By Samuel Shen and Kazunori Takada
SHANGHAI (Reuters) - Ten years ago, foreign insurers were lining up to celebrate China's entry into the World Trade Organization, eager to tap what was certain to become the world's next big insurance frontier.
A decade on, it is mainly the local insurers that are celebrating.
Four out of five foreign insurers are suffering losses in their China operations, strangled by tight regulatory controls and intense competition from local rivals who, the foreigners complain, enjoy unfair advantages. Some foreign firms are heading in the opposite direction, reducing their exposure to China or pulling out completely.
"Expectations have not been lived up to," said Chris Kaye, a Hong Kong-based partner at the Boston Consulting Group. "When you look at some of the business plans for entry...and look at the actual delivery performance, there has been a big shortfall. What we're seeing now is a re-evaluation of what it takes to win."
China's WTO entry did indeed herald a boom. Over the past 10 years, insurers have seen annual premiums jump six-fold to 1.5 trillion yuan ($236 billion). There is room for further growth, backed by a rising middle class in a country with 1.3 billion people.
That boom has produced clear winners, just not among the foreign players. China Life Insurance Co <2628.HK> <601628.SS> and Ping An Insurance <2318.HK> <601318.SS> have grown into the world's first and second-largest insurers by market valuation, respectively, in part thanks to the financial crisis hitting foreign insurers globally. They and non-life stalwart PICC have truly cashed in on the great China insurance sector boom.
On paper, China has played by the rules. Beijing, which will mark its 10-year anniversary since joining the WTO on December 11, has technically stuck to its promises to open the sector it made to gain entry to the WTO.
China pledged to allow foreign firms "effective management control" in life insurance joint ventures, but it limited foreign stakes to 50 percent while letting them choose their partners freely. Beijing also promised to phase out geographical restrictions on where they could operate.
Analysts say while China has met the letter of the law, in practice, the playing field is far from level.
"Regulatory hurdles are a big challenge," said Alex Wong, Shanghai-based partner of PriceWaterhouseCoopers.
Foreign insurance firms, for example, must endure lengthy and often inconsistent bureaucratic procedures to open a provincial branch, severely retarding their pace of expansion. Sino-foreign life insurance joint ventures have seen their growth typically capped to two provinces a year, a pace that would require at least 17 years to build a nationwide network, Wong noted.
Foreign banks also have faced similar regulatory controls over their expansion, but their limited retail presence as well as their focus on lending to multinational firms, most of which are based in major cities, have made business more profitable.
But for insurers, which target Chinese individuals or companies, having a large sales force is crucial, analysts say.
"The licensing restriction has led to many other problems, such as inability to gain economies of scale, weak brand recognition...and in some cases, disadvantage in talent wars," said Sally Yim, senior credit officer of rating agency Moody's Investors Service. "These are the hidden costs that had not been expected by foreign insurers."
In terms of ownership, foreign insurers can only enter China's life insurance market by setting up a joint venture with a local firm and their stake is capped at 50 percent.
Non-life insurers are allowed full control of their local unit, but are barred from selling compulsory third-party motor insurance policies, which puts them at a significant disadvantage in the lucrative auto insurance sector.
IN THE RED
China's life insurance sector, crowded with 61 players, is dominated by China Life and Ping An, which combined make up close to 50 percent of the entire market. The non-life space is dominated by PICC Property and Casualty Co Ltd <2328.HK>, which holds a 37 percent market share.
Foreign players have clearly failed to cash in. Of the 47 foreign insurers and JVs operating in China last year, only 11 made a profit, according to Moody's.
Despite their numbers, the foreign share of China's life insurance market has shrunk to less than 5 percent from a peak of 8.9 percent in 2005, according to the sector regulator, the China Insurance Regulatory Commission. The non-life piece of the pie is but a sliver at around 1 percent.
By contrast, foreign insurers command a more than 50 percent market share in both life and non-life arena in Hong Kong, Singapore and Malaysia.
In China, their troubles have been compounded by an influx of local entrants in recent years, some of which now boast much wider sales networks, while a growing number of major Chinese banks also have made forays into the industry, threatening the main sales channel for some foreign insurers.
Frustrated and disillusioned by the slow pace of deregulation and increasing local competition, firms such as AXA SA
The main regulatory hurdle facing non-life insurers is the lack of access to compulsory third-party motor insurance policies. Analysts say this greatly hinders their ability to compete in the auto insurance market, which makes up more than 70 percent of non-life premiums.
According to a PriceWaterhouseCoopers survey released on Monday, most of the 28 life and non-life insurers expect their market share to stagnate around current levels over the next three years. It also showed that the level of commitment of foreign insurers toward China has been falling since 2008.
Despite the gloomy outlook, analysts say it is unlikely that foreign insurers will abandon the Chinese market altogether given its potential. They also need to be in the world's second-largest economy to ward off a slowdown in United States and Europe.
BCG estimates that China's gross written premiums will grow around 11 percent every year between 2010-2017, compared with an annual pace of about 4 percent in the United States, 2 percent in Japan and less than 1 percent in Britain.
"It's very important for investors to participate in the China story. There's not much growth in the U.S. and Europe and if you look eastward, China remains an attractive market," Moody's Yim said.
But just how much of that growth foreign insurers will be able to capture in the long run remains far from clear.
(Editing by Brian Rhoads and Matt Driskill)