Insurance regulator shows teeth in crackdown
The China Insurance Regulatory Commission (CIRC) is starting to show its teeth, underscoring its tough line with a far-reaching crackdown on the intermediary market over the past few months.
In May, CIRC shocked foreign middlemen by enforcing an unprecedented three-month closure of Sedgwick Insurance & Risk Management Consultants (China) after it found the company operated an unlicensed broking business.
About the same time, CIRC ordered Hong Kong-listed New World Infrastructure to stop its unlicensed operations as a captive insurer arranging cover for its own projects.
Last month, it closed the Beijing representative-office of Jardine Insurance Brokers (JIB) - the Asian arm of Britain's largest independent quoted broker, Jardine Lloyd Thompson - again for unlicensed broking activities. JIB's Guangzhou office has remained intact.
The actions have won applause from the industry, though critics have been quick to point out the scope of CIRC's supervisory role has been limited.
'Most of the action was aimed at the intermediary market, which is one of a long list of [problems] facing the CIRC,' a mainland industry practitioner said.
There is, indeed, a laundry list of issues that merit CIRC attention, including: construction of a regulatory framework and improvement of legal enforcement; specifically, updating the 1995 Insurance Law and drafting of other regulations to replace makeshift policies and guidelines; relaxation of the numerous restrictions on insurance companies, such as where they can operate, what products they can sell and how they can invest revenue; strengthening precautions against potential market risks; tightening market supervision and standardisation of market practices; speeding licensing-approval procedures.
'These are not new issues,' a Hong Kong-based practitioner said. 'But they are all issues the CIRC needs to tackle, instead of focusing on just one segment.' Even the CIRC chairman Ma Yongwei acknowledged last month the commission had failed to resolve the sector's myriad problems.
Much of the reason lies with the mainland insurance industry's underdeveloped character and commensurate lack of professionals - including CIRC officials - to manage the fast-growing sector.
The mainland's insurance industry has been expanding at about a 37 per cent per year since 1979 - well above the country's breakneck economic growth rate.
The World Bank estimates that the mainland market will be worth 190 billion yuan (about HK$177.27 billion) in premium income next year.
Of immediate concern to insurance companies is loosening market restrictions, particularly rules confining insurers to invest premium income in treasury bonds, designated financial and corporate bonds, and bank deposits.
'For foreign insurers, these restrictions are like chopping off their hands, because insurance is about risks and investment management. Only those [companies] that perform well in both areas can be regarded as successful,' the Hong Kong-based practitioner explained.
The issue has become of acute importance to life insurance companies, which depend on capital appreciation of their investments for future redemption by policy holders, following Beijing's latest interest rate cut in June - the seventh cut in three years.
'There is a practical issue facing insurance companies to maintain financial viability despite the rate cuts,' observed the mainland practitioner.
In the latest cut, the benchmark one-year rate for yuan deposits fell to 2.25 per cent - leaving only a fraction of the 9.18 per cent rate of May 1996.
Market watchers point out the investment curbs also debilitate the industry by slowing its adoption of technical knowledge and professional conduct that would lay the foundation for further growth.
For foreign insurers, another important issue that requires swift action, analysts said, is the removal of geographic restrictions that limit overseas insurance operations to the cities of Shanghai and Guangzhou.
As part of its bid to enter the World Trade Organisation, Beijing indicated earlier this year its intention to open to foreign firms four more cities - Shenzhen, Chongqing, Dalian and Tianjin.
The most likely scenario for a comprehensive easing of geographic controls, however, would be the lifting of city-by-city approvals to provincial-wide licensing, said the general manager of a Shanghai-based foreign insurance company.
'It's very important that Beijing allows foreign participation on a provincial-level so that all cities in any province will be covered.' Shanghai-based foreign insurance companies, for example, are prohibited from serving their clients in nearby Suzhou, Wuxi or Nanjing.
'Our clients, foreign-invested enterprises located in Shanghai's neighbouring areas, very much hope the rules will be relaxed,' said the general manager.
Despite anticipated changes, Beijing remains cautious and its commitment to protect its fledgling local players makes rule changes that permit greater competition unlikely in the near future. By any standard, the regulatory regime is onerous, limiting the number of domestic participating companies to 11, and foreign insurance companies to 16.
In the end, the drawbacks of such an insular approach could outweigh its benefits. In Singapore, where similar market restrictions were lifted only this year, the costs have been substantial, observed Monetary Authority of Singapore chairman Lee Hsien Loong.
'One symptom of the protected market is the lack of impetus among incumbent insurers in Singapore to consolidate, innovate, and develop new products and distribution channels,' Mr Lee said.
The same scenario appears to be developing in the mainland.