An insurance market set to grow 20 percent year on year to achieve $128 billion by 2010, China looks like the perfect place to do business. Ana Paula Nacif reports

But those looking to grow their balance sheets should also keep an eye out for the risks facing the region. If at the moment the opportunities are endless, being an immature market also means China presents some challenges to brokers and insurers.

With a booming manufacturing industry, one of the main political risks in the region is the threat of civil unrest which may arise from labour disputes. The gap between rich and poor is growing exponentially, creating a divide which may well prove to be difficult to breach.

Civil unrest is not unknown to Chinese workers. Last year over 1000 workers took to the streets to protest against a plastic toy supplier to Disney and McDonald's. As the country presses on with economic and political reforms, there has been an increase in the number of mass incidents, such as riots, demonstrations and protests, from 58,000 in 2003 to 87,000 in 2005, mainly related to labour unrest, but also linked to uneven economic growth throughout the country as well as environmental degradation, corruption and human rights abuses.

New labour laws are expected to be enforced in a bid to keep workers happier and give unions more bargaining power. Although such measures may reduce violent actions such as riots, it also means that litigious actions could increase as a result.

Despite government efforts to promote unionization, there is still a long way to go before the country's workers feel they are being heard. Independent unions are illegal and, unlike their counterparts in the West, labour unions in China are neither independent nor representative of workers' rights. Chinese unions are all under the All China Federation of Trade Unions and, as such, are merely an extension of the state and the party with independent unions being illegal.

Tanja Vestergaard Jorgensen, political analyst (Asia-Pacific), Global Insight, explains that the government is increasingly worried about mass incidents. She says that a contributing factor to social unrest has been the fact that the government has focused on developing the eastern and coastal regions/cities, while neglecting the interior and western areas.

“Another factor is that the country is slowly dismantling the communist structures, which means that there is no more cradle-to-grave care and there are lots of people without employment, health care or social security,” she adds. “The Chinese government has laid off 43 million people working in state-owned enterprises between 1997 and 2004, about 40% of that workforce.”

She emphasises that the government has taken some steps to alleviate the situation through social and economic programmes, “but there is a lot more to be done. We are talking about a huge country and it does take time.”

Widespread corruption, nepotism and bureaucracy have also helped to make matters worse. President Hu has implemented several anti-corruption measures within the Chinese Communist Party, expelling 45,000 of its members in 2005.

“Corruption at all levels is a major issue in China. A problem that is recognised by the Communist Party,” Vestergaard Jorgensen explains. “The government wants stability and legitimacy, and that is why they have implemented various anticorruption measures.” But there is no consistency and the party has to tread a fine line between fighting corruption without exposing their own members who might, at the same time, be involved in some kind of dishonest conduct themselves.

Environmental degradation is another huge problem in China. According to the State Environment Protection Administration (SEPA) it would cost China about US$136 billion (or 7% of 2004's GDP) to undertake an effective clean-up of the deteriorating environment.

The government is trying to get its act together, but enforcing environmental policies throughout the country is easier said than done. Combine that with resistance from businesses and local authorities, and it becomes increasingly difficult to see China as a green country.

In terms of risks facing companies, Steven Dewhurst, partner at DLA Piper Hong Kong, cites corporate governance, regulatory activity, fraud and litigation culture as examples of the issues facing those doing business in China.

“Environmental liability, data privacy and security, as well as regulatory intervention, are also emerging risks,” he adds. “And, as the financial sector develops, you also have data collection issues. It is the sheer scale of the task, they don't have the logistic to cope with that and data breaches may be a problem.”

However, China remains a competitive market with endless opportunities, especially for reinsurers. “You have an increasing domestic market but lack of technical skills means that they are happy to push the risks to the reinsurance market. There is a skills gap and that is where the opportunities are,” says Dewhurst.

There were 100 insurance companies in China in 2005, whereas in 1999 there only 29. The country also has five reinsurance companies, only two of which are domestic.

Foreign insurers are gradually gaining space in the market. In 2006 there were 121 foreign invested operating entities. And in 2005 foreign companies had 18.15% of the market share in Beijing; 18.62% in Shanghai and 10.73% in Shenzhen.

Foreign insurers can access the market via three possible business vehicles - equity joint venture, whole foreign-owned enterprise and branch company of a foreign insurer.

According to Roy Chan, office managing partner, DLA Piper Shanghai, the Chinese market needs more variety of insurance products, with many areas still to be explored. There is also a need to further promote liability insurance, including professional liability, personal insurance, reinsurance, commercial retirement insurance, health insurance and the intermediary markets.

China has its problems, but the scope offered by this growing market may well be worth the risks.

Charles Keville, director of Aon Crisis Management in London, says that, for foreign companies, risks need to be assessed according to their line of business. “If a company retails electronic goods manufactured in China, there is a supply chain risk. Since China entered the World Trade Organisation, in 2001, there has been good progress. And although there is some social unrest within China, on a macro level, both economically and politically, the country has proved to be fairly stable.”

This Special item appeared in issue 112 of JTW News - February 2007

Author: Ana Paula Nacif - JTW News