Free Newsletters About Insurance!

Enter your Email

Challenges Of Insurance Industry - Challenges To Insurance Growth In China And India

Challenges Of Insurance Industry

The sustained growth of China and India's life insurance market presents exciting opportunities in size and scope. But newly emerging market segments and intensifying competition make traditional approaches insufficient to capture their full potential. Players who can innovate and identify differentiated models for different customer segments are most likely to succeed. We see the following key challenges that life insurers in China and India will have to deal with in the next decade:
  • Regulatory restrictions for entrants
  • Operational challenges
  • Increasing complexity in managing the product portfolio
  • The need for distribution excellence
Regulatory Restrictions For Entrants

We have already laid out above that, foreign players in particular, have to deal with significant regulatory constraints in both China and India. The stringent ownership requirements for foreign insurers make the choice of an entry model a most critical decision. For foreign players, entry into India generally means one of two choices: a 26 percent "active" stake or a 26 percent "investor" (more passive) stake. China entry is more varied: players can choose between a 50 percent joint venture or a minority stake in a local insurer, as Zurich has with New China Life.

But this is not merely a choice for the foreign partner. Joint-venture partnership is also a key decision for Indian and Chinese enterprises choosing to enter the insurance market for the first time. In India, there are few local insurers with the right know-how. As a result, firms choose to acquire that technical expertise through partnerships with foreign insurers. In China, despite already intensive competition, nonfinancial Chinese enterprises, state, owned or private, continue to be interested in diversifying into the insurance sector. 

While some of these, such as State Grid Corporation of China, developed their own wholly-owned insurance subsidiary (Yingda Taihe), many more chose to partner right from the beginning, such as the PetroChinaGenerali joint venture. Consequendy, foreign joint-venture partnerships with nonfinancial firms have increased over the years - between 2000 and 2006, the proportion of life insurance joint ventures with nonfinancial local partners increased from 33 percent to 71 percent.

So what is the right choice for a new entrant? What type of a partner would be the best fit? For China entry, should one look at a joint-venture partnership or merely buy into a minority stake? Not surprisingly, there is no single answer. First, an entrant, domestic or foreign, needs to establish how investment in the China or India market fits into its corporate portfolio or strategy. 

That would dictate the degree of control required and the type of partner as well. For example, foreign insurers seeking a large degree of control will find local nonfinancial companies attractive partners due to lower managerial conflict, potential synergies in cross-selling to the partner's customers, and lower premiums for any transaction. Our analysis shows that investors paid a premium as much as four times the normal rate for established life insurance firms.

Some foreign insurers seeking to break into the China and India market lament the amount of upside, technical know-how, and control that must be yielded in a joint venture for a relative small stake. However, it is important to bear in mind that no joint venture is permanent. Rather, it is a temporary construct where both sides seek some benefits within a certain period of time. For domestic partners, that benefit is often the industry knowledge from more developed markets. For the foreigner, it is the opportunity to capture local market knowledge, while waiting for further deregulation. Japan's SONY-Prudential is a classic example where both sides of the joint venture gained from the partnership and went on to prosper individually. Our observations show that success in a joint venture requires good implementation of the following elements:
  • Developing early spikes in channels or products. For example, Manulife-Sinochem focused on the Chinese family/retirement-planning market, while CMG-Cigna chose a strong focus on telemarketing, avoiding direct competition for scarce, quality tied agents.
  • Finding partners who are committed to the long-run. China International Trust and Investment Company (CITIC) believes life insurance is a strategic focus for its financial arm and explicitly wants its CITIC Prudential joint venture to be a long-term venture (it has been in operation since 2000) and capital invested has been over US$246 million (among the largest of all joint ventures).
  • Taking care when transplanting a foreign model. China's insurance joint ventures are full of examples where foreign insurers were too eager to transplant their home models. For example, at least two foreign insurers have tried to transplant their sales incentives system to China, but underestimated the difficulties in localizing the system.
  • Demarcation of powers between partners. Clear demarcation of power at the onset of a partnership can avoid misunderstandings and conflicts. While horror stories about Chinese joint-venture partners have been well-documented in the Western media, we have found that fault often lies with both sides right from the beginning of the partnership when misunderstandings are left unattended.
Finding the right joint-venture partner is not always easy, A partnership search is akin to courtship, where both sides need to find a suitable match. Holding out for the right partner might delay critical time-to-market, but more often than not, entering an inappropriate marriage is even worse. 

Operational Challenges

In the nascent markets of China and India, massive operational challenges exist in terms of geography and talent shortage. Despite the skyrocketing market growth, intensifying competition means operational efficiencies will increasingly matter. To grow further, players will need to overcome the challenges inherent in the China and India markets.

Large Geographic Expanses

The sheer size of both China and India is daunting. Each have hundreds of cities surrounded by vast rural areas, which are very hard to access. In its infant stage, life insurance market growth was driven out of the major urban centers, such as Beijing, New Delhi, Bangalore, Mumbai, and Shanghai. Today growth is increasingly coming from second- and third-tier cities and even rural areas. Furthermore, customers have increasingly heterogeneous needs and are gradually, but increasingly, becoming more demanding. All this has increased the potential opportunity but also made it much more difficult to capture.

To grasp the immense size and diversity of these markets, consider this: China comprises 31 provinces in a country that spans 5,200 km east to west. India has 29 states in a nation that spans 3,050 km from north to south. As of 2006, China has 119 cities with population over 1 million and India has 69. The US has only 9 cities of that size and Europe has 36. 

Beyond the four best-known first-tier Chinese cities of Beijing, Guangzhou, Shanghai, and Shenzhen, there were another 854 urban centers in China as of 2005 - 14 large cities with a population of over five million, 69 mid-sized cities of 1.5-5 million, and 775 small cities and towns with a population of 0.5-1.5 million. According to the 2006 Census of India, there were five cities with a population of over four million, 22 cities of population range 1 - 4 million, and 43 third-tier towns with a population of more than 500,000.

And wealth is by no means limited to the tier one cities. By 2025, 46 percent of China's "upper aspirant" segment is expected to come from mid-sized cities and another 9.2 percent from small cities and towns. Sixty percent of the population in mid-sized and small cities will be considered middle class; in the larger cities, as the affluent segment grows, about 50 percent of households would be middle class. Similarly in India, the McKinsey Global Institute estimates that 25 percent of the middle class will come from the second- and third-tier cities by 2025.

In short, the growth story in China and India is expanding from first-tier cities to include second- and third-tier cities and then the rural areas. This presents an enormous growth reserve as this potential market is massive (for example, in China, approximately 770 million people are still living on the countryside). But this also raises substantial logistical challenges for insurers who will have to deploy hundreds of thousands of agents, scattered over a vast geographical expanse. 

Even today, the agency networks of the leading players are already quite difficult to manage due to their geographic dispersion. In our experience, the majority of the insurers in these markets do not know (within a margin of 10 thousand agents) how many agents they currently have. In China, for example, one company accidentally discovered that one of its agents defrauded the company, claiming to have established an office from which subagents were deployed. However the office turned out to be his bedroom - and the agent pocketed the office rental payment. This small example provides a flavor of the even bigger problems of management that will come as the battlefield moves to the rural areas.

Rather than allowing themselves to be intimidated by the scale of the challenge, players are innovating to capture this growth opportunity. In India, micro-insurance and rural insurance initiatives in partnership with NGOs, rural distribution depots, and even the postal system are emerging to carry insurance into the hinterland. Further, players are beginning to innovate with "franchise" models - through which they appoint local entrepreneurs as "contract unit managers" and leverage their current employee base as agents (after training and certification), creating a win-win proposition for the entrepreneur and the insurer alike. To find out more, you can check Challenges Of Insurance Industry.