The insurer noted that China is exposed to significant natural threats, including earthquakes, windstorms, floods and tsunamis. Its study underlined the fact that supply chains in the region are more likely to face business disruption caused by a natural disaster, particularly because China has not yet ‘fully embraced’ many of the risk management practices followed in Europe and the United States, said the insurer.

FM Global’s study found that:

• Twice as many companies surveyed (86% versus 43%) say they are more reliant on China as part of their supply chain for their key product lines than they are on Japan.

• 83% of companies surveyed consider supply chain disruption a moderate to great risk.

• 95% of companies reliant on China for their supply chain are worried about natural disaster-related disruptions.

• 65% of companies surveyed are considering ‘increasing collaboration with suppliers on mitigating risk at their locations’.

“The findings of the study should be a wake-up call for companies that have substantial investment and dependency on supply chains in China,” said Vinod Singhal, Brady Family Professor of Operations Management at the Georgia Institute of Technology’s College of Management.

“A natural disaster-related supply chain disruption in China would have far-reaching and long-lasting negative economic impact. It would slow down the global economy because China is not only a major exporter of goods, but also a major importer of goods. It would cause shortages in many consumer and industrial products that could lead to inflation and devastate the share price of companies,” he added.

Dr Howard Kunreuther, the James G. Dinan Professor of Decision Sciences and Public Policy at The Wharton School of the University of Pennsylvania, added: “The findings in this report point to how interdependent risks can have severe financial consequences in global supply chains. Firms need to undertake proactive measures, such as finding several sources of supply so that they are not dependent on one company that may be adversely affected by a natural disaster. There needs to be a realisation that the process of developing a resilient supply chain takes time.”

FM Global said that it recommends businesses ask four simple but ‘often overlooked’ questions when they analyse their organisations’ resiliency, especially when it has, or could have, a critical reliance in emerging markets such as China. These are:

1. Does your senior management view resiliency as a competitive advantage and has it made the necessary commitment to address supply chain risk?

2. Has your organisation examined how it can mitigate risk within its product design and manufacturing processes?

3. How well does your company collaborate with its suppliers to assess and mitigate risk?

4. Does your corporation have appropriate business continuity and disaster recovery plans in place for supply chain disruptions in emerging markets, such as China?

Meanwhile, accounting firm PwC announced this week that it believes foreign insurance companies face ‘unprecedented’ challenges in China currently.

The firm said that the increasing dominance of domestic insurers and an escalating ‘war for talent’ have overtaken China’s regulatory environment as the key challenge for foreign insurance companies that operate in China.

The conclusions are based on PwC’s fifth Foreign Insurance Companies in China survey report based on interviews with senior executives from 28 foreign insurance companies based in Beijing, Chengdu, Chongqing, Guangzhou and Shanghai.

The accounting firm said that the survey reveals that 2011 was a challenging year for foreign insurance companies in China because they had to contend with increasing competition from domestic insurers and banks encroaching into their traditional marketplace. China’s rising cost of living is also making talent retention and recruitment more difficult, said the accounting firm.

David Law, Global Insurance Leader at PwC, said: “It hasn’t got any easier for foreign insurance companies to operate in China. Regulation and limitations in the number of insurance companies that are able to distribute their products through banks may benefit companies with a good partnership, but others, particularly the smaller insurers, may lose out.”

Recently introduced bancassurance rules have resulted in several shareholding changes and an increasing number of Chinese banks have replaced other domestic companies as joint venture partners. Foreign insurers are keen to take a share in their Chinese peers, a move they feel will help them expand geographically in China. They are also supportive of dual investments, where foreign insurers are allowed to invest in more than one insurance entity, said PwC.

The survey found that, for the first time in the five years that the firm has carried out the survey, life insurers identified increased competition from domestic insurers and the war for talent as the greatest challenges. Property and casualty companies still consider China’s tight regulatory environment to be the top concern.

The market share of the foreign insurers that took part in the survey has not improved much since 2010, said PwC.

Life insurers remained at 5% share and p&c insurers at 1%, the lowest level in Asia. PwC said that the figures are not expected to change dramatically in the next three years. But the announcement in May that foreign insurers will be allowed to enter the mandatory third party liability (MTPL) market may help boost the market share for property and casualty companies, said the firm.

But, despite the challenges inherent in penetrating the Chinese market, foreign insurance companies continue to stake their future in China.
Mr Law said: “The relatively low market share of foreign insurers in China is both a challenge and significant opportunity. Premiums are experiencing high levels of growth with low levels of market penetration, showing why China is such an attractive market. Selecting the right business model to capture China’s growth potential will be key. For the respondents, there is no question of quitting the Chinese market. While the challenges may be great, they are certainly not insurmountable, and there is a significant potential prize.” 



But while it may be a long hard slog for the primary insurers in China the reinsurers are enjoying something of a boom, in revenue terms at least.

Reinsurance broker Aon Benfield reported this week that Chinese reinsurance premiums have increased 70% since 2005 and that the pace of growth is expected to rise.

In its China Property & Casualty Insurance and Reinsurance Market Report the broker stressed, however, that the China Insurance Regulatory Commission (CIRC) has indicated in its latest five-year plan that the insurance industry will continue to face major challenges. Aon Benfield said that while many of the challenges are not new, they are ‘complex and amplified’ by the scale of the market and the speed of its development.

The broker highlighted some key developments in the Chinese market including the fact that:

• China represents close to 4% of the world’s total insurance premiums at RMB1.45tn ($226bn) for life and p&c, which has grown from 1% over the last decade. The CIRC is targeting a 15% CAGR (compound annual growth rate) over the next five years

• The Chinese p&c market outpaced GDP expansion for the 10 years to 2010, growing to RMB402bn ($59.bn), which represents a 20% CAGR

• Government subsidies have supported annual growth in agriculture premiums of greater than 100% from 2005 to 2010 to reach RMB13.6bn ($2bn) and

• Aggregate reinsurance premiums ceded by Chinese p&c insurers in 2010 were RMB44bn ($6.5bn), and have thus expanded by 67% since 2005.

But it is not an easy market by any means, noted the broker.

It said that, in terms of perils, China has suffered five of the top 10 deadliest natural disasters in history and recent events affected over 70% of China’s land area and more than half the population.

The CIRC’s 12th five-year plan consequently includes the creation of a national natural disaster risk transfer programme and the improvement of loss models and underlying data. The broker said that this could lead to potential growth in the purchasing of catastrophe insurance and reinsurance.

Malcolm Steingold, Chief Executive Officer, Asia Pacific for Aon Benfield, said: “Over the past 10 years, China has emerged as an insurance and reinsurance market that cannot be overlooked. However, when we look beyond the macroeconomic growth, underlying opportunities and challenges are not necessarily what they first appear to be. For example, a detailed analysis of the property market shows that growth has been more in line with gross domestic product than with the faster overall market growth, which is largely driven by motor business.”

Ralph Butterworth, partner at Inpoint, Aon Benfield’s consulting division, added: “The evolution of Chinese insurance regulation is bringing the market closer to international best practice. Over time this should support increased transparency and improved profitability, potentially hand in hand with the entrance of more foreign insurers into the Chinese market and the global expansion of Chinese reinsurers. Expertise and experience accumulated and tested in the global market are still of much relevance to China as it targets further growth over the next five years.”

Henry To, Chief Executive Officer, China for Aon Benfield, commented: “Over the years from 2001 to 2010, the Chinese insurance market (P&C and life) was the second fastest-growing national market in the world behind Malta and now represents close to 4% of the world’s total insurance premiums—up from about 1% in 2001. Given the still low insurance penetration rate and China’s comparative economic outlook, this share can only be expected to grow.”

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