Consulate General Guangzhou Lending a Helping Hand

UNCLAS SECTION 01 OF 03 GUANGZHOU 008541

SIPDIS

SENSITIVE
SIPDIS

USDOC FOR 4420/ITA/MAC/MCQUEEN
STATE ALSO PASS USTR/STRATFORD, MENDENHALL, MCCOY
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: ECON WTRO EINV PGOV CH
SUBJECT: Consulate General Guangzhou Lending a Helping Hand
to Guangdong's American Insurance Companies

(U) This document is sensitive but unclassified. Please
protect accordingly. Not for release outside U.S.
Government channels. Not for internet publication.


1. (SBU) Summary: Representatives of American insurance
companies operating in Guangdong province commented that
while the insurance environment in Guangdong has improved,
many problems still need to be resolved as the industry
expands in China. In particular, American companies are
concerned about local companies using conglomerates to
hinder foreign competition, a practice that goes against the
spirit of China's WTO commitments. The representatives
described further problems limiting American companies from
expanding including outdated insurance laws and different
interpretations of national laws at local levels; the
industry's over reliance on a premium collection-driven
model versus a risk reduction strategy; uncontrolled and
unethical agents; inexperienced regulators and consumers;
and the lack of trained personnel with the necessary skills
within the industry to handle an ever-expanding market. The
Consul General agreed to send a letter to Guangdong's Vice-
Governor Song Hai requesting that China meet its WTO
obligation to open its insurance market to U.S. insurance
companies. End Summary.

Regulatory Environment Slowly Improving
--------------

2. (U) In late February Congenoffs met with Burton Lai,
general manager of American Insurance Association (AIA);
Simon Foo, general manager of American International Group
(AIG); and Augustine Chow, deputy head of Met-life's
Preparation Committee. Insurance representatives say that
the regulatory environment in Guangdong is generally
beneficial for American firms, and has improved in the past
few years, though termed it "slow paced". However, there
are still difficulties with often unclear and inconsistent
enforcement of regulations. They all agreed that the
Guangdong provincial government had welcomed them with open
arms. The representatives also stated that local branch of
the China Insurance Regulatory Commission (CIRC),while
generally a positive force for developing the sector, could
be a double-edged sword, being lenient on some occasions,
while making narrow interpretations on others apparently to
avoid criticism from Beijing for perceived leniency.

CIRC Takes Lessons From Foreign Regulators
--------------

3. (U) CIRC plans to improve its governance by sending study
groups abroad to look at foreign insurance companies, which
are usually good exemplars of regulation compliance and high-
standard operations. Compared to the banking industry, where
foreign companies are subject to sudden penalties imposed by
the banking regulators, the insurance companies in Guangdong
receive a warning first and are given the opportunity to
remedy their practices and conduct self-audits. The
Guangdong insurance regulators, according to these managers,
are beginning to take a mild and encouraging approach,
allowing companies to remedy malpractice via internal
audits, and being tolerant as long as companies do not
repeat their mistakes.

Battling Conglomerates
--------------

4. (U) Insurance representatives also expressed concern
about local companies engaging in collusion to prohibit
foreign competition in certain sectors, such as the travel
accident and construction safety insurance sectors. The
local companies form conglomerates that can then exert
unfair influence on the industry to slice the pie for
itself. Instead of using their influence to enhance
operational standards or improve poor safety records, the
conglomerates allow protected Chinese companies to become
complacent, unafraid of better competitors. Local companies
also engage in co-insurance among themselves, a practice
which spreads risk and prevents disaster- but also limits
competition.

The Perils of Emphasizing Premium Collection
--------------

5. (U) Another major issue for the industry is the emphasis
on premium collection. Two years ago 85% of industry
revenue came from single (one-time) premium collection. The
industry is gradually switching to regular premium coverage

GUANGZHOU 00008541 002 OF 003


due to the gradual greater sophistication of Chinese
insurance managers. The industry has yet to move to the
more mature strategy of risk-reduction, however,
representatives say insurance practices are improving with
increasing sales on an individual-to-individual basis rather
than company-to-company sales as before.

Staffing Challenges
--------------

6. (U) Insurance representatives described Chinese firms as
lacking competent staff, particularly agents. Agents are
not well controlled by the industry and offer 70-80%
discounts on quoted premiums, particularly in the auto
sector, in order to collect their percentage of the sale.
Representatives described inland insurance services as
particularly poor with firms intentionally cheating
customers and not providing services. The National CIRC
drafts regulations for all of China despite dramatic
differences in provincial needs and capabilities. As a
result, this process has limited market development in more
developed cities and regions of China. The recently
promulgated Draft Rules for the Administration of Insurance
Sales Agents impose a ban on signing entrustment contracts
with two separate insurance companies by an agent. This is
in an effort to correct the problems associated with this
model.

Learning the Ropes
--------------

7. (U) The major factor holding back the industry remains
its relative youth. Chinese insurance companies still lack
an understanding of shareholder interests. The People's
Insurance Company of China Group (PICC) is in the process of
restructuring and trying to privatize. AIG representative
Foo said PICC restructuring will take a long time but will
succeed in the end (AIG has a 9% share of PICC). Regulators
are still inexperienced and many of them do not have
international exposure. Augustine Chow from Met-life
expressed that companies were in a disadvantaged position
when they had to work with regulators who knew little about
the market. There are limited training opportunities for
those within the industry, as well as for those using
insurance products.


8. (U) Although Guangdong is adjacent to Hong Kong, there is
limited talent flow between the two and industry attempts to
bring Hong Kong insurance expertise has gotten a lukewarm
response from Guangdong firms. Lai from AIA said he found
recruitment difficult because the applicants' experiences in
local insurance companies were not relevant to the modern
insurance industry. He said he often ended up recruiting
students from other disciplines and training them
completely. As an additional measure to fill slots with
experienced people, foreign firms have also hired Taiwan and
Malaysian Chinese since they also speak Mandarin.
Congenoffs also learned that Met-Life got Tsinghua
University in Beijing to recently establish a joint post-
graduate program with the University of Connecticut to
supply first-class actuaries.

Consulate Intervention
--------------

9. (SBU) The Consul General recently wrote a letter to Vice-
Governor Song Hai of Guangdong province noting that under
its WTO accession agreement China is committed to opening
its insurance market and noting the submission of an
application by the Guangzhou branch of AIU Insurance, the
parent company of AIG, for a license to operate throughout
Guangdong Province. This follows China's lifting of
geographical restrictions on foreign insurance companies in

2005. (Note: Simon Foo subsequently told the Consul General
that AIU received a written acknowledgement of its
application, a response that virtually never happens. He
saw the acknowledgement as a positive and direct response to
the Consul General's letter. End note.) The Congenoffs
also discussed the offering of seminars by American
insurance companies in Guangzhou to educate stakeholders in
the insurance industry. Firms highlighted needs for
programs in risk management, innovative products, insurance
banking, and intellectual property rights. In addition,
regulators might benefit from participating in the
International Visitors program. The Consulate subsequently
nominated a couple of insurance regulator for the IVP for FY

GUANGZHOU 00008541 003 OF 003



2007.

Enlarge the Pie
--------------

10. (U) AIG and AIA stressed the need to open more markets
in more areas in order to operate on a larger scale. Met-
Life said that while its operations in Guangdong were
generally going well, it still faced local protectionism,
growing anti-competitive actions by conglomerates especially
in the construction industry, and limiting insurance laws
that caused it to operate in uncertain gray areas that would
be legal in most developed insurance markets.

Comment:
--------------

11. (SBU) American insurance companies in South China still
face some major challenges. They acknowledge the steep
learning curve involved in navigating the local markets as
well as a changing, but still limiting, regulatory
environment. They can take advantage of the Consulate's
ability to act as a neutral party in helping to educate the
regulators and consumers about advancing industry
development. All in all, the future of the industry looks
bright. As South China's economy continues to boom, these
companies can look forward to claiming a growing piece of
the pie.

DONG