China Opening Doors to Insurance Contacts

Some recent events indicate that the Chinese insurance market is becoming more open to foreign insurers. U.S. and Chinese regulators recently concluded an agreement to begin sharing information; AIG opened an office in the capital, Beijing, the first foreign company to do so; ACE Ltd. and China’s Huatai Insurance Co. recently concluded a strategic business partnership, and New York welcomed a visit by Tang Yunxiang, president of the People’s Insurance Company of China (PICC).

His arrival in the Big Apple, where he opened the company’s first ever office in the U.S., was warmly welcomed by representatives from about 150 U.S. insurance firms. PICC sells three-quarters of all the property insurance in China, and is expected to be privatized within the next two or three years, albeit on a reduced scale, with the Chinese government maintaining majority control. Still many of those who turned out to welcome Mr. Yunxiang were no doubt thinking what a nice partner PICC would make.

The closer ties led representatives of the National Association of Insurance Commissioners (NAIC) and a delegation from the China Insurance Regulatory Commission (CIRC) to conclude a memorandum of understanding (MOU) in Kansas City, Mo., on May 20. The two authorities agreed “to work together, exchanging information on insurance regulatory issues and educational initiatives of mutual interest to the two countries.” The accord recognizes “the increasing global nature of insurance markets and the need for mutual cooperation among international regulators.”

NAIC president and Iowa Insurance Commissioner Terri Vaughan stated that, “In today’s global economy, it’s essential to foster open communication among regulators and encourage cooperation on matters of common interest. The purpose of this MOU is to help insurance regulators maintain efficient, fair, safe and stable insurance markets in China and the United States for the benefit and protection of policyholders.”

The NAIC indicated that under the agreement’s terms the next step is to “establish an Insurance Working Group” which will improve relations between insurance regulators in the U.S. and China and will “focus on specific regulatory issues of mutual interest.” It also provides a “framework for cooperation, the exchange of information and technical assistance to the extent permitted by applicable laws, regulations and requirements.”

Two days later AIG announced that its “100 percent owned” Chinese life insurance subsidiary, American International Assurance Company, Ltd. (AIA) had received authorization to open the Beijing office. On June 6, AIG’s CEO, Maurice “Hank” Greenberg attended the opening ceremony. At the following news conference, he indicated that the company expects to see its revenues from insurance premiums in the People’s Republic grow between 20 and 25 percent this year, over the $200 million in premium it recorded in 2001.

AIG’s history—it was founded in Shanghai in 1919—certainly appears to be working in its favor. It was the first foreign insurer to return to the Chinese market under the reform regime of Deng Xiao Ping, and is the only one that controls 100 percent of its Chinese subsidiaries. Greenberg defended that advantage at the press conference, stating, according to a report from Dow JonesNewswires, that “We came to China more than 20 years ago and provided many things for China and worked very hard for U.S. and China relations. Where were the other foreign companies 20 years ago? If they want to continue to complain, I’ll give them a large crying towel.”

They might need one. AIG’s head of communications Joe Norton confirmed that the company already has, or is in the process of formalizing licenses for eight cities—Shanghai, Guangzhou, Shenzen and Foshan, which offer both life and p/c coverage, and Beijing, Suzhou, Dongguan and Jiangmen, which offer only life products. They operate through two subsidiary companies, AIA and American International Underwriters Insurance Co. (AIUIC) for p/c.

“In 1996 we acquired a thirty year lease on the building in Shanghai [where AIG was founded] and it’s been renamed the AIA building,” said Norton. The subsidiary ownership question held up China’s accession to the World Trade organization for some months, as European negotiators sought changes to eliminate what they felt was an unfair trade advantage. AIG agreed to limit, but not eliminate, the number of wholly owned subsidiaries it operates in China, but the scope of this accord is quite vague.

According to several news reports, a CIRC official, who refused to be named or quoted directly, told reporters at a news conference on June 11 that AIG wouldn’t receive any more licenses for subsidiaries that weren’t at least 50 percent owned by a Chinese partner. But, as AIG has continued to receive licenses without this requirement, it might still benefit from its “grandfather clause” in its agreements with the Chinese. Norton admitted that he wasn’t exactly sure what the situation was either.

While the bulk of AIG’s revenues are currently being generated by its life insurance activities, property/casualty sales are increasing as well. Norton said that AIUIC “serves the non-life insurance needs of foreign invested enterprises in Shanghai, Foshan and Shenzhen.” It provides an array of property/casualty products and services to foreign invested enterprises, including “FORTUNE 500 companies” operating in those cities.

“Products range from standard property, general liability and marine coverages to specialized programs that address boiler and machinery, directors and officers liability, employer’s liability and professional liability exposures, products liability insurance and mechanical breakdown programs,” said Norton.

ACE’s deal with Huatai might give AIG some competition. Founded in 1996, Huatai had total assets of around $600 million at the end of last year and total premium income of $77 million. It writes both personal and commercial lines, oil and gas, marine hull and cargo and aviation from eight branches
in Shanghai, Beijing, Guangzhou and other cities. It’s been given approval by the CIRC to open 18 more branches and 22 “sub-branches.”

The deal is structured as a partnership arrangement. ACE will acquire 22 percent of Huatai’s outstanding shares for approximately $150 million. The investment will give ACE an immediate entry into China’s growing p/c market, avoiding the necessity of applying for and waiting to receive licenses from the CIRC. “The partnership will allow both companies to develop jointly new products and services for delivery nationally in China, and establish a framework for expansion into other key financial services areas,” said the announcement.

The actual investment procedures, however, are complicated by Chinese regulations. There will be three separate investments by subsidiaries: ACE INA, ACE Tempest Re and ACE US Holdings. Three ACE nominees, group chairman and CEO Brian Duperreault, ACE INA chairman Dominic Frederico, and ACE INA executive vice president Peter O’Connor will take seats on Huatai’s Board of Directors.

The bulletin explained that, “In addition to serving on the Board of Directors, Mr. O’Connor will become a full-time senior advisor to Huatai based in Beijing. Mr. O’Connor has 39 years of international insurance experience and will report to ACE Limited Vice Chairman Evan Greenberg, who is head of ACE’s international operations.”

Duperreault expressed his pleasure at the deal, calling Huatai, “a unique company operating in an exciting marketplace.”

He also noted that it would “provide ACE with nationwide access to China and enable us to provide our products and services to the largest and fastest growing market in the world. We are confident that together we have a compelling business proposition for our clients.”

It’s not too farfetched to think that some day New Yorkers may be able to proudly display their homeowners’ insurance policy from the People’s Insurance Company of China, while Beijing residents can count on their life insurance with AIG, and insure their cars with ACE.

Topics USA Legislation China Property Casualty AIG