China Insurance Report Q2 2008

As was the case in Q108, the main focus of this report is BMI's proprietary Insurance Business Environment Rating (IBER). The rating brings together a number of pieces of relevant quantitative data, together with BMI's Country Risk Rating (CRR). The IBER makes it easier for the insurance sector business environment in a particular country to be compared with the business environment for any other BMI-monitored industry in that country. The IBER also allows an objective and meaningful comparison of the insurance sector business environment between countries.

Over the coming months, we will substantially change the format of the BMI insurance reports. In essence, we will focus to a much greater extent on the companies that are active in the non-life and life segments.

This report is substantially different from its predecessor. For virtually all countries considered by BMI, including many for which we do not regularly produce reports on the insurance sector, the 2008 reports will include hard data - derived from official sources - to the end of 2006. They incorporate forecasts as far as 2012. To a much greater extent than was previously the case, we have incorporated details of the various lines that comprise the non-life segment. Most importantly, we have introduced the new Insurance Business Environment Rating. The IBER combines our assessment of the insurance sector - which is based predominantly on quantitative data - with BMI's proprietary Country Risk Rating (CRR).

The details are given in the methodology section at the end of this report.

China's IBER is 61.7. By comparison with other countries in the Asia-Pacific region, China is an undeniably attractive market for foreign insurers but is, perhaps, not quite as exciting as reports in the trade and mainstream media might suggest. What really makes China stand out is the absolute size of premiums - in both segments - and absolute growth in premiums that appears likely to take place in 2007-2012. China's IBER is also boosted by its relatively high Country Risk Factor. Over the long term, policy continuity has been high: this will likely remain the case. Subject to the caveat that the authorities have not yet dealt convincingly with the problem of inflation, the economic and political environment are also favourable. The main deficiencies rest with the bureaucracy and the legal framework. Other factors which hold back the IBER include the low overall GDP per capita, the tax regime and the low level of non-life penetration.

Over the five years to the end of 2012, we are looking for non-life premiums to achieve annual growth of 11% in local currency terms. The extent of the appreciation of the CNY vis--vis the US$ remains to be seen: for the time being, though, we are looking for annual growth of 16% in US$ terms. For life premiums, the corresponding figures are 8% and 13%. In the non-life segment, a key growth driver is the rise in non-life penetration from 1.00% of GDP to 1.10% of GDP. We are also looking for an increase in nominal GDP from around US$3,221bn in 2007 to US$7,696bn in 2012. In the life segment, the key driver of growth is the envisaged rise in total population from 1,331.4mn to 1,370mn. For the time being, we are looking for life density to rise from about US$40 per capita to US$75 per capita.

China still scores quite poorly in terms of its measure of openness to foreign companies. However, the size of its economy and likely continued growth make it a popular choice for both life and non life insurers. Recent announcements concerning the granting of permits to particular foreign firms so that they can establish businesses in specified cities shows that the market is far from being totally closed to major foreign firms.

In the short term, the extent of inflation is an important factor. Inflation boosts the relative attractiveness of life insurance relative to bank deposits (which pay negative real rates of interest to savers). However, inflation is also consistent with higher operating costs, enlarged claims expenses (which need to be covered by greater premium costs) and more volatile financial markets.