China's insurance upheaval and its expanding role in the global economy

China's insurance upheaval and its expanding role in the global economy | Insurance Business

China

Part one of two

China’s rapid economic development in recent decades has made it a powerhouse on numerous fronts. Major changes are happening in the Chinese insurance industry, as it evolves to accommodate the country’s expanding role in the global economy.

In order to shed light on the massive changes in Chinese insurance’s legal and regulatory environment, Insurance Business spoke with Brinton Scott (pictured), managing partner at international law firm Winston & Strawn LLP’s Shanghai representative office, and his team.

Merging regulators to continue reforms
One recent major development is the reorganisation of China’s financial system, such as expanding the powers of the People’s Bank of China and the merging of the banking and insurance regulators.

According to Scott, the changes are geared towards stricter and more effective regulation of China’s financial system and are likely to favour large insurers, especially multinational giants.

“We expect to see stricter regulation because the China Insurance Regulatory Commission (CIRC) has already set this trajectory,” he said. “Since 2016, the CIRC has stepped up its enforcement measures and enacted new regulations, which, among other things, restrict investment products and high-risk investments, promote traditional protective products and impose new compliance requirements.”

In January 2018, the CIRC promulgated the General Plan for Risk Reduction and Reform of the Insurance Industry, which, according to Scott, means that it intends to continue to enact reforms even after being merged with the banking regulator.

“These reforms appear to have the full support of the Communist Party of China. As such, even if there were no reorganization of China’s financial regulators, we would still expect to see further reforms.”

As such, Scott believes that while the reorganization of China’s financial regulators may not alter the general direction of reforms, it will likely make the reform process more comprehensive and effective. The new centralised system is likely to be more suited to closing the regulatory gaps and loopholes between the banking and insurance sectors and creating a more comprehensive monitoring system.

“This new regulatory environment will put smaller insurers at a disadvantage because, generally speaking, they lack the resources to cope with the higher compliance burden,” Scott said. “As well, they have depended heavily on investment products, which are now restricted. It will be difficult for these smaller insurers to muster the resources to develop and market protective products.”

He added that changes could also provide acquisition opportunities

“Multinational insurers, on the other hand, have the resources and expertise (in compliance and risk management) to compete in this new regulatory environment and we predict that many will increase their presence in China,” he said. “Some may enter the market by purchasing smaller domestic insurers, which now represent appealing targets.”

Turning from investment to protection
China’s long-running insurance crackdown, which Insurance Business has written about extensively, has made numerous headlines. One of the largest issues has been the Chinese government’s seizure and subsequent bailout of Anbang Insurance Group.

“The CIRC’s reforms have changed the nature of the industry,” Scott said. “In particular, the restrictions on universal life insurance and high-risk investments have deprived certain insurers of their main source of income. In 2017, sales of universal life insurance products plummeted 50.3% year-over-year and the industry is reorienting itself towards slower, more sustainable growth based on selling protective products.”

The crackdown, according to Scott, will have an effect on smaller insurers, which could be swallowed up by larger firms after their main revenue sources have been cut.

“Protective products require a greater investment of marketing resources than investment products,” he said. “This, combined with the heavier compliance burden, will leave some insurers struggling to adjust. As mentioned earlier, many domestic insurers will have difficulty adjusting to these new market conditions. This could lead to larger well-established insurers regaining market share and multinational insurers expanding their presence in China.”

 

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