China opens its doors

China has opened its doors to foreign insurers in a bid to further liberalise the financial market. Since 1st January 2020, 100 per cent foreign ownership in life insurance companies has been allowed in China. The opportunity is a huge talking point as insurers look to target this c. USD3 trillion¹ market.

Recent liberalisation and development of China’s insurance sector

Foreign insurers have previously been restricted to owning no more than 50 per cent of a life insurance company in China. This didn’t stop foreign insurers entering the market. In fact, close to 50 foreign life and non-life insurers have done so in the past 30 years², however it tended to be via joint ventures (JVs) with onshore partners, holding up to a 50 per cent stake. Those JVs have had various degrees of success, dependent on the relationship, cultural fit and risk appetite between the parties, and their shared goals. However, no single foreign insurer JV has managed to gain a significant market share to date³.

Over the last few years, we have seen China relax restrictions providing insurers with new opportunities in the country.

The opportunities for foreign insurers

China is already the world’s second largest insurance market and is tipped to become the largest insurance market globally by 2030⁸. As of July 2020, total assets of China’s insurance industry are RMB22.06trn (USD3.22 trillion), representing a 13.5 per cent y-o-y increase⁹. Clearly this represents a huge opportunity for foreign insurers and will now become a key growth market for many.

A low insurance penetration rate of 4.6 per cent versus a global average rate estimated to be 6.1 per cent¹⁰ indicates the insurance market is still developing and there is scope for new products and providers to help close this gap. Taking learnings from other developed markets could improve the understanding and take-up of insurance products locally.

Options for entry

For new entrants to the market, the options are relatively straightforward:

1. Set up a Wholly Foreign-Owned Enterprise (WFOE) insurance entity in China.
2. Set up a JV with a local partner.
3. Acquire an existing China based insurer.

However, for those with an existing JV, the options may vary depending on the insurers’ strategy, which could include:

1. Leave as is and continue with current JV.
2. Buy out, or a majority stake of, the JV from the existing partner (e.g. HSBC Insurance (Asia) Limited has entered into an agreement to acquire the remaining 50 per cent equity interest in HSBC Life China, from The National Trust Limited¹¹).
3. Sell their share of the existing JV and set up a brand new WFOE insurance entity in China.

Both points ii and iii would be subject to agreements with the JV partner and regulatory approval.

The insurer will need to ensure they have or apply for the right insurance licence(s) from CBIRC before they commence business. Each area of insurance has a specific licence, e.g. life, P&C, health, etc, and they may need to apply for multiple licences if planning to offer different insurance products and offerings. The insurer will also need business approval from CBIRC which includes an on-site inspection to review internal controls and underwriting and/or claims processes.

Strong momentum despite Covid-19

Whilst Covid-19 has impacted the global economy, it has not dampened the opportunity in the insurance market. Insurance continues to be a necessity (life or general) and foreign insurers continue to press ahead with their plans. In March 2020, CBIRC released the Interim Rules on Insurance Asset Management Products, which helps to broaden the investment channels of long-term insurance funds. It gives full play to the advantages of insurance asset management products, which help guide long-term funds to participate in the capital market, support infrastructure projects, and improve the quality and efficiency of service to the real economy¹². The market regards it as another sign of China further encouraging the growth of the insurance sector.

How Securities Services can help

HSBC is a licensed custodian for insurers in China and is focused on helping our clients enter the market, navigate the local nuances and complexities and grow their business. Our China insurance solution includes:

• One-stop-shop insurance custody solution for local and/or QDII (overseas) investment and full-suite securities services solution.
• Market expertise and thought leadership through timely update, intelligence and best practices on market developments and dialogues with regulators.
• Consistent servicing locally and regionally/globally with a dedicated client coverage team.
• Adoption of local system vendor with significant market share in China’s insurance sector allows prompt development for insurers’ needs and regulatory changes.
• Highly recognised and commendable Securities Services provider regionally/globally for the insurance sector with strong understanding of insurers’ needs (HSBC 2019 Securities Services Annual Client Satisfaction Survey).
• Dedicated on-boarding manager and stringent governance to ensure efficient and fast setup and migration.

HSBC in China

HSBC has been established in China since 1865. As a leading international bank, HSBC has a proven track record of onshore custodian services for over 25 years. HSBC has been licenced to perform insurance custody services since 2015.

China is a strategically important market to HSBC. We have been making constant investments in China to continue to capture the expanded opportunities brought by the opening-up of China’s financial market, and actively participate in the financial reform and innovation. Leveraging HSBC Group’s strong global subcustodian network and extensive custody expertise, we are able to better service both local and international insurers with our holistic onshore and offshore proposition, and connect one of the largest insurance markets with rest of the world.

China’s insurance market is expected to become the largest globally by mid-2030.