1. The Status Quo of Chinas Insurance Industry
Chinas insurance market is still at the initial stage. It only accounts for a small proportion of the national economy. Since Chinas insurance industry was resumed in 1980, more and more insurance agencies, independent regulatory mechanism and organizations have gradually emerged in the market, and the service scope has also been greatly extended.
By the end of 2005, there are 93 insurance corporations altogether in China, among which six were insurance groups and 82 were insurance companies (including 40 foreign insurance companies and 5 insurance asset management companies). The national premium income had reached RMB 492.734 billion, (RMB 34.1 billion was from foreign insurance companies, accounting for 6.9%), up 13.95% over the year of 2004, and 3.09 times of the amount of 2000, which had a CAGR of 25.29%.
The fast growth of premium income stimulated the insurance asset to a rapid expansion. By the end of 2005, the total insurance asset had amounted to RMB 1522.594 billion, up by 27.03% over the year of 2004, and the total insurance capital had exceeded RMB 100 billion (three times of that in 2002). By the end of 2005, the insurance capital got a capital balance of RMB 1413.584 billion (5.53 times of that in 2000), up by 31.15% over the year of 2004. The insurance companies hold treasury bonds of RMB 358.83 billion, financial bonds of RMB 178.51 billion and corporate bonds of RMB 10.76 billion. Currently, there are 1.815 million staffs engaged in insurance, accounting for over 40% of the total number of staffs in financial enterprises in China. In 2005, 14 new insurance corporations were established in China, among which 13 ones were insurance companies and one was an insurance asset management company.
Along with the rapid growth of economy, Chinas insurance industry and the concerned policies are also experiencing a fast development. The market access mechanism has been greatly improved and accordingly, more and more insurance companies have been established. In 2004, for instance, a number of insurance companies got the authorization for establishment, including the first agricultural insurance company, the first construction insurance company and the first pension insurance company. In 2005, eight Chinese insurance companies and four foreign insurance companies entered Chinese market, heating up the competition in the insurance market. The insurance companies have more rights over capital operation. They have obtained approval to handle corporate bonds, securities investment funds and to invest directly in the stock market. More financing channels are available for the insurance company. For example, they have obtained permissions to invest in stimulant bond or in convertible corporate bond. China Insurance Regulatory Commission is making great efforts to strengthen the management of risk resistance.
However, we should also note that Chinas insurance industry is still at the initial stage. The unbalanced development of economy caused the difference in the development of insurance industry in different areas. For instance, in Guangdong and Shanghai, the insurance market is abundant in both demand and supply, which is far more prosperous than that of Central and Western China. Currently, the major problem is that the development of Chinas insurance industry does not accord to the development of the national economy, the society and the demand of Chinese people.
2. The Causes of Merger and Acquisitions
On December 11th, 2004, China ended the transitional periods according to the commitments to WTO, which indicated Chinas insurance industry had entered a new era because it would be completely opened to the world. But, from another angle, some problems still exist in Chinas insurance industry:
Firstly, the reforms of some state-owned insurance companies are not sufficient. The product is in an unreasonable structure and lacks innovation mechanism, especially the life insurance such as medical care insurance and the insurance services in the countryside. Secondly, the risks in insurance industry can not be neglected. Some insurance companies are in trouble with the losses from old insurance contracts. The problem of unfaithful services in insurance companies is rather serious. Thirdly, the concentration of insurance company is deficient. Compared with that of some developed countries, the scale of Chinese insurance companies is rather small, whose total asset is far less than that of some large international insurance companies. The world well-known insurance company -- AIG Co. owns much larger amount of asset than that of the whole Chinese insurance industry. Deficient concentration is one of major reasons why Chinese insurance companies are weak in the resistance to risks.
The key to develop Chinas insurance industry is the implementation of merger and acquisitions. Firstly, merger and acquisitions can enlarge the scale of business, reduce costs, increase profits, and strengthen the capability of resisting risks and competitiveness. Secondly, merger and acquisitions can reduce competition and increase market share. Under the stress of intensive competition, merger and acquisitions is a good way to improve the structure of insurance products. Meanwhile, it is also a shortcut to realize cross-sector operations. Thirdly, merger and acquisitions between insurance companies can develop new services. Fourthly, the mixed operation in financial industry accelerates the capital integration between banking, securities and insurance industries and enlarges their service coverage. Insurance companies can have the functions of banking and investment at the same time. For insurance company, purchasing other financial institutions can not only reorganize the capital resource but also can optimize the resource configuration and absorb advantages from each other. Reorganization through merger and acquisitions is faster than internal investment adjustment and it can achieve economic synergies effect at the same time.
