VZCZCXRO2346
RR RUEHCN
DE RUEHGZ #8541/01 0860902
ZNR UUUUU ZZH
R 270902Z MAR 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1994
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

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expanding including outdated insurance laws and different 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