98bn, up by 72.3% compared to 1H2010 - although China Life was a notable exception in the latter case. And during the first half insurers realized investment return of RMB103.11bn, a return rate of 2.1%, 17 bps higher than in 1H2010.*

But perhaps the most concerning  development has been a relatively sharp increase in industry debt, with some estimates putting the total borrowed as high as RMB100 billion in the first six months alone. Z-Ben’s Zhu explained why. “Insurers’ fast expansion and low investment returns brought their solvency ratios under the required level (150%). When shareholders are not willing to inject more capital, issuing subordinated bonds is the easiest and fastest way for insurers to solve the trouble of capital shortage.

“In 2010, insurers issued a total of RMB22.55bn bonds. So far this year, we have seen more frequent capital borrowing activities. Since China Life announced its RMB30bn bond issuance plan this August, we expect that the total borrowing by insurers this year will reach a record high. The issuance cost may be higher than previous years,” she continued.

“In this May, CIRC issued Draft Measures for Insurers’ Subordinated Bonds. The new regulations lowered the threshold for issuing bonds from 100% of net assets to 50% while limiting issuance volume. So to some extent, CIRC is trying to control the risk by limiting the volume.”

This is an area which will need to be monitored, according to Mercer’s Mikelonis. “The continued borrowing in the insurance industry could lead to future issues depending on the stability of the company and whether the government will provide guarantees in future years. However, simultaneously the investment rules for insurers have been relaxed so there is a mixed message in this space.”

But while there is a long way to go in terms of market development, we are already seeing China’s insurers become more sophisticated. As Mikelonis points out, “in the group insurance space we have seen a definite switch from the business objective of gaining market share at all costs to a shift towards profitability. This means that difficult decisions are made about client retention and other business strategies which have affected results.”

The new Five-Year Plan offers a comprehensive framework for future sector development, setting ambitious headline targets and calling for action in a range of areas. However, for Mercer’s Mikelonis, the plan’s success or otherwise will ultimately boil down to China’s ability to improve professionalism and soft skills within the industry.

“Any development of the insurance industry will depend on attracting and training professionals who understand how to price the risk that is being written. Continuing education requirements and standards should be increased so that group and individual insurance principles are being followed appropriately and customers receive full disclosure specific to the product purchased. Insurance brokers and other intermediaries need to continue to push for transparency and professionalism as the industry continues its development,” she concluded.

*Data supplied by Z-Ben Advisers.