American International Group _AIG_ and Allianz SE _ALV_ to Target China Drivers in _50 Billion Auto Insurance Market

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American International Group _AIG_ and Allianz SE _ALV_ to Target China Drivers in _50 Billion Auto Insurance Market Powered By Docstoc
					           American International Group (AIG) & Allianz SE (ALV)        2012

   American International Group (AIG) and
  Allianz SE (ALV) to Target China Drivers in
       $50 Billion Auto Insurance Market

Soon-to-be-relaxed rules in China have firms including American
International Group Inc. (AIG) and Allianz SE (ALV) eager to grab a
bigger share of the $50 billion that the country‟s drivers spend each
year on auto insurance.

Both insurers are making plans to offer more products as China lifts
a ban on foreign companies selling mandatory policies for drivers.
On a recent two-week trip, Kevin Goulding, the Shanghai-based head
of Chartis China, AIG‟s property- casualty business in the country,
scouted four municipalities and provinces with a combined
population of 500 million, as he weighs where to open the company‟s
next branch and lays plans to sell car coverage for the first time.

“We‟re definitely looking forward to moving into the auto market in
China,” he said in a phone interview. “It‟s an extremely large market
and will also allow us to offer other products to consumers.”

The policy shift, announced in February during Chinese Vice
President Xi Jinping‟s visit to the U.S., may be a boon for foreign
insurance companies, which have struggled to gain a foothold in the
world‟s largest auto market, where an average of about 40,000 cars
are sold a day. Non-Chinese property-casualty carriers‟ share of
premiums has been stuck at 1 percent since 2004, a December report
from PricewaterhouseCoopers LLP shows.

The compulsory coverage, which protects drivers against third-party
liability, is a loss leader for Chinese insurers. The companies often
bundle the policies with more-lucrative voluntary insurance that

American International Group (AIG) and Allianz SE (ALV) to Target China Drivers in
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           American International Group (AIG) & Allianz SE (ALV)        2012

covers damage to cars. Taken together, the protection has been a
profitable business in China since 2009, representing about 70
percent of all property-casualty insurance sold in the country.

Compulsory Coverage

Based on that ratio, auto would account for more than $50 billion in
premiums in what the China Insurance Regulatory Commission said
was a 478 billion yuan ($75.8 billion) property- casualty market last
year. PICC Property & Casualty Co., China‟s largest non-life insurer,
with about one-third of the market, generated more than 100 billion
yuan in premium revenue from the auto segment in 2011.

The rule that limited foreign insurers only to sales of the optional
coverage has stymied their growth in the country, said Sally Yim, an
analyst at Moody‟s Investors Service in Hong Kong.

“If a customer wanted to buy motor insurance, why would they want
to choose a foreign company that can‟t provide the compulsory
coverage,” she said by phone. Being able to offer a comprehensive
package will “help them build their brand recognition and gradually
build scale.”

Underwriting Profit

Chinese regulators have protected the domestic industry, still in its
early stages of development, from foreign competitors, said Yim.
About 60 percent of PICC‟s 8.02 billion yuan total underwriting profit
came from auto coverage in 2011.

The largest local companies made at least 5 cents for every premium
dollar on underwriting auto insurance in the first half of 2011,
according to a Moody‟s report in February. Insurers in the U.S. lost 1
cent per premium dollar on consumer auto policies in 2010, the last

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           American International Group (AIG) & Allianz SE (ALV)        2012

year of available data, according to a report by the National
Association of Insurance Commissioners. Insurers also make money
by investing float, or the premiums held before paying claims.

Allianz, which got about 5 million euros ($6.7 million) in auto
premiums from China in 2011 after five years of selling voluntary
coverage, plans to offer the compulsory policies and invest to
increase its market share once it‟s permitted, said Peter Nestmann,
chief executive officer of the Munich-based insurer‟s property-
casualty unit in the country. The company‟s strategy is to sell
coverage at car dealerships and target buyers of luxury brands, such
as Mercedes-Benz and BMW.

„Not Easy‟

“If you‟re not allowed to sell the most basic liability coverage, it‟s not
easy to compete,” Nestmann, who‟s based in Guangzhou, said by

For now, non-Chinese insurers are awaiting rules from regulators
detailing when, where and how they‟ll be able to sell the mandatory
coverage. Liberty Mutual Holding Co. projects that it will take six to
18 months before it will be able to offer the products, according to
Jackson Tang, CEO of the Boston-based insurer‟s China subsidiary.

The company began selling voluntary auto coverage in the country in
2005 in Chongqing on the expectation that the rules would be relaxed
for foreign insurers selling compulsory car policies, said Tang.
Liberty Mutual has more than 90,000 auto policyholders in the
country and plans to enter areas where there are few foreign rivals,
he said.

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           American International Group (AIG) & Allianz SE (ALV)        2012

Tokio Marine

The insurer may have competition as it expands. Japanese firms
including Tokio Marine Holdings Inc. (8766), Sompo Japan Insurance
Inc., Mitsui Sumitomo Insurance Co., and South Korea‟s Samsung
Fire & Marine Insurance Co. all expressed interest in selling the
policies as soon as regulators permit. Mitsui, like Liberty Mutual and
Allianz, already offers voluntary auto insurance in China. Sompo said
it will begin providing that coverage in Shanghai as early as June.

For AIG‟s global property-casualty insurer Chartis, the move into
China‟s auto market compliments a shift toward selling more
coverage to individuals. Consumer insurance accounted for 38
percent of the unit‟s policy sales in 2011, compared with 30 percent
two years earlier, according to a regulatory filing. Chartis China is the
largest foreign property-casualty insurer in the Asian country, on
sales of commercial coverage and accident-and-health policies.

AIG traces its roots to an insurance agency founded by Cornelius
Vander Starr in Shanghai, after the American entrepreneur arrived in
the city in 1919. More recently, the New York-based insurer has been
invested in China‟s auto insurance market through a 9.9 percent
stake in PICC. The two firms have had a strategic relationship since
the Chinese insurer‟s initial public offering in 2003.

AIG‟s Hancock

Peter Hancock, who heads Chartis globally, is relying on growth in
developing economies to boost returns, as AIG seeks to attract
private investors to replace government funds from its 2008 U.S.
rescue. Asset sales to pay back the bailout led AIG to retreat from
selling life insurance in China in 2010, when the company sold a
majority stake in AIA Group Ltd. (1299), the Hong Kong- based
insurer with operations across Asia.
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           American International Group (AIG) & Allianz SE (ALV)        2012

Hancock personally thanked Xi for the decision to lift the auto-
insurance ban at a luncheon at the Marriott Wardman Park hotel in
Washington on Feb. 15, during the Chinese vice president‟s visit.
After years of lobbying by the insurance industry, Chinese regulators
are relaxing regulations to benefit from foreign companies‟ expertise
and improve service.

Still, building an auto business in the country faces hurdles. The
government sets rates for the mandatory coverage. And foreign
insurers face restrictions on where and how fast they can open new

It takes about 18 months to win approval to sell coverage in a new
province or municipality, said Liberty Mutual‟s Tang, who‟s based in
Chongqing. And the licenses are granted one at a time. Chinese firms
don‟t face the same requirements.

„Can You Imagine‟

“Can you imagine, if I wanted to open 10 provincial branches, it
would take me 15 years,” said Tang in a phone interview. “Local
companies can apply for 10 branches, 15 branches in the first year
and just open them.”

One way for foreign insurers to distinguish themselves from local
companies, said Moody‟s Yim, is on service. Domestic carriers have
struggled to process and settle claims as the number of vehicles
surged to 228 million, China‟s insurance regulator said in a work plan
posted on its website this month. Companies were ordered to submit
plans for how to improve service by the end of March.

Even with better service, foreign insurers may find it tough to steal
customers in cities like Beijing. Local companies such as Ping An

American International Group (AIG) and Allianz SE (ALV) to Target China Drivers in
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           American International Group (AIG) & Allianz SE (ALV)        2012

Insurance (Group) Co., China‟s second-biggest insurer, have claims
staff at car dealerships to handle almost everything after an accident.

Service Quality

“We drove back to the dealership where we bought the car, they took
pictures of the broken part, had us fill a form, they paid the bill, and
we drove home after the repair,” said Dong Xuan, 34, a manager at a
Beijing-based construction company. “It‟s simpler than we thought,”
she said of her experience last year after her Ping An-insured Toyota
Corolla smashed its front light hitting a taxi.

“The first thing I look at is convenience, then service quality,” said
Yang Guang, 35, an English teacher at a Beijing- based college who
won the right to buy a car in the otherwise- restricted city as part of a
government monthly car-license lottery in February. “I‟ll see what
foreign insurers have to offer, but I doubt they can elbow their way
into the dealerships that have already partnered with local insurers.”

Figuring out which customers are the best risks may also pose a
challenge. The number of drivers in the country climbed to 239
million at the end of February, according to the Ministry of Public
Security. Chartis‟s Goulding said it would take a few years before the
company has enough data to make accurate forecasts about the

Profiling Customers

“Worldwide, auto has small margins, so you have to be very smart on
how you profile your customers,” he said.

Official statistics show that China‟s roads have gotten safer in recent
years, even as the country has added more cars and drivers. Road

American International Group (AIG) and Allianz SE (ALV) to Target China Drivers in
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           American International Group (AIG) & Allianz SE (ALV)        2012

fatalities fell to about 2.8 for every 10,000 vehicles from 3.2 in 2010,
according to the State Administration of Work Safety.

Still, that‟s more than twice the rate in the U.S. in 2010, according to
the most recent data from the National Highway Traffic Safety
Administration. Further, a study of death records published in the
January 2011 Bulletin of the World Health Organization showed that
the rate of fatalities from road traffic may not have declined and
could be double what‟s reported by the police.


China is adjusting to the increase in motorists, said Peter Hessler, a
New Yorker staff writer and author of “Country Driving: A Journey
Through China from Farm to Factory,” which chronicles how the car
is transforming the country. Driver education in China is “the blind
leading the blind,” he said in a phone interview from Cairo, where he
now lives.

“In the developing world people drive in ways that people in the
States think is crazy,” said Hessler. “The difference in China is that
they all learned in the last five years, basically. I don‟t think you‟ve
ever had a country that‟s had this scale of the automobile suddenly
becoming a part of life.”


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