One of the secret fears of foreign insurers was the possibility that the might of local Chinese banks would be thrown against them. Foreign insurers may love liberalization, but they greatly feared the possibility of China emulating the United States by crushing the dividing walls between insurance and banking businesses.

While commercial banks will not be allowed to underwrite securities and insurance policies, they will be allowed to sell securities and insurance policies for brokerages and insurers, said the Bank of China in a statement.

Local banks wanted the walls separating banks, insurance and securities to be removed because, they argued, they have been put at a disadvantage when competing with foreign rivals.

But the central bank said the financial industry is not mature enough to handle a supermarket-like banking system, under which banks try to be universal financial service providers. If the central bank had accepted the request of domestic banks, foreign insurers would have found it extremely difficult to build up the consumer bases they hope to. The effect would have been greater in the non-life segment, because a majority of buyers of industrial and project insurance are still state-run companies that have a close relationship with domestic banks.

There was an expectation that authorities would loosen restrictions on banks and insurance firms entering each others fields after they recently allowed state-owned China Insurance Company to restructure itself into a financial holding company. This restructuring allows it to invest in business other than insurance. Another firm, the Beijing-based China International Trust and Investment Corp., is permitted to control a range of financial businesses that include banks, securities brokerages and insurance firms.

Fortunately for foreign insurers, the central bank has now made it clear that it had made a couple of exceptions, but, by and large, the domestic banks will not be allowed to enter the insurance business.

In other developments, Chinese authorities have not been content with the conditions laid out by the WTO, but have decided to bring about some systemic changes in the market and drastically amend the Insurance Law.

“The Insurance Law clashes with the current circumstances as well as Chinas WTO commitments,” explained He Jingzhi, the industrys only high-ranking representative in the National Peoples Congress, the countrys high decision-making body.

The NPC is working on a proposal outlining the legislative changes required to help China meet its WTO commitments on market liberalization and is expected to make a decision later this year.

The proposal contains suggestions for changes in more than 40 clauses in the Insurance Law that was enacted in 1995. The idea is to balance the need for greater liberalization and the growing calls from domestic insurers for a level playing field in the face of mounting pressure from foreign rivals.

The current Insurance Law is seen by critics as outdated on several points such as the use of premiums and the types of insurance business. Insurers are not allowed to freely invest their premium income on different investment options like bonds of private companies, real estate or the stock market.

Some aspects of the law, such as the legal provision on investment norms for insurers, have caused a lot of complaints from the industry. For example, the law says that premium income can only be deposited with banks or used to buy government and financial bonds. This provision may have made sense before 1996, sources say, but since then, interest rates have been cut eight times and this has squeezed profit margins and deepened the repayment risks of insurers.

The industry wants to use alternate options. It has requested the government issue medium- and long-term treasury bonds that will have higher interest rates to enable them to match liabilities with assets in a suitable manner.

One proposal for establishment of a special investment fund by a select group of insurers has been temporarily rejected by top leaders, Ms. He said. Insurers had argued with authorities that a portion of their premium income may be kept aside in the form of a special investment fund that would be canalized into high-risk, high-gain investment options.

“We should conduct an in-depth study of the question concerning the use of funds of domestic insurance enterprises, appropriately broaden channels for the use of insurance funds and increase insurance investment returns, so as to enhance the competitiveness of international insurance industry,” said Hoa Yansu, head of the insurance department of the Central Finance and Economy University.

Ms. He said insurers also would like permission to invest in the stock market in a small way and expand investments if things go well in the future

“If we leave our funds idle in fear of risks, its a big risk in itself,” according to Ms. He, who also serves as the general manager in the Shanghai branch of China Life Insurance Co.

Ms. He recently gave vent to the problem of bad blood between domestic and foreign insurers when she publicly disapproved of the recent trend of foreign insurers to team up with Chinese industrial companies rather than professional insurance firms.

It is possible that foreign insurers are hoping to set up fully owned insurance companies in China when regulations are further relaxed in the future and this is why they prefer having a partner with no experience in insurance, she said.

In another development in the Chinese market, the fast pace of growth expected in the Chinese insurance industry sector after the nations entry into the WTO has revealed a major shortage of actuaries.

The country has only about 40 local actuaries, with only a few boasting international actuarial qualifications. Most senior actuaries work for larger insurance companies while foreign companies find it extremely difficult to find local actuaries.

Given the generally low salaries of professionals in different fields, actuaries are somewhat better off with annual pay ranging between 200,000 Yuan and 400,000 Yuan (US$24,000-US$48,000), although this is insignificant compared to the fact that foreign actuaries get over one million Yuan a year.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.