Allianz and Axa join vanguard as China courts capital*

Allianz and Axa’s near-simultaneous announcements last month about Chinese expansion reflect a push by Beijing to court investment in domestic financial services companies. Allianz, in gaining clearance to establish China’s first wholly foreign-owned insurance holding company, and its French peer, in becoming the sole owner of a top-ranked P&C carrier, both claimed “firsts”.

The approvals reflect a greater Chinese openness to inbound investment that was underscored in April by a package of reforms announced by the recently merged Chinese Banking and Insurance Regulatory Commission (CBIRC). The People’s Republic of China has several reasons for welcoming aspirant foreign owners of Chinese carriers: the need to attract capital into the market, a desire to lift insurance penetration, and a wish to signal that the country is open for business amid continuing trade tensions with the US.

For Western carriers, the prize is access to the world’s most populous market where low levels of insurance penetration are set to grow with Chinese GDP expansion. The “One Belt, One Road” infrastructure investment programme is forecast to generate huge opportunities for carriers. China is already the third-largest insurance market with $223.9bn in non-life premiums in 2017, according to AM Best. Allianz recently predicted the Chinese insurance market – including life – would grow at an annual rate of 12.9 percent over the next decade, well over three times the predicted pace in North America. Moore Stephens’ global insurance head Peter Allen said: “From the Chinese government’s point of view it makes sense both strategically and tactically, and from carriers’ point of view the sheer physical size of the Chinese market means in the long-term big players like Allianz can’t avoid being there.”

The reforms proposed by the CBIRC in April included the abolition of the two-year representative office requirement for foreign players wanting to establish their own insurance company, and the clearance of foreign-funded brokers to operate on an equal footing with domestic peers.The moves also provided for qualified foreign institutional investors to operate insurance agencies and loss-adjustment businesses.Foreign backers have been able to own 100 percent of Chinese P&C carriers since 2004, but few have made the most of that opportunity.

Allianz and Axa announced their moves on 26 November.The Allianz entity will be based in Shanghai and known as Allianz (China) Insurance. Axa, meanwhile, is to buy the remaining 50 percent stake in Axa Tianping Property & Casualty Insurance Company, the 15th-ranked Chinese P&C carrier. The moves followed news in May that Willis Towers Watson had become the first international broker to receive a full licence in China. JLT gained a licence extension soon after.

Few advisers expected a stampede of interest from foreign players and they noted that the barriers to entry remain high. For some, the approvals for Allianz and Axa appeared deliberately timed for the G20 summit in Argentina. Li Jiao, counsel at Buren, a member firm of Global Insurance Law Connect, also suggested there was an element of showboating with the Axa and Allianz approvals. “In terms of the procedure I don’t see any indication from the government that they will speed up the establishment of foreign invested enterprises in China,” she said.

Yang Tiecheng, a partner at Han Kun Law, said questions remain over how foreign carriers will be permitted to operate across China in practice. “Whether they are joint ventures or wholly owned it’s unclear whether they will be treated the same as local insurance companies in terms of the type of business they can do and in terms of expansion across the country. That is an issue.”Given the small market share of foreign-funded insurers there is little chance of these carriers becoming dominant forces anytime soon, the lawyer added.“They won’t be able to catch up in the near future – there is no worry about foreign investors squeezing out Chinese insurance companies.”

Also in the works is a reform that would allow foreign owners of life insurers to lift their holdings to 51 percent from 50 percent. As currently proposed, they would have to wait another three years from the implementation of the reform to own 100 percent.However, that timeframe is widely expected to be accelerated.

Han Kun’s Yang Tiecheng noted that Chinese Premier Li Keqiang said last month China would attempt to meet the goal of 100 percent foreign ownership in financial institutions (including life insurers) as soon as is practical. On announcing its buyout of Axa Tianping Property & Casualty, Axa noted that the P&C market in China has been growing at 13 percent a year over the past five years. And with just 1.3 percent insurance penetration, the opportunities are clear.

But Moore Stephens’ Allen cautioned: “There are still very major barriers to entry – not least of which is the fundamental unprofitability of the market. I would see this being a very long game – we are talking about decades not years – and my strong instinct is that this remains a big players’ game.”

_{*This article was published by Insurance Insider on December 11, 2018, and written by Laura Board. Please click here to see the original article.}