Finance and economics: Insurance in China Safe or sorry?
Regulators try to tame the unruly parts of an important industry.
EVEN for a country used to rapid growth, the expansion of China’s insurance industry has been something to behold.
Assets managed by insurers have doubled in less than four years to 13.9 trillion yuan ($2.1 trillion) .
Their revenues from selling policies have accelerated, climbing 42% year-on-year in the first quarter of 2016.
Most remarkable has been the increase in their workforce.
Over the past six months alone, they have added 2m to their sales force.
They now employ some 7.2m people, up 120% since the start of last year.
Put another way, roughly one in every 50 workers in Chinese cities is selling insurance products.
Fast growth is, in one respect, just what China’s insurance industry needs.
The population will get much older in the coming decades, but the public pension scheme is still in its infancy.
By supplementing public coverage with private policies, the government hopes that people may just manage to escape penury in their old age.
At the moment the government covers roughly a third of medical expenses and insurance companies less than a tenth, leaving individuals to pick up more than half the tab themselves, according to Enhance International, an insurance consultancy.
That is an especially heavy burden, naturally, for the elderly.
But excessively rapid growth, built on flimsy business models, risks doing more harm than good.
There have been plenty of worrying signs.
The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products, an extremely risky strategy for what is supposed to be a sober and reliable industry.
To deliver these returns despite a lacklustre stockmarket, they have piled on debt and cut into their own margins.
Moreover, these short-term products do not necessarily help investors through retirement: people are free to cash out when their policies mature, leaving them with no coverage against death, illness or accidents.
Regulators appear to have had enough.
In March they announced their strictest rules yet to curb speculative behaviour.
They barred insurers from selling products with maturities of less than one year and began to phase out those with maturities of less than three years.
These measures, though somewhat crude, should help prevent mismatches between long-term assets and short-term liabilities.
This month regulators turned their attention to some of the insurers that have been among the boldest in expanding.
First they sent inspectors to Sino Life Insurance Co, which has run down its capital in recent quarters.
Then they went to Anbang, which has increased its assets some 50-fold over the past two years.
That inspection was a particularly important signal about the clout of regulators.
Many observers had assumed that Anbang would receive preferential treatment, thanks to strong political connections (its chairman is married to the granddaughter of Deng Xiaoping, a revered former leader) .
But regulators blocked its $14 billion bid earlier this year for Starwood, a big international hotel chain, and now seem to be clipping its wings at home.
More fundamentally, China has also overhauled solvency rules, which should force insurers to change the way they operate.
Capital requirements had been based on simple gauges of size.
Now they are much closer to the norm in developed markets, varying in line with how quickly policies turn over and how premiums are invested.
Firms that rely excessively on short policies or that invest heavily in the stockmarket must hold a much bigger cushion.
The heyday of rapid expansion by opportunistic firms is over, predicts Lee Yuan Siong of Ping An Insurance, one of China’s biggest providers.
“The government saw the danger early enough before it got out of control.”
If the new rules work, insurers will need to focus on persuading people to buy their policies for protection rather than as an investment.
That is a safer bet, but a harder sell.