Foreign firms fill gap in liability cover
China's king of white-goods Haier Group got almost nowhere when it went looking for insurance cover for its US$1 billion worth of exports, as domestic property insurers were hesitant to provide product liability insurance due to the varying legal and consumer-protection regimes worldwide.
The Qingdao home-appliances giant exports everything from refrigerators to air-conditioners (a combined 2.6 million units last year), as well as washing machines and mobile phones.
As it pondered how to protect itself against potential product liability claims from customers offshore, American International Underwriters (AIU) quietly slipped in to answer its call.
Strictly speaking, foreign property insurers operating in China - including the property and casualty arm of the American International Group - are barred from providing liability cover to domestic customers on the mainland until next month. However, they can provide such cover to foreign customers.
Industry practitioners say the situation is a grey area, claiming that such risks do not occur on the mainland - only offshore.
Now it seems that AIU has also been extending product-liability cover to other top Chinese exporters, including television maker Sichuan Changhong Electronics Group. Last year, Changhong sold about three million sets overseas.
'We have been doing marine cargo insurance for Chinese companies for many years, and also we have been underwriting product liability for Chinese companies [for their exports] offshore,' an AIG spokeswoman said yesterday.
She said the company was not sidestepping regulations.
Haier could not be reached for comment.
To industry practitioners, Haier and Changhong's search for foreign insurers makes perfect sense in the fledgeling market.
One executive with a mainland property insurer said: 'We are more inclined to underwrite traditional cover for vehicles, commercial property and households. Product liability is very new to us, and it is not easy to grasp the risks involved. Underwriting losses may occur if risk-management is not properly controlled.'
The level of sophistication and risk-management required for product liability also deters the increased presence of even the biggest of Chinese domestic insurers - PICC Property and Casualty, the country's No1 property insurer with a 70 per cent market share.
PICC collected 1.8 billion yuan (HK$1.67 billion) in net premiums last year on overall liability cover - or less than 5 per cent of its total premiums. In more mature overseas markets, liability cover is usually a thriving business for insurers.
Despite PICC's tiny exposure, it dominates the mainland market, with an 80.8 per cent share in the liability market, underscoring the relatively underdeveloped segment on the mainland.
A Hong Kong-based insurance analyst said: 'The expertise applied on liability - a 'long tail' business - is very different from that of traditional cover. And when you talk about product liability, in particular for exported goods, it also involves foreign legal systems and consumer protection laws as well as a whole range of historical data on the average claims in lawsuits of that particular country, and those rules may vary country to country. This is very sophisticated business.'
China's property insurers have low reserves against its regional peers, and this is an impediment to taking out long-tail business which usually requires adequate reserves.
'It is a natural trend for mainland insurers to develop this segment of business as they seek to diversify product range and geographical reach on the back of business growth,' the analyst said.
Generally, foreign insurers have more experience and expertise in dealing with liability cover in overseas markets.
The need for such cover by mainland exporters is growing as China rapidly takes centre stage as the global workshop for most industrial product categories.
Two years ago China Export & Credit Insurance Corp (Sinosure), was born. It is the only official export credit insurance agency to provide exporters with protection against payment risk for goods shipped. However, product lability is apparently lacking.
Industry practitioners say mainland companies may have been overcharged by foreign insurers on product liability given the lack of a reference rate at home.
The China Insurance Regulatory Commission has apparently made little comment on the issue.