The Property Casualty Insurance Market in China Casualty Actuaries of Greater New York Spring Meetin

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The Property Casualty Insurance Market in
ChinaCasualty Actuaries of Greater New York
Spring Meeting 2004
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• 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).

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• Outlook of Chinese insurance industry
  demonstrated when Chinas 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!

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Since 1978, Chinas economy has boomed as a
result of sweeping economic reforms.
Source China Statistical Yearbook, 1999.
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• Chinas 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
• Chinas population of 1.3B is 4 times the US.
• 2002 US PC premiums 370B, 3.5 of GDP

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• PICC first Chinese PC 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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2002

• Foreign Insurers (FIs) lt 1 share of market
• FIs confined to Shanghai and few other provinces
• FIs confined to policies for foreign companies
  operating in China
• FIs limited to branch operations or 51 stake in
  joint-ventures

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Beginning December 2003

• FIs can write insurance in most major provinces
• FIs can set up 100 owned companies
• FIs can write insurance for both foreign and
  Chinese companies for some lines 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

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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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Whats 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!