Financial Services

China has been the world’s most exciting marketplace for international insurers for a decade and looks set to retain this status in the near future. The country’s regulatory system has progressively liberalized since it joined the World Trade Organization, while annual economic growth is forging ahead at almost double digit rates. China consequently offers business development prospects unmatched in the history of the global insurance sector.

Its insurance penetration rate, at just over 2 percent in 2005, is less than half that of Japan, South Korea, Taiwan and Hong Kong. However, China’s population of 1.3 billion and per capita GDP give it a “middle class” of well over 300 million. This group can afford not only sophisticated consumer goods and overseas travel, but also savings and investment products to provide for future needs and retirement.

Yet this vision of Eldorado for international insurers can be deceiving. China is a complex and heterogeneous patchwork of micro markets, ranging from the coastal provinces, which have been part of the global trading economy for over 20 years, to the vast number of second tier cities inhabited by millions and offering relatively high living standards; and the sparsely populated, largely rural marketplaces, which are less accessible in the west.

The inability of international insurers to form wholly-owned ventures in China – with the exception of AIG, which benefited from its pioneer status – means that international companies have been compelled to form joint ventures with local commercial entities, or to take equity stakes in existing insurance players. Add to this a complex regulatory environment, where international insurance players still have to go through an arduous licensing application procedure, and China is not for the faint-hearted.

The biggest constraint faced by all new entrants to the Chinese market is the alarming dearth of talent. Recruitment, training, leadership and retention across huge distances with remote branches also pose major challenges for the life insurance industry. Aside from recruiting employees from state-owned enterprises, with no experience of working for a multinational, growth in the insurance sector has depended on infusions of overseas talent.

This comprises both non-Chinese executives seconded from their parent companies in Europe or North America – and increasingly – large numbers of expatriate Chinese from Taiwan, Hong Kong, and the Southeast Asian markets. The latter have gained insurance experience by working for multinationals in their home markets and have the language and cultural skills to transfer their knowledge to local Chinese staff. Yet overseas staff often lack soft skills – particularly the flexibility, pragmatism and patience required to train and develop teams with no previous experience in insurance and little commercial expertise.

Over the last decade large numbers of qualified insurance professionals have been attracted by the challenge, dynamics and attractive compensation offered by the Chinese marketplace and now hold key leadership positions – as chief executives of joint ventures or general managers of branch operations. But despite an expanding pool of capable Chinese junior managers, trained in situ and rotated through domestic and overseas assignments to develop their skills, demand still outstrips supply, making China a seller’s market for talent.

Escalations in compensation, poaching and job-hopping have consequently become widespread as the joint ventures compete to roll-out branches fast. Many of the current branch general managers are over-promoted agency sales leaders and lack the competencies required to run an end-to-end business with full profit & loss accountability.

Even with the increase in the number of overseas-educated, Chinese returnees, demand is still likely to exceed supply in the short-term. The only solution seems to be a continued reliance on expatriate talent and the trend towards importing executives from other areas of retail financial services like banking.

But even here the expansion of the international banks in China is creating its own enormous demand for qualified talent. The recent regulatory liberalization to allow “cross business” means domestic banks will also be moving into the insurance sector and keen to attract candidates with insurance domain expertise, intensifying the war for talent.

Looking to the future, industry consolidation should alleviate the talent shortage to some degree. A few international players are starting to lose enthusiasm for China due to dysfunctional joint venture relationships or the realization that future capital investment required in China will prevent them from developing more promising ventures in other emerging markets with a faster path to breakeven and greater upside potential.

On the other hand, a number of significant players in the global insurance markets are not yet present in China and may be inclined to enter the booming market. Learning from the mistakes of the first movers, these late-entrants will probably focus on niche products or more specialized distribution.

From a recruitment perspective, all of the major regional players have appointed new chief executives over the last 12 months or are expected to do so in the coming year. These appointments will, in turn, force Chinese firms to refresh and upgrade their senior management teams, meaning that top talent should remain the most scarce and valuable resource in the market.