The development of foreign insurance business in China

Insurance has an indispensable part to play in China's economic restructuring process. The long-term growth and capital appreciation sought by insurance companies are of critical importance to the term transformation of savings and thus the very success of China's welfare system reform. Insurance encourages the effective growth of domestic capital markets and effectively enhances the fund-raising opportunities for State and corporate bodies. The development of a modem insurance industry in China and the promise of a vast insurance market provide a wealth of opportunities for foreign insurers/insurance intermediaries. Yet the future nature of the restructuring process remains uncertain, and the realisation of the market potential demands a clear understanding of the problems involved in China operation. There has, however, been very little systematic study of the strategic issues involved in the development of foreign insurance business in China. This thesis intends to fill the gap by providing an analysis of provincial life insurance demand, and of such strategic issues as partner selection and location choice criteria. The thesis first examines the history of the insurance industry in China, and highlights the main features of China's regulatory framework and the implications for foreign insurance participation. The demand for life insurance is then examined by a pooled time-series and crosssectional analysis of China's twenty-eight provinces (municipalities and autonomous regions) over the period of 1985-1995. The econometric results support the hypotheses that life insurance demand is positively related to income and the economic development level, the degree of insurance consciousness/awareness, the supply of insurance services in the market, and life expectancy; and that demand is negatively related to the anticipated inflation rate. The results suggest that Chinese life insurance purchasing behaviour is more determined by old-age income protection and support than by the concern for dependant income protection against breadwinner's premature death. It is also suggested that life insurance demand in China is constrained by inadequate supply. For most foreign insurers, the long-term aim is the award of a license to establish a branch, a joint venture or a wholly-owned subsidiary so that they can engage in profit-making activities in the Chinese market. Approval is not automatic, and winning over the Chinese authorities requires more than demonstrable expertise and experience. In compliance with the Chinese authorities' preference and/or requirement, many foreign insurers are seeking joint ventures with Chinese partners despite their corporate preference for the wholly-owned entry mode. The criteria used in the selection of a joint venture partner were examined using a questionnaire survey, and it was found that foreign insurers placed more weight upon compatibility with their prospective partners in terms of objectives than upon complementarity in function. As regards complementarity, the functions of the Chinese partners that most attracted foreign insurers were their contacts with central/local authorities and their market networks. The questionnaire survey was also used to establish the most important criteria in location choice. Furthermore, the survey evidence was supplemented by an econometric analysis, using a conditional logit model, of the location choice of 138 foreign insurance representative offices in China. Both analyses found that location choice was determined primarily by factors such as accessibility to the Regulatory Authority, local market size and growth potential, the stock of foreign direct investment and the degree of openness and insurance consciousness. Interestingly, offices were not confined to those cities where foreign operations were currently allowed, and that these other variables in addition to 'openness'were found to be significant. The survey data were also analysed for differences between the different types of insurance companies, and between companies of different nationalities. Finally, the strategic implications for foreign insurers, as well as the policy implications for the Chinese Government, were discussed. Insurance Business in China 2 PhD Thesis © Xiaohong WU 1998