Life insurance is an agreement signed by an insurance policy holder and an insurer, where the insurer promises to pay a sum of compensation upon the occurrence of the insured individual’s death. It not only gives ordinary people peace of mind and helps supplement retirement benefits, but raises capital for large infrastructure projects (Perkowski, 2011). The domestic China life insurance market, after 20 years of spectacular growth in the insurance industry, has ranked as the sixth-largest in the world, with a high insurance premium growth rate of 26.
5 percent (“China knowledge”, 2012). Even so, the life insurance industry in China is still in its infancy. The overall size is relatively small, and the annual life insurance premium is less than 20 percent of the $1. 2 trillion of premiums collected by the United States (“Planning reports”, 2012). In this essay, I first examine the existing dilemmas in the China life insurance industry, and then move on to propose some possible solutions to identify the problems. The most notable problem of the life insurance industry in China is the limited diversity of insurance products.
In the insurance market, as the overall increase of income level and awareness for life insurance, people have expanded demand for life insurance for the safeguarding function. However, the life insurance industry in China has formed a tendency of “focusing on investment, neglecting guarantee” (“Planning report”, 2012), which means that the life industry has excessive focused on the investment-featured life insurance, instead of the basic function of safeguard provided for the aged. The lack of diversity also results from the poor innovation in the industry.
Since the start of life insurance industry in China is late and its market power is still weak, there is a shortage of professional actuary and empirical date, which are the necessary factors of product innovation. An additional concern is the non-standard internal management. Constricted by planned economy, the life insurance industry paid more attention to business development than the internal management over the past 20 years, which result in some unstandardized corporate institution setting and the lack of standardized management tool (Wang & Xu 2012).
Not only leads to the market confusion, the non-standard management method also causes dishonest behavior within the industry. A report issued by the China Insurance Regulatory Commission (CIRC) revealed that fraudulent and misleading information from life insurance sales is the most common cause of customer complaints (“China insurance”, 2012). The last problem to discuss is the low premium rate of the life insurance industry.
More than half of the funds are deposited as fixed deposit in the banks, so the premium rate has to over depend on the bank rate. Since 1994, the People’s bank of China has cut interest rate of financial institution for 7 consecutive times, from which the insurance industries suffered considerable losses (Huang, 1999). The life insurance market also lacks professionals in investment and fund application section, who are the key for rational investment decision making.
The bad debts and bad loans caused from that reduce the financial efficiency in the market, as well as have a negative impact on the premium rate. One way of tackling the diversity problem is that the insurance companies could make regular and in-depth market investigations to identify the market trend and customer preference since the single products cannot satisfy the needs of customers. After accurate analysis, companies could focus more on the insurance products which cater for the market demand.
The insurance company might also explore new and attractive insurance products by utilizing the data from market investigations so as to appeal potential customer. Regarding the non-standard internal management, a wise and strong regulation is vital to establish a healthy market (Binder, Hu and Walker, 2006). Government could work out regulations to standardize the enterprise organizational structure, position setting and human resource management. Then the transparent internal management could gain public trust upon the industry.
The CIRC is also responsible to strengthen the monitor on the financial health and risk-management systems of life insurers to ensure the smooth operation within the industry (Binder, Hu and Walker, 2006). With respect to the premium rate problem, government could relax the rules to provide more flexible investment options to the insurance industry. For instance, by investing the funds in the real estate, insurance companies could make full advantage of character of its funds, which is strong stability and long maturity, to effectively avoid the fluctuation of interest rate, as well as high deflation.
To conclude, the life insurance industry in China did not keep pace with the whole development of China, mainly because of its single variety products, non-standard internal management and low premium rate. To alleviate the problem, insurance companies could launch innovative products, and government could enhance the regulatory system, strengthen the supervision, and widen the investment channel. Since the life insurance industry is of vital importance for the social welfare, it is urgent to take effective measures to enhance the life insurance industry in China.
References: Binder, S. H. , Hu, H. Z. & Walker, P. B. (2006). Life insurance industry in China – McKinsey Quarterly- Financial Services – Insurance. Retrieved November 27, 2012 from https://www. mckinseyquarterly. com/A_life_insurance_policy_for_China_1758 China Life Insurance Industry Indepth Research and Investment Strategy Planning Report, 2012-2016 – Research Report-Forward (2011). Retrieved November 27, 2012 from http://www. forwardbi. com/report/detail/8db2f75ca4a742a4. html China Insurance Industry (2012).
Retrieved November 27, 2012 from http://www.chinaknowledge. com/Business/CBGdetails. aspx? subchap=4&content=18 Huang, L. (1999). Broadening of life insurance fund investment channel in China. The journal of insurance management in China, 5 11-16. Perkowski, & (2011).
Life insurance in Chia – Forbes. Retrieved November 27, 2012 from http://www. forbes. com/sites/jackperkowski/2011/12/06/life-insurance-in-china/2/ Wang, X. J. & Xu, Y. (2012). Market statue of Life insurance industry in China. Retrieved November 27, 2012 from http://www. doc88. com/p-250206880020. html.