Foreign Insurers in South China See Systemic Problems

UNCLAS SECTION 01 OF 02 GUANGZHOU 030812

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E.O. 12958: N/A
TAGS: EFIN ECON EINV WTRO CH
SUBJECT: Foreign Insurers in South China See Systemic Problems

REFERENCE: A) Guangzhou 30413, B) Guangzhou 8541

(U) This message is sensitive but unclassified. Please handle
accordingly.


1. (SBU) Summary: Representatives of AIU and Metlife and the Consul
General reviewed the difficulties of operating in South China's
"cutthroat" insurance industry at a luncheon on September 25. They
cited unethical sales agents and the poaching of staff by
competitors. Local regulators are still not transparent in their
decision-making, less by design and more by virtue of their lack of
experience. End Summary.

Unethical Agents
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2. (SBU) Simon Foo, General Manager of AIU's Guangzhou branch, and
Augustine Chow, General Manager of Metlife's Guangzhou branch, told
the Consul General that unethical insurance sales agents are rife in
South China. This is particularly true in the auto insurance
sector, in which foreign firms are not yet allowed to participate.
Agents are deceitful when engaging clients, many of whom are
unfamiliar with insurance services. The representatives blamed the
"cutthroat" nature of South China's insurance industry and a lack of
willingness by, or inability of, local regulators to clamp down.


3. (SBU) AIU's Foo added that Chinese banks continue to issue a
large number of short term (two-or-three year) insurance policies.
As a result, agents are under constant pressure to renew policies,
and in many cases sell at discounted premiums. These factors in
turn explain why insurance rates are falling in China while they are
rising throughout the rest of the world - book now, worry later.
Metlife's Chow estimated that up to 30 percent of agents for
domestic companies do not have minimum required qualifications, but
are sent out into the marketplace to sell because of the pressures
managers are under to deliver results.

Poaching is Widespread
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4. (SBU) Responding to the Consul General's question about staff,
AIU's Foo and Metlife's Chow said Guangzhou has a shortage of
qualified professionals. (Bank representatives said the same thing
in a recent meeting - see ref A.) Metlife recruits proactively but
still rarely reaches its hiring goals. Though Metlife only opened
its Guangzhou office in April 2006, it has already seen significant
turnover, some people staying for little more than the duration of
the training. Both representatives said it was not uncommon for
companies to poach staff from competitors (at a meeting the week
before, Guangzou-based bankers told us that this rarely happened in
the banking community; there was a gentleman's agreement in place
with regard to personnel). In one case Sunlife hired away one-third
of the staff of Metlife's Beijing office.


5. (SBU) Foo said communication among foreign insurance companies in
Guangdong was weak, owing in part to the absence of an association.
(Guangdong-based foreign banks do have such an association). No
foreign company has yet taken the initiative to spearhead such an
organization. In a conversation with AIA's Burton Lai on September
25, the CG suggested that an association be organized and offered
to meet with representatives shortly after its formation to discuss
ways to improve the insurance environment in Guangzhou.

Transparency: Opening Branches
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6. (SBU) Opening new sales offices or branches outside of Guangzhou
remains a challenge. Foo said local regulators lack experience and
are thus generally hesitant to approve such offices, though Shenzhen
is an exception to this rule. Personally meeting with local
officials and regulators is often the best way to break the logjam.
(Note: AIU received a license to operate throughout Guangdong
province in mid-2006. Foo said the entire process, from application
to approval, took approximately two months. This may owe in part to
a letter sent by former Consul General Dong to Guangdong Vice
Governor Song Hai on behalf of AIU's application (ref B). End
note).

Nevertheless, CIRC Can Be Helpful

GUANGZHOU 00030812 002 OF 002


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7. (SBU) Foo said CIRC is generally helpful and does not show
favoritism to local insurance providers. However, Chow added that
regulators have insisted that Metlife detail its business strategies
during the application process. He blamed this on their lack of
experience, though noted this information is very useful to domestic
competitors. CIRC has cooperated with AIA on setting up seminars
for regulators and city officials in Guangdong regarding services
such as product liability, marine coverage, and export credit
insurance. This type of event is "win-win," as it expands AIU's
market presence while improving the competitiveness of local
companies and the understanding of local officials.

Comment
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8. (SBU) China's insurance industry woes - inexperienced regulators,
unethical agents, and a shortage of qualified staff - are
attributable - perhaps more charitably than warranted by the two
insurance representatives - to its youth. As a consequence, foreign
firms are clearly disadvantaged and their ability to sell their
products affected. When asked whether China's leaders would address
these issues, Metlife's Chow said a couple of "big collapses" by
domestic companies would likely need to occur first.

GOLDBERG