The Impact of WTO Accession on China's Insurance Industry

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ABSTRACT

This article provides an overview of China's commitments to the WTO with respect to the insurance sector, along with an analysis of the major issues to be faced by China's insurance industry following WTO accession.

INTRODUCTION

On December 11, 2001, China became a member of the World Trade Organization (WTO). This will have a large impact on China's insurance industry, already illustrated by the Chinese government's commitment to open the insurance market further to foreign companies.

Company Ownership

China's government has promised that, upon WTO accession, foreign nonlife companies will be allowed to establish branches or partnerships, with a maximum ownership stake of 51 percent; two years after WTO accession, subsidiaries will be allowed. Foreign life companies may establish partnerships with maximum ownership of 50 percent upon WTO accession and 51 percent three years after accession; fully owned subsidiaries will be allowed five years after WTO accession. Upon accession, foreign reinsurance companies will be allowed to set up branches/subsidiaries or partnerships and provide life and nonlife reinsurance without regional restrictions or numerical restrictions on operating licenses.

Regional Restrictions

Upon WTO accession, foreign life and nonlife companies will be allowed to operate in Shanghai, Guangzhou, Dalian, Shenzhen, and Foshan; two years later, they will be further allowed to operate in ten more cities: Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan, and Tianjin. all regional restrictions will be removed three years after accession.

Business Restrictions

Upon WTO accession, foreign nonlife companies will be allowed to engage in the sale of "master policies" without regional restrictions and also to underwrite large commercial risks. Currently foreign nonlife companies are allowed to provide property coverage, related liability, and credit insurance for subsidiaries of foreign companies operating in China. Two years after accession, these companies will be allowed to provide the whole range of nonlife products to both Chinese and foreign clients.

Currently, foreign life companies are allowed to provide individual (nongroup) life insurance to both Chinese and foreign citizens. Three years after WTO accession, these companies will be allowed to provide health, group, and retirement/annuity products to both Chinese and foreign citizens.

Reinsurance

China Re, the national reinsurance company, currently requires a 20 percent cession fee, which will be reduced by 5 percent each year after WTO accession and zeroed out four years later. But foreign reinsurance companies will still be excluded from mandatory insurance for auto third-party liability, public transportation vehicle liability, and commercial vehicle driver/contract mover liabilities. As these changes indicate, there will be more competitors, and they will compete under largely the same rules. Competition will be more intense. On December 11,2001, the day China officially became a member of the WTO, New York Life and MetLife were licensed to establish joint ventures in China, and AIG received licenses to open branches in four cities. Before that, ING received a license in Guangzhou and began operations in 2002. Zhonghong, a foreign partnership, also received a license in Guangzhou. Tai Ping Insurance, a Chinese company domiciled in Hong Kong, recently began life business in Shanghai, Beijing, Guangzhou, and Cheng Du.

CHALLENGES AND OPPORTUNITIES

Following WTO accession, China's insurance industry faces some challenges as well as some opportunities. We describe the major issues regarding the WTO and China's insurance industry in this section.

Institutional Shortcomings and Old Mind-Sets

China's insurance industry has a short history. Chinese companies' operating systems, financial strength, management, technology, and expertise are not comparable to foreign companies. …