HONG KONG -- While there are signs that China is liberalizing the insurance sector, foreign players are still grappling with a crowded market dominated by domestic companies, as the latest victim American International Group announced another selldown of its investment in Chinese non-life insurer PICC Property and Casualty.
New York-based AIG announced on Monday that it will sell $750 million worth of shares in PICC, cutting its holding for the second time this year to just around 5%.
Foreign life insurers in China have long struggled with a modest market share of around 6% over the past 10 years, according to an EY report released on Monday, while the top five domestic players including China Life Insurance and Ping An Insurance Group control nearly 70% of the market.
Foreign property and casualty insurers almost doubled their market share to 2.2% in 2014, but that figure was largely inflated by French insurer AXA's acquisition of a 50% stake in Tian Ping Auto Insurance for 3.9 billion yuan ($610 million) last year.
Nonetheless, there are signs that the Chinese government is slowly opening up the sector. The deregulation of the industry, the expansion of free-trade zones and the rise of Internet finance could well be game-changers for foreign insurers.
The launch of FTZs in Shanghai and Shenzhen's Qianhai area in southern China could theoretically spur demand for cargo insurance. Foreign players will not only enjoy an international tax and currency regime comparable to most free markets, but also direct access to the mainland's customers, whose health spending is expected to reach $1 trillion by 2020, according to a McKinsey report, up about three times from 2011.
In February, German insurer Allianz and China Pacific Insurance set up the first joint venture in the Shanghai FTZs to offer health cover. But Jonathan Zhao, Asia-Pacific insurance leader and managing partner at EY, said that there is still a lack of transparency around the FTZ.
"Can you sell products across different FTZs? Can you sell them outside the FTZs? These are questions the government has to clarify," he said.
But recent regulatory changes could benefit foreign players. A new solvency regime known as China Risk Oriented Solvency system, or C-ROSS in short, is due to be implemented in the next quarter. It requires both domestic and foreign insurers to hold capital based on risk levels rather than premium volumes. In other words, the more an insurer buys into risky assets such as equities, the more capital it has to hold against that investment.
An option to take on additional risks present opportunities for foreign insurers, which tend to have a better knowledge of risk management, said EY's Zhao.
The China Insurance Regulatory Commission has also unveiled a new guideline in July allowing online sales of insurance, theoretically creating an avenue for foreign companies to tap into the Chinese market.
But this is not going to work out for foreign insurers without a strong distribution network across China. Regulations still require insurers to have operations in provinces where they want to sell certain types of insurance products, such as auto insurance.
Brian Metcalfe, an associate professor at Brock University who studies foreign insurers in China, said that overseas players who want to gain a foothold in the market are still likely to do it through mergers and acquisitions.
Foreign companies can typically own up to 50% stakes in joint ventures. A notable exception was U.S.-based Starr Group's buyout of state-backed Dazhong Insurance last year.
But foreign insurers are not only eyeing local players as their venture partners but also non-insurers with comprehensive mobile networks. Many are attracted by the massive customer base enjoyed by Internet giants such as Alibaba Group Holding, Tencent Holdings and Baidu.
"The number of potential clients for a traditional insurer goes by 10,000 but that figure can go up by 10 million on Alibaba's [e-commerce platform] Taobao," said EY's Zhao. "Even if it's just one-tenth of that, it's already a big market."