Insurance reform in China to lead to consolidation of industry

The move by the mainland's insurance regulator to loosen controls on mergers and acquisitions among Chinese insurers is the first step towards establishing an exit mechanism that will allow weaker players to withdraw from the business through market-driven channels, analysts said.

Easing M&A rules was part of the key reform of the mainland's insurance industry, said Wang Guojun, an insurance professor at the University of International Business and Economics.

"This is the first step, which is also an important step," Wang said. Although it would take time, the new rules would likely provide more incentives for companies to undertake M&As, he said, with such consolidation more dependent on market conditions and prices.

Small and medium-sized insurance companies, some of which were poorly operated, were hoping to receive a capital boost or to be bought out, but the lack of an exit mechanism and strict M&A rules had dampened their hopes, Wang said.

The China Insurance Regulatory Commission announced new rules on April 4 that allow insurers to buy a stake in more than one peer, with effect from June 1. Existing rules ban insurers from buying stakes in more than one company that competes in the same market segment.

The 20 per cent shareholding ceiling that an investor can hold in an insurer will also be removed, while any purchase of more than a third of an insurer will need regulatory approval.

In the insurance sector - especially life insurance - an orderly exit from the market has been difficult, because life insurance policies were over very long terms, said Sally Yim, senior credit officer at rating agency Moody's Investors Service.