Doing Business in China – The Life Insurance Sector

1. Doing Business in China – The Life Insurance Sector PRESENTATION TO:LAW 889 – China and Globalization Jochen A. Haug

2. Project Objectives • Introduction to the Life Insurance Business • Going abroad - China as an Emerging Market • Legal Framework • Business Strategies • Case Study: Allianz Group • Key Lessons

3. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

4. Life Insurance Business Definition • Provision: Payment of a sum of money upon the death of the insured • Can be used as means of investment or saving • Attractive for MNC life insurers to enter emerging markets • Universal product based on common human need • Fast growing industry in most emerging markets – with changing regulations favoring increased foreign ownership • Home markets are mature, saturated and highly competitive • Succeeding in this areas requires adaptation to different cultures • Differing cultural mindset towards insurance across nations • Need to adapt local face to appeal to the local consumer • Need to overcome legal and regulatory obstacles Global Status Quo

5. Example: Market Analysis Germany • Population of Germany: 82 M • Number of Life Insurance Contracts: 95 M • Number of Players in the Market: 35 • Market Share of Top 5 Players: 33 %

6. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

7. Market Analysis China I • Population of China: 1.297 B • Real GDP Annual Growth Rate since 1980 : 8-10 % • Insurance Industry Growth Rate since 1990: 30 % (p.a.) • Market Opening: 1990s • Number of Players in the Market: 35 • Market Share of the Top 3 Players: > 90 % (China Life Insurance, PICC, Ping An Insurance Group) Market shares Domestic Insurers: 97.4 % Foreign Insurers: 2.6 % (5-10 % in coastal cities) ___________Sources: CIRC; Watson Wyatt Survey 2005; McKinsey Report 2005; World Bank 2005

8. Market Analysis China II • China is already World’s Top 8 Life Insurance Market • Life Insurance Penetration Rate: 2.14 % • Life Insurance Premiums 2004: 39.88 B $ • 13 Domestic players: 38.82 B $ • 22 Foreign players: 1.05 B $ • Expected to reach premiums in 2008: 100 B $ • Growth Rate Life Insurance 2004 > 2005: 12.3 % (huge household-savings rate) (40 %) • Increase Premium Income 2004 > 2005 • Domestic Insurers: 3.7 % • Foreign Insurers: 356.1 % ___________Sources: CIRC; Watson Wyatt Survey 2005; McKinsey Report 2005

9. Competitive Advantages Local Players • huge national sales network • access to whole market since starting • well established brands • experienced management teams • responsiveness to market • local knowledge and local relationships • strategy tailored to given geography • access to government financial support • deep industry expertise • more professional sales force • brand image Foreign MNC

10. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

11. Market Opening in China: The Early Stage 1980s • Government allowed foreign insurance companies the opening of “Representative Offices” (no business conduct at all) • 1992: First license issued to AIG for life insurance (Shanghai only) • Few more licenses issued for Shanghai, Guangzhou, Shenzhen only • 1998: Establishment of the China Insurance Regulatory Commission • Very limited role of foreign firms in the national market 1990s Consequence

12. Market Opening China: WTO Accession 2001 Gradual Phase Out • Almost all restrictions on foreign insurance companies lifted • 2001: No numerical limitations any more • 2003: Opening of 12 additional cities Beijing, Chengdu, Dalian, Chongqing, Shenzhen, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan, Tianjin • 2004: All geographical restrictions lifted • 2004 – 2006: Phasing out of limitations on the scope of business • No complete lift of ownership restrictions in insurance industry • Life Insurance: - 50 % foreign ownership ceiling (no increase) • Non Life Insurance: - 51 % equity share limit - Wholly foreign owned entities from 2003 Remaining Restrictions

13. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

14. Business Strategies for China I Before Market Entry • Why going to China: Export platform - Access to Market – Competitor Defense Learning Source – Capabilities (Labor Force) • Form of market entry (level of control / legal framework) • Long run strategy: Adequate time horizon for profitability • Understand mindset of culture towards business / insurance • Realize responsibility, interest, limited authority of various bodies • PR in terms of China’s political sensitivities and goals • Establish “one face to China” • China is not one single market: 1.3 B people - totally different geographies – 205 languages

15. Business Strategies for China II Mode of Market Entry • Limited by RegulationJV may be the only option • Contractual Joint Venture • Pro: Lower initial investment, immediate access: local know-how, face • Con: Reduced control (IPR), potential of strategic conflicts (“same bed, different dreams”), expansion only with new agreement • Equity Joint Venture • Pro: Cost sharing, provided: site, labor, initial capital, “guanxi” • Con: Risk of strategic conflicts, veto of local partner, narrow business licenses, legacy issues, complex interest • Wholly Foreign Owned Entity • Pro: Control (Management & Technology), hire labor force de novo • Con: Bearing all upfront costs, lack of a domestic ally

16. Business Strategies for China III After Market Entry • Adapt business to the local environment (local face and language) • Important to be perceived as a local brand • First Mover Advantage - Success by tying up with local partners • Innovative business model, customized products and relationship focus can help to gain market share against dominant local players • Good relations to local government are critical: Personal relations (“guanxi”) more important than contracts (not enforceable) • No entanglement with corruption (Code of Conduct)

17. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

18. Case Study: Allianz in China I • 1917: Allianz set up first operations in China (providing insurance coverage to industrial and commercial clients in coastal cities) • 1979: Reinsurance Agreement with the People’s Insurance Company of China (PICC) • 1994: Representative Offices in Beijing, Shanghai and Guangzhou • 1998: Joint Venture with Dazhong (strong local player in non-life insurance business in Shanghai) for life insurance business • 2003: Establishment of Allianz Insurance Company Guangzhou Branch (first non life business) • 2006: Stock Acquisition (2.5 %) of Industrial and Commercial Bank of China (ICBC – Top 3 in China) for 1 Billion US$ (sales channel) • 2006: Re-name of JV into Allianz China Life Insurance • Since 2000: Strong promotion for public awareness: Donations, Training programs for local graduates, Sponsoring

19. Allianz in China: Marketing

20. Case Study: Allianz in China II Mode of Entry • C - Joint Venture: Allianz Dazhong Life Insurance (Shanghai) • Wholly owned property branch: Allianz Insurance (Guangzhou) • Stake acquisition: ICBC Each entry following respective regulation limits • Be local: Using local image and promotion (Chinese Culture) • Offering all products and websites in Chinese and English • IP Protection (training JV partner ↔ potential competitor) • Good relationship with local government most important • Personal relations (“guanxi”) more important than contracts (enforcement issue) Key Factors

21. Case Study: Allianz in China III Status Quo • Total Premium Income Allianz Life 2005: 36.2 M $ • Increase 2004 > 2005: 41.6 % • Business Sites: Shanghai, Beijing, Guangzhou, Hong Kong • Total Premium Income 2006 Q 1: 25.27 M $ • Expected Premium Income 2006 Total: 101 M $ • Increase 2005 > 2006: 186 % • Expansion expected: Zhejiang Province, Sichuan Province Future Perspectives

22. Life Insurance Business in China: Overview Life Insurance Business China - Emerging Market Legal Framework Business Strategies Case Study Key Lessons

23. Key Recommendations For Multinational Corporations • China offers huge chances for business as well as many risks • Need for a long term strategy • Need for a tailor made China strategy (adapt to local environment) • Playing in regulated markets • Importance of PR and relations to the government and officials • Protect IP and rely more on personal relationships than on contracts • Provision of clear regulations • More market opening – competition improves also own players • Increase legal enforcement and the court system • Provision of better IP protection For Chinese Government

24. Key Lessons 1 Mature and Saturated Home Markets → Going Abroad 2 China: Emerging Market with huge Potential (Globalization) 3 China: Regulation Framework 4 China: Business Strategies and Risk Management 5 Case Study: Allianz Life Insurance China – so far a Success Story 6 Recommendations for MNC and China

25. Q & A