BANKING
Room to Grow: Manulife-Sinochem Seeks to Lead China's Insurance Industry
April 24, 2006
Christopher Bjorke

"Product innovation should be done cautiously ... products that worked well overseas must be carefully reviewed." —Emil Lee, SVP and CFO, Manulife-Sinochem ARTICLE TOOLS Print Version Reprints RECENT ARTICLES Different cities, same customers China is the region's top stop for exporting Improving wire transfers Quantifying your banks' performance

The Chinese insurance market may be set for a boom, and Manulife-Sinochem has spent the past decade positioning itself to be in the front of the industry when it comes.  The CFO of this Canadian-Chinese joint venture discusses China's market, banking system and regulatory environment, all with an eye toward future expansion.

Personal insurance is still making inroads in China and has room to grow, both in the country's increasing middle and upper classes as well as the poorer countryside where government social services are faltering, as a recent study in the McKinsey Quarterly notes. The newly wealthy have money to spend on new insurance needs, while the rural poor can use private insurance to supplement shrinking public social provisions. Among a population famous for its saving rate, added protection for the future should be an easy sell.

Manulife-Sinochem (MSL) formed as a joint venture between Canadian insurer Manulife (International) Ltd. and Chinese foreign trade giant Sinochem, with the Canadian partner holding 51 percent. The company recently won approval to operate in the western province of Chengdu and plans to expand its business beyond the coastal regions.

Emil Lee, senior vice president and CFO of the joint venture, answered AFP's questions via e-mail.

Can you give an overview of MSL?

Manulife-Sinochem was establish in Nov. 1996 in Shanghai and is the first joint venture life insurance company in China. Our goal is to be the most professional life insurance company in China, providing the very best financial protection and wealth accumulation products and services to our clients. Leveraging the World Trade Organization accession and the growth of the insurance business in China in recent years, MSL now operates in 10 different cities, spread across the Yangzi River Delta and Pearl River Delta, the richest areas in China.

In 2005, we started operation in six cities in one year. At year's end, we had about 250,000 clients in China and assets of about US $244 million.

What is the importance of Western China and how does the company's expansion into Chengdu play a part in the company's longer-term plans?

Chengdu is located in the central area of China, and it plays a very important role in the economic development in Western China. After decades of development in the coastal areas of China, the government began to emphasize the development of Western China by providing financial support and preferential policies in recent years. MSL can leverage the rapid economic growth in Western China with its early entry into the market there.

What are some of the differences in managing cash and treasury operations in China from that in the West?

In China, a lot of people used to pay for everything in cash, and personal checks are rarely used because of their high transaction costs. Although we encourage our clients to pay their premiums through banks' direct debit system, there are still some clients unwilling to authorize MSL to collect the premiums directly through their bank accounts. Therefore, we still have to rely on the service of local banks with larger banking networks over the major cities in China to help with premium collection. The systems of the local banks are not as advanced as we expected and the service of banks still has much room for improvement. All this makes cash and treasury operation in China very challenging.

What are customers' payment options? If they don't use direct debit through their banks, how do they pay?

We encourage autopay but some prefer to pay cash to our agents and our agents deposit the premium into MSL's account. They are linked up with the bank so that the deposit would clearly be identified as the premium payment from a particular policyholder.

How do you think the banking system could be improved?

The most important issue is that negotiation often needs to be done locally, i.e., not all banks allow you to enter into a national agreement and we have to negotiate with banks locally on the services they provide, the charges, etc. The reason is that they are rewarded locally on how much business that each branch can bring in.

What options are there for sweeping payments collections into more centralized accounts?

The bank system does have the capability for cash sweeping and centralization across different banks. Given that we are expanding rapidly across the country, this is something that we are actively pursuing.

Can you say anything about the importance of relationships in business and banking in China?

Banks are the most important business partner for MSL in China. As discussed above, we have to rely on the local banks for premium collection. And according to a recent regulatory requirement, insurance companies must appoint a local licensed bank to be its assets custodian. Banking relationships will also have a significant impact if we have bank assurance products. This can be seen in some new entrants in the market who are eager to sell bank assurance business in return for the rapid growth of premium income in the initial operation years.

What kind of risks are you exposed to right now, and how do you analyze those risks?

In operational risk, MSL constantly has to guard against poaching of our top agents and staff. In financial risk, the appreciation of the renminbi (RMB) poses a slight risk on our foreign currency assets, but this can be mitigated with proper matching and conversion into RMB-denominated assets.

What kind of risks may be on the horizon?

With rapid expansion, there are two major factors that need to be considered carefully. The first one is the strong demand on proper resources and talent. The other is how to tackle the problems MSL will face under the centralization model in a vast country with offices situated geographically far apart. Cost containment with rapid expansion will be a great challenge.

How do you navigate the regulatory environment there, and how do you deal with regulatory differences across regions?

One of the critical factors for success in China is finding the best way to deal with the government and various regulators. The regulators in China have a tough job to do, as the industry is still very new. The lack of sophistication among the local players forced the regulators to impose regulations that don't seem sensible in the context of the Western world. In addition, regulations in China are not centralized. There are rules and regulations issued at the provincial and even city level. As such, more resources have to be put in place to cope with the regulatory changes.

A couple of examples: Regulators were thinking of extending the free-look period to three to six months as they want to protect the consumers, and asking smaller insurance companies to outsource their investment functions to the larger insurance companies—their competitors. The rationale is that the larger insurance companies will have economy of scale and can get better yield.

MSL stands out among the other foreign companies, as we have a dedicated team with lots of experience to manage government relations.

As an insurer, are there many differences between selling insurance in a more collectivist country like China as opposed to in the West?

There doesn't appear to be. The products in China are very much similar to products bought by consumers in other Asian markets. The consumers do rely more on the government to protect them against mis-selling, when the agent deliberately or carelessly misrepresent the product, such as overstating the investment return or the type of protection covered by the policy, etc.

What future expansion targets does the company have in terms of customers and new products?

We will continue to expand rapidly, hopefully at least two to four cities a year over the next few years.

We are known to be the product innovator in China, but product innovation should be done cautiously. The unit-linked product problem a few years ago served as a warning that products that worked well overseas must be carefully reviewed before being offered in China. MSL will continue to produce the best products and provide the best value to our customer, considering current market environment in China.

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