In contrast to China's nascent retail-banking industry, the life insurance and savings business is already huge and increasingly competitive. Over the past decade, it has increased by about 30 percent each year, making China the world's fastest-growing major life insurance market. Rapid growth is expected through 2008, when it will have exceeded $100 billion in premiums, surpassing France and Germany (Exhibit 1).

Behind the growth lies a 40 percent household-savings rate, coupled with limited and deteriorating public-pension and health schemes that have generated high demand for personal-retirement savings and protection vehicles. Attractive options are limited. Capital controls block the ability to invest in other countries, and there are few good local stocks or mutual funds. Bank deposits yield a flat 2 percent—no match for a typical savings policy, which pays a guaranteed 2 percent, plus 70 percent on returns that exceed the guaranteed portion, and is tax-exempt to boot.

During the late 1990s, foreign insurers were invited to invest in Chinese ones, subject to a 25 percent foreign-ownership limit, or to form 50-50 joint ventures with local partners. Yet today more than 90 percent of the market remains in the hands of three domestic insurers: China Life Insurance, Ping An Insurance, and China Pacific Life Insurance. Joint ventures in life insurance can sell local-currency products, though only to people in China's coastal cities. More than 20 leading global insurers have taken advantage of this opportunity, but so far their joint ventures command less than 2 percent of the national market (Exhibit 2).

Nonetheless, a look at the major coastal cities—Beijing, Dalian, Guangzhou, Shanghai, Shenzhen, Suzhou, and Tianjin—reveals quite a different picture: a few joint ventures there have in short order built market shares of 5 to 10 percent.¹ The threat to incumbents is great, as these cities account for 65 percent of all affluent and "mass-affluent" households and for a third of the total life insurance market. Most of the growth in the industry's profits will probably come from this area.

Several factors are likely to pose a direct challenge to the three dominant insurers. The productivity of their huge sales forces (China Life has 650,000 agents) is on average one-fourth that of leading players in Hong Kong—and deteriorating. Annual churn rates for agents often exceed 50 percent, compared with 20 percent in developed markets. Many agents give customers poor service and misleading information. To top it all off, at the end of this year the limits on the places where joint ventures can operate will be lifted, giving foreign insurers access to the remaining two-thirds of the Chinese life market. In this new environment, domestic incumbents will probably be absorbed in fixing their internal problems. Foreign insurers with strong brands, more professional agents, and better service will be in an excellent position to increase their share of the affluent and mass-affluent markets.

But time is running short for foreign insurers considering a move into China. To succeed in an increasingly crowded and competitive market, they will need superior skills or the ability to apply a targeted or innovative approach to the well-tested models used by the early entrants. Most of the 20 or so leading global insurers in China—including Aegon, ING, MetLife, and Standard Life Assurance—have formed joint ventures with domestic institutions and built new forces of underwriters and sales agents from the ground up.² Compared with buying into existing Chinese insurers, joint ventures give the foreign players more control over the sales channel and the freedom to combine their own skills with their Chinese partners' understanding of the local market. There are also no legacy issues, such as an unproductive sales force or a book of negative-spread policies.³

Joint ventures also have a downside, of course. The struggle for market share is already fierce in the big coastal cities. It takes time to build an agency force from scratch. Attractive Chinese partners are in short supply, as are good sales agents. We therefore believe that it is already too late for newcomers to adopt the joint-venture strategy unless they have superior execution skills in, say, recruiting and training. Companies that do will not only have greater appeal for their prospective Chinese partners but could also make up for their late arrival by quickly training agents who would be more productive and more likely to stay than those employed by their competitors.

An alternative for a foreign insurer would be to differentiate itself from the established competition by forming a joint venture to build a smaller and more targeted sales channel. There may, for example, be an opportunity to set up a force of financial advisers to serve the most affluent customers. Even under current regulations, these advisers could offer a bigger basket of products than is available in China today, including term life, whole life, savings policies, unit-linked annuities, and variable or fixed annuities. They could also recommend products that suited the real needs of their customers rather than just pushing their own company's products.

Transforming a sales force of several hundred thousand agents is just as hard as building one from scratch

For a foreign insurance company in China, the other possible strategy, used so far by only a few, is to buy into a Chinese financial institution and then to support the transformation of its sales force. Emerging national insurance companies such as New China Life Insurance and Taikang Life Insurance, for example, have opened their doors to the Swiss insurers Zurich Financial Services and Winterthur, respectively. Chinese insurers recognize that foreign ones can bring unique skills, in sales management, underwriting, and operations, that will help them improve the quality of their distribution systems—a prerequisite for selling more sophisticated products to the affluent. To the foreign investor, this strategy offers a shortcut to reaching national coverage and a chance to test the waters, with the possibility of increasing the stake beyond the current 25 percent limit if and when regulation allows. The downside, compared with a joint venture, is that this approach probably requires a larger capital investment and offers less control. And transforming a sales force of perhaps several hundred thousand agents is every bit as daunting as building one from scratch, city by city.

The Belgian-Dutch insurer Fortis, the number-one bancassurance⁴ player in the Benelux countries and Spain, applied its own version of the minority-shareholding strategy when it acquired a quarter of Taiping Life Insurance, a new national insurer, in 2001. Despite the lack of full control, Fortis exerts considerable management influence over Taiping. Three top executives who were seconded to the company steered it toward bancassurance, which reduced its dependency on sales agents as the main channel. By 2003, roughly 70 percent of the company's business came from agreements with Chinese banks to sell Taiping insurance policies, and Taiping held a 22 percent share of the bancassurance market in Shanghai.

But the current Chinese bancassurance model may not be sustainable in the long term, for it is driven by aggressive sales of simple single-premium products whose economics will probably become less attractive for insurers once banks start to rationalize the economics from their own perspective. To succeed in the long term, insurers and banks will have to forge closer ties that would make bancassurance relationships mutually attractive. In more mature markets, such as Europe, success calls for close cooperation between the two parties: insurers deliver products and sales support streamlined to the specific needs of banks in hopes of capturing the full potential of savings and protection products for their clients.

Given the problems of transforming a huge national sales force, a newcomer that buys into a Chinese insurer and uses traditional agents to sell products will need a creative business model. One option could be to segment a sales force into two or three tiers and to focus on the top one, which would operate in lucrative coastal urban markets. In extreme cases, separate sales forces could be set up, with different brand names and their own management, to make it easier to differentiate recruiting, training, and compensation systems without sinking the morale of the low-end agents.

Despite the challenges, opportunities still abound for foreign insurers in China. But a me-too strategy won't get a company very far. Creative modifications to existing strategies will be required to carve out a piece of what will soon rank among the world's most important markets for life insurance.