The Motley Fool

1 Huge Headwind That China’s Insurance Stocks Are Facing

China’s insurance market is massive. In 2018, total insurance premiums in China stood at RMB 3.8 trillion (US$563 billion) and this will only get bigger – much bigger. According to Swiss Re Institute, total insurance premiums in China are expected to more than quadruple to US$2.36 trillion by 2032.

Chinese insurance companies benefit from powerful tailwinds such as an ageing population, low penetration rates, and rising incomes. Insurers also have a big margin opportunity in utilising digitisation technology such as artificial intelligence (AI) and big data.

With AI, insurance companies can process claims more efficiently, spot fraud easier, and train insurance salespeople faster. With big data, meanwhile, insurers can better price an insurance policy and potentially realise improved margins.

While the tailwinds augur well for Chinese insurance companies like Ping An Insurance Group Co (SEHK: 2318) and China Life Insurance Company Limited (SEHK: 2628), China’s leading insurers also face obstacles.

Here’s one headwind that I think investors should be aware of before investing in Chinese insurance stocks.

The insurance market is opening up

Due to US pressure on China to open up its markets, China’s government has allowed foreign insurance companies such as Allianz to own a controlling interest in their Chinese businesses.

By owning a controlling stake, foreign insurance companies have more say over operations and have more incentive to take market share from their domestic rivals.

Foreign insurers are a threat to domestic insurers. They have the latest AI and big data technology. Their actuarial and risk management methods are very advanced. Because they have been exposed to more competition, foreign insurers are (generally) more efficient.

Foreign insurers are also run by managers who put shareholders first, versus state-owned enterprises (SOEs) like China Life who sometimes put the Chinese government’s interests first.

So far foreign insurers aren’t that big in China. As of April 2019, their collective market share by premiums was 6.48%. While their market share isn’t big, their share of the market is rising fast. In April the collective foreign insurer market share in China was 1.78 percentage points higher versus the prior-year period.

Ping An better-equipped to face foreign competition

Among China’s leading insurers, China Life and Ping An are among the biggest. In terms of size, both are similar but headed in opposite directions.

According to the China Banking and Insurance Regulatory Commission, China Life’s share of total 2018 premiums in the Middle Kingdom declined to 17.3% from 18.2% year-on-year. Meanwhile, Ping An’s market share rose to 16.2% from 14.4% the year before.

As its name suggests, China Life is a leading player in China’s life insurance market. It has hundreds of millions of long term individual and group life insurance policies and other policies in force. One of China Life’s competitive advantages is that the company possesses the broadest service and distribution network among all insurers in China with over 1.57 million exclusive individual agents.

On the other hand, Ping An is more of a financial conglomerate, with life and health insurance accounting for around half of sales. Banking accounts for another one-fifth of revenue and property and casualty insurance accounts for 21%.

Technological edge

Because it has more exposure to non-insurance sectors, Ping An is arguably the better play in the face of foreign competition. The company has also invested a lot more in technology. To date, Ping An has invested US$7 billion into technology initiatives and the company plans to spend another US$15 billion more over the next 10 years.

The technology will help Ping An be more competitive with increased efficiency and lower costs. Given Ping An’s huge customer base, the company can cross-sell its newly-developed technology and realise greater benefits.

If current trends continue, foreign insurance companies could continue to gain one or two percent of the market each year. While this is a negative revenue driver, China’s insurance market might be big enough for both domestic and foreign stakeholders to generate solid returns.

In the first half of 2019, China Life’s sales rose 11.6% year-on-year while Ping An’s operating profit attributable to shareholders rose 23.8% year-on-year.

Wall to climb for foreign companies

Although the national government will make it easier for foreign insurers to do business, foreign insurance companies still have a hurdle in gaining approval from local provinces, which could take some time.

Some local insurers have also been irresponsible and priced insurance premiums lower to gain market share – these will represent another hurdle for foreign insurers that aim to price policies responsibly.

Foolish conclusion

China is opening up its lucrative insurance market, and the foreign competition will be a headwind for domestic insurers. Between China’s two leading insurers, Ping An is arguably the better bet because it has invested so much in technology.

Competition might not be bad news for domestic insurers. Foreign insurers will push domestic insurers to be more efficient and the added efficiency could increase profits even if do.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.