China worth risk for foreign insurers(2)

Competing on service

Foreign insurers can also compete well on service, an area where there is a substantial gap between supply and demand.

The domestic insurers are not complacent. In the top echelon of the industry at least, they are looking to become more customer-centric. Once they move, they will move fast, but with their traditional distribution and business models, it will take them a while to adapt.

While they do, there is a window of opportunity for foreign insurers to expand their business and online models, and quickly roll out superior service models to attract customers. And by being largely online, they would also have a significant cost advantage, which could lead to lower product prices and attract more customers.

If we turn to the dynamics of the China's economy, growth in the tier 1 and 2 cities will be modest, and they will become strong insurance retention and switching markets, playing to online models.

In the next five to 10 years, China's domestic development will be driven increasingly by the lower-tier cities, and the large domestic insurers will find it difficult to quickly deploy their rigid distribution models in these growth areas.

For example, recruiting and retaining skilled agents is one of the biggest problems today for the industry, and it's hard to imagine that staffing tier-3 and 4 regions will be any easier.

Again, the savvy insurer should build up alternative or open new channels of distribution in these emerging provincial economies. But they will need their own additional provincial licenses, partner with provincial insurers, or move substantially online.

Price comparison websites

Buying or taking substantial stakes in domestic insurers is easier said than done. Fewer are available, with many already in equity partnership with foreign insurers.

However, there are still more than a handful of mid-sized insurers without foreign partners, and some existing partnerships are not going well. Some foreign insurers may choose to exit within the next few years.

As insurance price liberalization continues, the case for price comparison websites or online brokers increases, and this provides a new entry model. Here, however, the need to build a brand presence is even more important than for a traditional insurer, and as this will take time, I would expect these to start emerging fairly rapidly.

While building a brand will consume capital, this entry model requires far less regulatory capital, approvals and scrutiny.

Innovative cooperation

The bank and motor-dealer channels, the largest third-party channels in life and property insurance respectively, are not growing as fast as before, and are even contracting in some areas. They no longer offer foreign insurers a quick route to growth. And as distribution is undergoing a re-think, further cooperation is needed.

With online distribution, foreign insurers can overcome their distribution disadvantage to an extent, but they still need to acquire underwriting licenses province by province, and gaining them is a slow process, even for Chinese insurers. As noted, purely online operations seem to offer a way through this expansion conundrum, at least in the short term.

To get greater and faster distribution coverage, foreign insurers could partner up with smaller domestic insurers and re-consider their online strategy.

A foreign company could also cooperate with a small domestic insurer that has underwriting licenses in complementary provinces, roll out their online expertise for that partner and share profits via quota share arrangements or other non-equity agreements.

In China, you need to understand the system and play it. Unfortunately, most foreign insurers are rigid and traditional in their thinking and will only entertain Western business models, and so cannot succeed. This perhaps helps explain why all the foreign insurers together only have just above 1 percent of the property and casualty market, and 4 percent of the life market.

Now is the time for foreign insurers operating in China to double their development efforts to embrace the market opportunity, to diverge from Western business models via innovation, and to compete where the large domestic incumbents will find it hard to penetrate.

There are still opportunities for insurers with treasure chests to get into the market.

In my opinion, the dynamics for success in the China market have never been better.

　　The author is head of Insurance Consulting at KPMG China.