Changes by China's insurance regulator to shore up the country's insurance sector that go into effect next month should make it easier for overseas insurers to enter or expand their foothold in the market.
Under rules the China Insurance Regulatory Commission announced in April, insurers — including those based outside of China — can acquire Chinese peers operating in the same business segment as the acquirer. They replace rules that restricted foreign insurers from buying a stake in more than one Chinese company operating in the same business area.
The revised rules “represent a significant opportunity for both domestic and foreign insurers that wish to build and expand their business in China,” New York-based law firm Debevoise & Plimpton L.L.P. said in a briefing note.
“Foreign insurers will have a shortcut route to expand distribution networks,” said Maurice Williams, London-based managing director of the Asia-Pacific, Middle East, Turkey and North Africa division of Willis Re, part of Willis Group Holdings P.L.C. “Previous rules required a gradual buildup from a specified city or province licenses, but they can now acquire a nationwide license via acquisition.”
The new rules were inspired partially by a desire to enable smaller insurers to merge more easily and reduce fragmentation in a market dominated by several large players with numerous smaller, often weak companies (see story, right) said Michael Cripps, a partner in the China corporate group at law firm Clyde & Co. L.L.P. in Shanghai.
The rules are among a series of steps by CIRC to open the marketplace, he said. For example, the regulator in 2012 allowed insurers with foreign investors to enter the third-party auto marketplace.
The new rules likely will give outside insurers a swifter route into the Chinese market through mergers and acquisitions, although there is likely to be little immediate change in the overall number of insurers licensed by the regulator.
“We do expect to see more M&A activity” as a result of the changes, said Carrie Yang, a partner in the corporate, insurance and reinsurance team at Clyde & Co.
Outside insurers may be able to build nationwide networks more quickly by purchasing domestic companies or taking a stake in domestic companies, Ms. Yang said.
Philip Chan, Hong-Kong-based manager for the greater China region of XL Group Ltd., said the rules will give foreign insurers a route into the China market.
“However, insurers must give due consideration to controls, the cost justification of the equity invested, performance and the impact on their own brand,” he said.
“Nondomestic insurers in China are actively targeting and developing (auto accident and health) business,” Mr. Chan said. “Longer term, liability business will gradually grow. The pace of growth will depend on the development of laws and regulations and the enforcement system.”
“In China, setting up a nationwide distribution network can be time-consuming as well as costly,” said Vivian Cheung, a senior financial analyst at A.M. Best Asia-Pacific Ltd. in Hong Kong. “Stronger players, in terms of financial strength, may look to acquire insurers that are less financially sound, yet (have) some built-in product distribution advantages that they lack.”
This will particularly favor outside players, “as many of them lack a nationwide distribution network like the large domestic players have,” she said. Smaller domestic players also could “beef up their business profile.”
The rules may result in new international companies investing in the market, said a spokeswoman for Marsh L.L.C. in Beijing. Outside insurers that already have a presence in China can “expand their footprint,” she said.
“This should facilitate faster growth of foreign insurers' market share in China,” said Willis Re's Mr. Williams. Particularly in lines where global insurers can use sophisticated pricing tools, analysis and marketing techniques, there are “huge opportunities” for overseas companies to gain a greater foothold in the market, he said.
“Greater economies of scale and wider risk spreading are the key incentives for foreign insurers to take part in M&A deals,” Fitch Ratings Ltd. in Hong Kong said in an analysis of the revised rules in China.