Insurance industry to shift focus to value creation

As returns fluctuate widely and have barely broken even, the market focus will shift to pursue value creation in the next five years.”

China’s life insurance market has begun to focus more on value creation and is poised to become the third largest in the world while experiencing two-digit growth within the next decade, according to the latest report by consulting firm McKinsey & Company.

After 20 years of unprecedented growth, the life insurance industry in China has been through three stages from a huge boost with an annual growth of 33 percent in the 1990s, to consolidation into three major insurance companies focusing on profits in the 21st century, before finally arriving at the current upgrades of product structures at a slower pace.

According to the report, the industry’s aggregate returns over the last decade in China have exceeded the cost of equity by just half of 1 percent, far less than lower-risk investments.

While the overall economic performance of the industry is weak, some insurers have consistently outperformed and delivered substantial returns. The report also pointed out that there is a wide spread in value creation among the 12 largest insurers in China.

“As returns fluctuate widely and have barely broken even, the market focus will shift to pursue value creation in the next five years,” said Shi Lei,

Shi Lei,

senior partner of McKinsey & Company

senior partner of McKinsey & Company.

“Insurers have to rethink about how to deal with distribution channels, profit margin and risk control in order to catch up with the market trend and create value-added products to stand out from the competition.”

Meanwhile, Chinese families with annual household disposable incomes of between $16,000 and $79,000 are expected to account for half of gross life premiums by 2020.

Based on McKinsey & Company’s research findings, mass affluent consumers are mostly young, highly educated and demand more protection and investment products from insurers. About 60 percent of them buy insurance for protection while 25 percent do so as an investment.

“Few agents today have the skills or knowledge to meet the expectations of mass affluent consumers and this presents significant opportunities for insurers who can recruit, train and retain high-quality agents,” said Shi of some of the challenges that the insurance industry in China faces.

Medical insurance was found to be among the fastest-growing opportunities for life insurers in China. Gross written premiums for total health insurance rose by about 20 percent each year between 2007 and 2013, and this growth is expected to continue at a double-digit pace for years to come.

The report also revealed that China’s overall healthcare spending is set to grow at a compounded annual growth rate of about 16 percent, from the $400 billion in 2012 to $1.4 trillion in 2020.

Furthermore, Chinese consumers are becoming more digital savvy and are able to seamlessly cross boundaries between the physical and virtual worlds when they make decisions.

“For China’s life insurers, the challenge is straightforward — stable, attractive returns will come only to those who fundamentally rethink the industry’s value proposition to lead in the digital era while they continue to excel in risk and capital management,” said Shi.