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UNCLAS SECTION 01 OF 02 CHENGDU 000020 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD EINV PGOV CH
SUBJECT: U.S. INSURANCE GIANT ADVOCATES MULTINATIONAL APPROACH TO 
PRESSING CHINA ON MARKET ACCESS 
 
CHENGDU 00000020  001.2 OF 002 
 
 
¶1. (U) This message contains company proprietary information. 
Not for Internet distribution. 
 
 
 
¶2. (SBU) Summary.  U.S. insurance giant Liberty Mutual chose to 
open its first PRC branch (and later subsidiary) in southwest 
China's Chongqing, rather than enter the bruising Shanghai 
market like many other foreign insurers.  Chinese law 
discriminates against foreign insurers by 1) blocking 
acquisitions of other insurance companies; 2) requiring 
consecutive applications to open successive branches, usually 
with a wait of at least one year; and 3) not allowing them to 
write mandatory, third-party auto insurance, the most profitable 
part of the business.  China protects its domestic market to 
give it more time to develop; foreign firms are stronger in 
claims/risk research, and enjoy stronger brand images.  Liberty 
Mutual has endured years of losses, and advocates that foreign 
governments and insurers "band together" to convince the Chinese 
government to promise a 10-year plan for market liberalization. 
End Summary. 
 
 
 
Major U.S. Insurance Company Targets Southwest China 
 
--------------------------------------------- ------- 
 
 
 
¶3. (U) Liberty Mutual -- the fifth-largest property and casualty 
(P&C) insurance company in the United States -- first entered 
the China insurance market in 1993, its China subsidiary CEO 
Jackson Tang told Consul General recently.  Liberty Mutual chose 
to open a branch to sell P&C insurance in Chongqing rather than 
Shanghai, where there were "too many P&C companies already."  In 
2007, Liberty Mutual converted its Chongqing branch office into 
a wholly owned subsidiary, mainly to take advantage of lower 
capital requirements for subsidiaries (RMB 20 million) versus 
branches (RMB 100 million).  There are 18 local, Chinese 
insurance companies in Chongqing; New York-based MetLife also 
has a 50-50 joint venture (JV) there.  (Note: Foreign life 
insurance companies must be JVs, Tang explained, while P&C 
insurance companies can be wholly owned.  End Note.) 
 
 
 
Three Ways China Unfair to Foreign Insurance Companies 
 
--------------------------------------------- --------- 
 
 
 
¶4. (SBU) Tang complained that Chinese law discriminated against 
foreign insurance companies in three ways: 
 
 
 
1) Draft regulations that currently govern the insurance market 
do not allow foreign insurance companies to have two separate 
legal entities.  This means, for example, that foreign insurance 
companies are not allowed to buy other insurance companies in 
the same line of business. 
 
 
 
2) Foreign insurers must apply consecutively to open each new 
branch.  Approval of each new branch usually takes at least one 
year.  Expanding its operations beyond Chongqing, Liberty Mutual 
received approval in 2009 for a branch office in Beijing, and is 
now in the process of applying for a branch in Hangzhou. 
 
 
 
3) Foreign insurers are not allowed to write mandatory, 
third-party liability auto insurance.  Instead, they are only 
left with the least profitable parts of the auto insurance 
business -- physical damage and excess third-party insurance. 
Auto insurance currently accounts for 70 percent of China's 
total insurance market.  Physical damage is the "worst part" of 
the auto insurance market because China has no deductibles -- a 
customer could run up operating costs, for example, by 
presenting a claim for one USD.  Moreover, in order to sell 
excess third-party insurance, Liberty Mutual is forced to work 
with local insurance companies that sell mandatory third-party 
insurance since no customer buys only excess insurance.  This 
means that local Chinese insurance companies are taking the 
"good part of the business even though Liberty Mutual finds them 
 
CHENGDU 00000020  002.2 OF 002 
 
 
the customers."  (Note: Tang also asserted that China had, so 
far, failed to honor a WTO commitment to open up the mandatory 
third-party auto insurance business to foreign insurance 
companies.  This issue was being addressed by both governments 
in the frameworks of the Joint Commission on Commerce and Trade 
(JCCT) and Strategic and Economic Dialogue (SED), he added.  End 
Note.) 
 
 
 
Beijing Protects Immature Insurance Market; 
 
Central and Provincial Regulators Also a Macro-Barrier 
 
--------------------------------------------- ---------- 
 
 
 
¶5. (SBU) Beijing maintains these protectionist measures because 
it believes the Chinese insurance market remains immature, and 
wants to give local insurers more time to develop, Tang said. 
Market opening will be "gradual, and years in the making," he 
predicted.  Another "macro-barrier" to market access is how 
China has both the central government regulator in Beijing ( the 
China Insurance Regulatory Commission), as well as insurance, 
banking, and stock market regulators in the provinces, Tang 
asserted.  At the same time, he added, this macro barrier has 
been less of an issue for Liberty Mutual because it has 
maintained good relations with Beijing regulators, and the local 
Chongqing government. 
 
 
 
Liberty Mutual Stronger Than Local Competitors ... 
 
--------------------------------------------- ----- 
 
 
 
¶6. (SBU) Liberty Mutual is much stronger than local P&C 
insurers, Tang confided, which tend to be weak in claims/risk 
research.  Local insurers are jealous of Liberty Mutual, which 
enjoys a high industry ranking, good relations with regulators, 
and a strong brand image.  Chinese customers tend to believe 
that foreign insurers are more reliable and provide better 
service.  Liberty Mutual is already the sixth largest of 18 
competitors in Chongqing (as well as the sixth largest of 17 
foreign P&C companies in all of China), he noted. 
 
 
 
... But Has Suffered Years of Losses 
 
------------------------------------ 
 
 
 
¶7. (SBU) Despite this growth, Tang explained, Liberty Mutual's 
China business is still not profitable because it does not have 
sufficient scale and, most importantly, because it lacks access 
to the market for mandatory, third-party auto insurance.  He 
recounted how his head office in the United States gives him 
grief about continuing losses, forcing him to provide assurances 
that one day the company's China operations will be very 
profitable. 
 
 
 
Foreign Governments/Insurers Need 
 
Unity to Pressure for Market Access 
 
----------------------------------- 
 
 
 
¶8. (SBU) So far, more foreign insurance companies want to enter 
the China market than exit it, Tang said.  This higher 
enter-exit proportion will continue as long as the (loss-making) 
foreign insurers continue to have a "wait and see" attitude 
toward whether the PRC will grant further market access.  Tang 
claimed that foreign governments and companies have been too 
fractured in their approach to lobbying China on market access 
("a plate of sand").  He advocated that foreign governments, 
insurers, and banks "band together" to convince Beijing to 
promulgate, for example, a "10-year plan" for liberalization. 
In the meantime, he stressed, Liberty Mutual would be ready to 
"eat 10 years of losses." 
BROWN