Joint U.S. – China Insurance Dialogues

The Hangzhou Dialogues: Nurturing cooperation in risk management as China rises

Shorenstein APARCThe Stanford China Program

Montana State Auditor John MorrisonNAIC's International Vice-Chair for Asia

Joint U.S. – China Insurance Dialogues

1. The NAIC-CIRC relationship

2003 Meeting

Memorandum of Understanding

Interns

Issue Based Symposia Yi Chang, 2007- health insurance Xian, 2008 - asset management or

catastrophic coverage

Education based relationship

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

2. IAIS

Growth

Beijing 2006

Executive Committee U.S. leadership China membership

Uniformity/consistency based Solvency II

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

3. China’s Insurance Market(as of 1/08)

107 Companies, 62 Domestic, 35 U.S. branches, 1600 agencies

$414b US in assets $96.6b US in 2007 premium, up 24% from 2006;

30%/yr since 1980 Per capita $46 US vs. $3747 in the U.S. Life 75%, Non-life 25% (health, compulsory

auto, commercial property casualty) Low density, 2.7% GDP CNInsure

Joint U.S. – China Insurance Dialogues

4. The China Insurance Regulatory Commission (CIRC)

Created 1998

Cabinet level ministry since 2003

31 local offices in every province except Taiwan

Centralized authority

Provinces support local consumers and industry

www.circ.gov.cn

Joint U.S. – China Insurance Dialogues

5. U.S. – China Insurance Trade Negotiations

USTR Department of Commerce 2001 Doha Round-multilateral (153 WTO members, China 2001) General Agreement of Trade and Services (GATS) includes

insurance Four prior rounds of insurance dialogues Key issues

Branching (old) Investment rules (old). Broader asset classes/overseas; equal treatment,

seasoning Market access: caps on ownership of domestic companies; JVs; Wholly

owned subsidiaries, esp. life (Doha) Auto TPL. (Doha) Private pensions/enterprise annuity. Domestic adv 57/1; moratorium

Joint U.S. – China Insurance Dialogues

6. 2008 U.S. Insurance Dialogues attendees

U.S. side USTR (AUSTR, Director for China Affairs, +3) NAIC USDOC U.S. Embassy AIA (American Insurance Association) ACLI (American Council of Life Insurers) AIG, Travelers, Chubb, ACE, New York Life, Met Life, Liberty

Mutual, FM Global

Chinese side CIRC PICC China Life

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

Joint U.S. – China Insurance Dialogues

7. Preliminaries

Moment of silence for earthquake victims Government to Government session (no industry)

Vice Chair Li Kemu: Commercial insurance important supplement to public systems; economy, efficiency, stability; sub prime crisis, earthquake crisis; premium revenue growth; International community

AUSTR Tim Stratford: appreciation to Li; saddened by quake; watching carefully as government makes tremendous efforts to rescue; U.S. Companies helping to gather funds; President Bush supportive; our governments recognize much to gain

Li on key trade issues: In discussion on opening MTPL insurance to foreign insurers (no WTO commitment); overseas investment no longer limited; Branch companies of foreign insurers, being approved now; Investment of foreign insurers in China, “We are actively promoting this issue” and ask USTR help

Stratford response. Noting favorable rulings; urging increased equity caps

Joint U.S. – China Insurance Dialogues

8. NAIC: Comments on Market Regulation, John Morrison / Walter Bell

State Regulation vs. Sub Prime

Corporate governance-Sarbanes Oxley vs. NAIC Model Audit rule

Market Analysis Framework/Market Conduct Annual Statement

Functional regulation

Asset management/ SVO

Joint U.S. – China Insurance Dialogues

9. CIRC: Update on Insurance Law, Yang Hua Bai

Current law passed June 30 Phase 1, submit to State Council; Phase 2, Solicit opinions;

Phase 3, expand scope of insurance law Transparency is an important principle of WTO to ensure stable

and fair environment for industry and to protect citizens CIRC is exceeding WTO requirements Solicited opinions of foreign insurers and regulators 30 day period before implementation, established channels to

answer questions Transparent implementation, too

Lawsuits can be filed based on laws and regulations Public hearing before canceling license -TV broadcast (e.g.,

mandatory 3d party liability) Regular press conferences

Joint U.S. – China Insurance Dialogues

10. American Insurance Association: The Role of Risk Management and Loss Reduction-How Insurance promotes an expanding business sector, David Snyder

2006 U.S. Disasters-$300 billion paid to businesses and individuals to rebuild, saving public funds

Employment: 489,000 jobs, $31b payroll, $15.4b premium taxes, 16% of public financing (bonds)

Loss reduction, risk analysis, education, public safety (auto, workplace)

Charitable contributions Asset protection for national priority industries Benefit of foreign companies in market (esp. MTPL) :

consumer choice, product innovation, actuarial capacity, technical improvement, mitigate domestic exposure, stimulate trade

Joint U.S. – China Insurance Dialogues

11. China Life: Corporate annuity / health supplements, Wan Feng

Growing private pension market: 16,000 companies had private pensions supplementing social security; 30,000 in 2007. 60m employees

Health insurance: 34.3b RMB premium, 27% increase from 2006. 30.17m people covered, 8.75m had medical expenses covered

Provincial models (laboratories of democracy?): govt /other stakeholders, TPAs

By 2020, 16% of population will be over 60, needing pensions

Most of China Life Pension Co. are state owned enterprises

Seeking tax benefits and other governmental incentives for health insurance

Joint U.S. – China Insurance Dialogues

12. AIG: Private pensions, Alan Lam

History of private pensions; pervasiveness-41% U.S., 87% Japan, 30% France

Growth of seniors in China, 3.3-1 individuals supporting retirees

Government may: raise taxes, cut befits, raise retirement age, or create incentives for private pension plans

Employer sponsored, Teacher association, unions Principles: long term capital appreciation, quality

of assets, diversification managing risk and return, catering to age, risk tolerance

Case studies: Brazil, Hong Kong

Joint U.S. – China Insurance Dialogues

13. NAIC: Recommendations for development of health insurance, John Morrison

Premium assistance, tax subsidies, purchasing pools TPAs to manage employer sponsored plans. Provider networks,

plan design, regulation, enrollment and billing, claims handling, HSAs, pension and work comp

Supplemental benefits, esp. for BMI. Medicare supp., Part D., lost wages/out of pocket

High risk pools Reduce Marketing costs. 5-12% vs. 30-40% Clarify regulatory authority. Uniformity and transparency Improve quality of care Promote wellness (e.g. tobacco) Control health care costs. HIT, EHRs, EBM, P4P, primary care Fight fraud

Joint U.S. – China Insurance Dialogues

14. Asset management

NAIC, Walter Bell. To address timing lapse between premium receipt and claim payout; to support sometimes unprofitable underwriting; facilitate asset-liability matching. Non-life 4.2-4.4%; Life 5.6-5.9%. Securities Valuation Office (SVO) assures 80% of assets are investment grade and not > 10% stock equities (diversification). NAIC Investments of insurers model acts.

MetLife. Eric Wu, director of international investments. Snapshot of asset allocation: 41% corporate bonds; government bonds; proactive asset management; diversification.

CIRC, Guo Yan, Director of Capital Management. Non-discriminatory approach. Companies investing globally, including equities; control concentration of risk; tiered approach based on sophistication; encourage investing in mature markets. Derivitives may be used to hedge (not speculation) but need underlying assets.

China Insurance Society, Lu Zhongmin, president. Investment-linked products. More than 20 companies offering, creates net cash outflow from equity markets; volatility with rapid market growth. Disclosure of risks.

Joint U.S. – China Insurance Dialogues

15. Catastrophic risk insurance

CIRC Asset Insurance Division. Earthquake highlights need. 11.8% of damage from catastrophes in developing countries covered by insurance. Higher in developed countries. One sixth of Chinese population faces natural disasters. *Climate change causes more significant natural disasters.* Hurricanes, floods. People not aware of value of insurance. Commercial insurance limits government burden.

Insurance Association of China, Jin, Jiang Qiang. Earthquake: <5% appears covered. China needs cat risk management. Current model is government. China is moving toward new model-joint effort, government and industry. Financial system not yet developed for these risks. Cat fund needed. CIRC risk management task force.

NAIC, Walter Bell. U.S. earthquake, hurricane flood risk. Principles: personal responsibility, bldg codes, maximize risk bearing capacity of private market, state-regional cat fund, federal backstop. Consider all perils coverage with plain checklist.

AIA, Dave Snyder. Shared issue. U.S.-Wind covered, flood federal, earthquakes excluded with pools, fire following covered. All perils controversial.

Joint U.S. – China Insurance Dialogues

16. Microinsurance

CIRC, Duan Jiaxi. Serve low income people. Government subsidies. Regulators encourage rural expansion. Three major life companies 25% in rural areas. Next steps: evaluate system, encourage rural, build new distribution channels (China Post?), update services, enhance study of microinsurance, increase international cooperation.

ACLI, Brad Smith. World Bank-insurance for the poor. Can introduce companies in developing markets. Avoid 2 tiered system.

NAIC, John Morrison. Differences from conventional insurance: cash premium, unlicensed intermediaries, sold to groups, targets low income, consumer education, declaration of good health, small sums, group pricing, few exclusions, simple policy and claims process. Encourage availability, adhere to IAIS core principles, key to economic development, watch unregulated schemes.

Joint U.S. – China Insurance Dialogues

17. Agriculture Insurance. PICC, Wang He; USDA, Jorge Sanchez, Ag attaché

Total coverage: 830m RMB 1993-500b RMB 2007

2005-06 new era > 100 new products; 2007 personal/commercial

67 million acres of land; 28m livestock head

Risk management; increase awareness

Government has 6 subsidy programs

Control, transfer, mitigate risk

Joint U.S. – China Insurance Dialogues

Questions and Answers

Montana State Auditor John Morrison

NAIC's International Vice-Chair for Asia

jmorrison@mt.gov

1-800-332-6148

Joint U.S. – China Insurance Dialogues