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The Hangzhou Dialogues: Nurturing cooperation in risk management as China rises

. Shorenstein APARC The Stanford China Program. The Hangzhou Dialogues: Nurturing cooperation in risk management as China rises. Montana State Auditor John Morrison NAIC's International Vice-Chair for Asia. 1. The NAIC-CIRC relationship. 2003 Meeting Memorandum of Understanding

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The Hangzhou Dialogues: Nurturing cooperation in risk management as China rises

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  1.  Shorenstein APARC The Stanford China Program The Hangzhou Dialogues: Nurturing cooperation in risk management as China rises Montana State Auditor John Morrison NAIC's International Vice-Chair for Asia

  2. 1. The NAIC-CIRC relationship • 2003 Meeting • Memorandum of Understanding • Interns • Issue Based Symposia • Yi Chang, 2007- health insurance • Xian, 2008 - asset management or catastrophic coverage • Education based relationship

  3. 2. IAIS • Growth • Beijing 2006 • Executive Committee • U.S. leadership • China membership • Uniformity/consistency based • Solvency II

  4. 3. China’s Insurance Market(as of 1/08) • 107 Companies, 62 Domestic, 35 U.S. branches, 1600 agencies • $414b US in assets • $96.6b US in 2007 premium, up 24% from 2006; 30%/yr since 1980 • Per capita $46 US vs. $3747 in the U.S. • Life 75%, Non-life 25% (health, compulsory auto, commercial property casualty) • Low density, 2.7% GDP • CNInsure

  5. 4. The China Insurance Regulatory Commission (CIRC) • Created 1998 • Cabinet level ministry since 2003 • 31 local offices in every province except Taiwan • Centralized authority • Provinces support local consumers and industry • www.circ.gov.cn

  6. 5. U.S. – China Insurance Trade Negotiations • USTR • Department of Commerce • 2001 Doha Round-multilateral (153 WTO members, China 2001) • General Agreement of Trade and Services (GATS) includes insurance • Four prior rounds of insurance dialogues • Key issues • Branching (old) • Investment rules (old). Broader asset classes/overseas; equal treatment, seasoning • Market access: caps on ownership of domestic companies; JVs; Wholly owned subsidiaries, esp. life (Doha) • Auto TPL. (Doha) • Private pensions/enterprise annuity. Domestic adv 57/1; moratorium

  7. 6. 2008 U.S. Insurance Dialogues attendees • U.S. side • USTR (AUSTR, Director for China Affairs, +3) • NAIC • USDOC • U.S. Embassy • AIA (American Insurance Association) • ACLI (American Council of Life Insurers) • AIG, Travelers, Chubb, ACE, New York Life, Met Life, Liberty Mutual, FM Global • Chinese side • CIRC • PICC • China Life

  8. 7. Preliminaries • Moment of silence for earthquake victims • Government to Government session (no industry) • Vice Chair Li Kemu: Commercial insurance important supplement to public systems; economy, efficiency, stability; sub prime crisis, earthquake crisis; premium revenue growth; International community • AUSTR Tim Stratford: appreciation to Li; saddened by quake; watching carefully as government makes tremendous efforts to rescue; U.S. Companies helping to gather funds; President Bush supportive; our governments recognize much to gain • Li on key trade issues: In discussion on opening MTPL insurance to foreign insurers (no WTO commitment); overseas investment no longer limited; Branch companies of foreign insurers, being approved now; Investment of foreign insurers in China, “We are actively promoting this issue” and ask USTR help • Stratford response. Noting favorable rulings; urging increased equity caps

  9. 8. NAIC: Comments on Market Regulation, John Morrison / Walter Bell • State Regulation vs. Sub Prime • Corporate governance-Sarbanes Oxley vs. NAIC Model Audit rule • Market Analysis Framework/Market Conduct Annual Statement • Functional regulation • Asset management/ SVO

  10. 9. CIRC: Update on Insurance Law, Yang Hua Bai • Current law passed June 30 • Phase 1, submit to State Council; Phase 2, Solicit opinions; Phase 3, expand scope of insurance law • Transparency is an important principle of WTO to ensure stable and fair environment for industry and to protect citizens • CIRC is exceeding WTO requirements • Solicited opinions of foreign insurers and regulators • 30 day period before implementation, established channels to answer questions • Transparent implementation, too • Lawsuits can be filed based on laws and regulations • Public hearing before canceling license -TV broadcast (e.g., mandatory 3d party liability) • Regular press conferences

  11. 10. American Insurance Association: The Role of Risk Management and Loss Reduction-How Insurance promotes an expanding business sector, David Snyder • 2006 U.S. Disasters-$300 billion paid to businesses and individuals to rebuild, saving public funds • Employment: 489,000 jobs, $31b payroll, $15.4b premium taxes, 16% of public financing (bonds) • Loss reduction, risk analysis, education, public safety (auto, workplace) • Charitable contributions • Asset protection for national priority industries • Benefit of foreign companies in market (esp. MTPL) : consumer choice, product innovation, actuarial capacity, technical improvement, mitigate domestic exposure, stimulate trade

  12. 11. China Life: Corporate annuity / health supplements, Wan Feng • Growing private pension market: 16,000 companies had private pensions supplementing social security; 30,000 in 2007. 60m employees • Health insurance: 34.3b RMB premium, 27% increase from 2006. 30.17m people covered, 8.75m had medical expenses covered • Provincial models (laboratories of democracy?): govt /other stakeholders, TPAs • By 2020, 16% of population will be over 60, needing pensions • Most of China Life Pension Co. are state owned enterprises • Seeking tax benefits and other governmental incentives for health insurance

  13. 12. AIG: Private pensions, Alan Lam • History of private pensions; pervasiveness-41% U.S., 87% Japan, 30% France • Growth of seniors in China, 3.3-1 individuals supporting retirees • Government may: raise taxes, cut befits, raise retirement age, or create incentives for private pension plans • Employer sponsored, Teacher association, unions • Principles: long term capital appreciation, quality of assets, diversification managing risk and return, catering to age, risk tolerance • Case studies: Brazil, Hong Kong

  14. 13. NAIC: Recommendations for development of health insurance, John Morrison • Premium assistance, tax subsidies, purchasing pools • TPAs to manage employer sponsored plans. Provider networks, plan design, regulation, enrollment and billing, claims handling, HSAs, pension and work comp • Supplemental benefits, esp. for BMI. Medicare supp., Part D., lost wages/out of pocket • High risk pools • Reduce Marketing costs. 5-12% vs. 30-40% • Clarify regulatory authority. Uniformity and transparency • Improve quality of care • Promote wellness (e.g. tobacco) • Control health care costs. HIT, EHRs, EBM, P4P, primary care • Fight fraud

  15. 14. Asset management • NAIC, Walter Bell. To address timing lapse between premium receipt and claim payout; to support sometimes unprofitable underwriting; facilitate asset-liability matching. Non-life 4.2-4.4%; Life 5.6-5.9%. Securities Valuation Office (SVO) assures 80% of assets are investment grade and not > 10% stock equities (diversification). NAIC Investments of insurers model acts. • MetLife. Eric Wu, director of international investments. Snapshot of asset allocation: 41% corporate bonds; government bonds; proactive asset management; diversification. • CIRC, Guo Yan, Director of Capital Management. Non-discriminatory approach. Companies investing globally, including equities; control concentration of risk; tiered approach based on sophistication; encourage investing in mature markets. Derivitives may be used to hedge (not speculation) but need underlying assets. • China Insurance Society, Lu Zhongmin, president. Investment-linked products. More than 20 companies offering, creates net cash outflow from equity markets; volatility with rapid market growth. Disclosure of risks.

  16. 15. Catastrophic risk insurance • CIRC Asset Insurance Division. Earthquake highlights need. 11.8% of damage from catastrophes in developing countries covered by insurance. Higher in developed countries. One sixth of Chinese population faces natural disasters. *Climate change causes more significant natural disasters.* Hurricanes, floods. People not aware of value of insurance. Commercial insurance limits government burden. • Insurance Association of China, Jin, Jiang Qiang. Earthquake: <5% appears covered. China needs cat risk management. Current model is government. China is moving toward new model-joint effort, government and industry. Financial system not yet developed for these risks. Cat fund needed. CIRC risk management task force. • NAIC, Walter Bell. U.S. earthquake, hurricane flood risk. Principles: personal responsibility, bldg codes, maximize risk bearing capacity of private market, state-regional cat fund, federal backstop. Consider all perils coverage with plain checklist. • AIA, Dave Snyder. Shared issue. U.S.-Wind covered, flood federal, earthquakes excluded with pools, fire following covered. All perils controversial.

  17. 16. Microinsurance • CIRC, Duan Jiaxi. Serve low income people. Government subsidies. Regulators encourage rural expansion. Three major life companies 25% in rural areas. Next steps: evaluate system, encourage rural, build new distribution channels (China Post?), update services, enhance study of microinsurance, increase international cooperation. • ACLI, Brad Smith. World Bank-insurance for the poor. Can introduce companies in developing markets. Avoid 2 tiered system. • NAIC, John Morrison. Differences from conventional insurance: cash premium, unlicensed intermediaries, sold to groups, targets low income, consumer education, declaration of good health, small sums, group pricing, few exclusions, simple policy and claims process. Encourage availability, adhere to IAIS core principles, key to economic development, watch unregulated schemes.

  18. 17. Agriculture Insurance. PICC, Wang He; USDA, Jorge Sanchez, Ag attaché • Total coverage: 830m RMB 1993-500b RMB 2007 • 2005-06 new era > 100 new products; 2007 personal/commercial • 67 million acres of land; 28m livestock head • Risk management; increase awareness • Government has 6 subsidy programs • Control, transfer, mitigate risk

  19. Questions and Answers Montana State Auditor John Morrison NAIC's International Vice-Chair for Asia jmorrison@mt.gov 1-800-332-6148

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