A New Year's resolution for the Globalizing insurer

The day after Christmas on Wednesday, December 26th 2007, China Pacific Insurance Group Ltd., China's third-biggest insurance company, had a spectacular Shanghai stock market share launch with its 30 yuan shares (US$ 4) ending the day 61% higher as reported by Reuters. The company had put a billion A-shares up for sale on the Chinese mainland, taking in US$ 4.1 Billion - the sixth-biggest share launch in mainland Chinese history.

China Pacific is the third domestic insurer in China to have a spectacular debut in Shanghai this year after China Life Insurance Co Ltd. and Ping An Insurance (Group) Company of China Ltd. I want to use this as an example of how globalization of insurance is contrary to popular opinion helping not hurting the domestic insurance industry in newly opened markets such as China. Countries such as China have moved away from protectionism or state control and have deregulated and privatized insurance to encourage a stable, properly managed, and thriving insurance industry. This increases the professionalism in the domestic insurance industry as domestic companies scramble to apply best practices developed by new foreign competitors and start providing superior customer services, introducing new products and transferring technological and managerial know-how.

A historical precedent for this spectacular success of the effect of globalization on the Chinese domestic insurance industry was ironically set by China’s arch rival Taiwan. Before Taiwan opened its insurance market to foreign competition in the 1980s, life insurance premiums accounted for less than one percent of Taiwan’s GDP, with local players such as Taiwan Life Insurance Company enjoying 100 percent of the market. After almost 15 years of the globalization of Taiwan’s life insurance market, it accounts for over 4 percent of GDP. Taiwan’s overall GDP has more than doubled from 1987. The foreign insurance companies had extremely good rates of growth but as did the domestic companies who are now in 2007 larger and more profitable than ever before and still dominate the Taiwanese life insurance market. These same Taiwanese companies, who once vehemently opposed opening their market to foreign competition, are now themselves going global by establishing operations in other countries in Asia.

The Economist published an article on December 19th, 2007 in their Buttonwood column on the crises to watch for in 2008 which I read with great interest. The article identified two areas of worry in 2008: the commercial property market and (surprisingly) the former iron curtain countries of Eastern Europe. I raised my eyebrows reading about the Eastern Europe bit, because up until recently, insurers going global such as Swiss Re were touting this post communist region as one of the key areas of insurance growth in the world along with Asia and Latin America. I predict that in 2008, domestic and foreign insurers in Central and Eastern Europe will globalize further and increase their market share thanks to removal of regulatory barriers to market entry as regulators share their expertise across borders creating a more uniform regulatory environment, privatization of state monopolies, consolidation and reform in pension and health and workers' compensation insurance. As we saw in the Taiwan example, this in turn will help to boost the GDP in these countries in the long run, so this area of worry identified by the Economist may just be a bit of false alarm.

A New Year’s resolution for insurers in 2008 should be that even if they have no intention of establishing a global presence, they must be prepared to compete successfully with insurers who do, because they can be certain these insurers are assessing the potential of their corner of the world. Today, Chinese media said that China Pacific Insurance Company now planned as soon as possible to go ahead with a second listing in Hong Kong, where it would issue 900 million shares valued at not under the Shanghai launch price.