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Economic Stimulus Plan Expected to Help China's Fledgling Domestic Insurance Market
(BestWire Services Via Acquire Media NewsEdge) The economic stimulus package announced by China's government last November was taken as a positive sign by the insurance industry, boosting confidence in growth prospects amid a global financial meltdown.
The financial programs recently unveiled as part of the State Council 4 trillion yuan (409.1 billion euro) economic package are aimed at stimulating domestic consumption and infrastructure development in the next two years. The financial programs mainly engage investment in rural infrastructure, utilities, transportation, technology, low-income housing and rebuilding from a series of disasters in 2008.
While these financial policies do not have a direct and immediate implication for the insurance industry, in the macroeconomic perspective, steady economic growth and confidence may support insurers' market development in the country. A policy to boost internal consumption is thought by insurers as key to sustain growth in gross domestic production, and hence premium revenue, in the long run.
Stimulus to Growth
China's fiscal spending programs on infrastructure development will offset lower foreign demand for the country's declining exports in the global downturn. Next year, China is expected to post gross domestic product growth of 7.5%, according to Allianz Dresdner Economic Research.
China's economic package is aimed at stimulating domestic demand in a way to keep the nation's economy "alive," said Rainer Schaefer, economist for emerging markets at Allianz Dresdner Economic Research.
"If it's successful, that would be great," said Schaefer. The stimulus plan will drive growth, and all companies, including insurance firms, will make a profit from this boosting of consumption and GDP in China, he said.
However, the extent of impact will be determined by the effectiveness of government's investment policy on infrastructure projects, said Schaefer.
As China's real estate and foreign trade will "enter a less exuberant growth phase than before" even after the credit crisis, it will be impossible to regain its double-digit growth in China, according to Axa Investment Managers. Public spending in China should be able to maintain growth of 7.5% in 2009 and 8.5% in 2010, Axa Investment Managers said in a report.
Capital Market Investment
In funding infrastructure projects, China's government will issue treasury bonds and has encouraged insurance companies on more direct infrastructure investments. This will indirectly play a positive role in helping increase incomes in the insurance industry with investment returns and bond yields, according to the government.
The stimulus package itself will not have big impact on the insurance sector, said Jason Yeh, associate professor in Chinese University of Hong Kong's finance department. But rather, the government's move to lift limitations on insurers' stock and infrastructure investments will have an immense influence on the industry. In this regard, the relaxation will improve insurance companies' profit stream as they access more investment options in the market, said Yeh.
Insurance companies are encouraged to buy government bonds and qualified corporate bonds, through which they provide financial support to the construction of infrastructure projects under the stimulus package. China's insurers have also been allowed to invest capital in unlisted companies to fund infrastructure construction and to invest as creditors in projects.
Exports Still Rule
Booming infrastructure and construction development may not bring more profit for insurance companies because these government projects' loss ratios trend to be high in China, said Yeh. More infrastructure projects will create increasing demand for nonlife insurance. However, rising premium incomes do not simply mean insurers can make more profit because construction projects are of "high hazard" for claims in China.
Yeh said the stimulus package focuses on promoting employment, particularly for labor workers whose consumption on insurance products are basically low. Rather, government's policy to support export business should have a bigger impact on insurance business, said Yeh.
In general, China's insurance sector still has an "optimistic" outlook for 2009 as the industry has performed better than other financial services such as banking and securities, said Yeh. China's low insurance penetration and the regulator's move to deregulate investment policy for insurers are major factors for the positive prediction.
China's massive economic stimulus package has boosted the confidence of insurance companies for continuous growth and development in the market despite global financial problems.
The government's economic initiatives would provide more opportunities for insurers, said Andrew Kemp, regional director of the Asia-Pacific region with the TT Club, an international transport and logistic insurance services company.
China is an important growing market and the government's spending on infrastructure development for roads and transportation would make an indirect impact on insurance business in the long run, said Kemp. The TT Club is looking for more opportunities to work with Chinese companies, he added.
In the long term, shipping, ports, terminals and transportation development are driving future growth for the company's insurance business in China, said Kemp. China's stimulus package has not made a huge difference in doing business, but this will move overall business to go ahead, he said.
(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)
Copyright ? 2009 A.M. Best Company, Inc.
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