"I want to use my mother's insurance contract to borrow money. But her policy will only reach maturity in 18 months. Does that mean we'll have to take a big loss?"

A young couple in their thirties with a four-year-old in tow has arrived at a Taikang Insurance service point in Beijing's financial district. They own a store and have run into cash-flow problems, which they hope to solve by taking out a loan using a family insurance policy as collateral.

In China, showing up at an insurance office, policy in hand, to secure a business loan is common practice. As a result brick-and-mortar service points are an indispensible part of the insurance industry there. This business model starkly differs from Taiwan's, where the vast majority of insurance sales people directly visit customers at home or the workplace.

Taikang Life Insurance Company currently maintains more than 4,000 service points across the country and holds an 8-percent share in the Chinese life insurance market. Its workforce, including office staff and sales personnel, exceeds 250,000 people. Taikang was the first Chinese insurer to gain government approval for teaming up with a foreign investor. U.S.-based investment banking firm Goldman Sachs now holds a 12-percent stake in the company.

Taikang chairman Dongsheng Chen, who founded his company sixteen years ago and successfully grew it into China's fifth largest insurer, recently discussed his vision for China's insurance industry in an exclusive interview with CommonWealth Magazine at his office on the top floor of Taikang's corporate headquarters in Beijing.

Following are highlights of the interview:

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To be honest, China's life insurers borrowed their marketing model from Taiwan.

In 1992 AIG Insurance was granted a business license in Shanghai and established an insurance company there. Only then did China get to know insurance marketing and individual agents. These were previously unheard of.

In 2003 Ping An Insurance began to study (this business model) and approached the Kuo Hua Life Insurance team. With the assistance of Taiwan's Cathay Life Insurance, Taikang began to put together a marketing team in 1996.

In the sixteen years since our founding, Taikang has built close ties with Cathay Life Insurance. We dispatch a trainee delegation to Taiwan every year, sometimes we even send over two groups a year to study at the Cathay Life training center in Danshui. In recent years Cathay Life has also sent several dozen staff members to China to learn from us. They work at Taikang sales points for three months to learn about Chinese market development.

However, the Chinese insurance industry modeled its actuarial and investment systems on those of Europe and North America.

Developing a Typically Chinese Supervisory System

During the past decade the Chinese economy grew at a fast pace, which provided China with a huge opportunity to boost the international profile of its supervisory officials. For instance, the recently retired chairman of the China Insurance Regulatory Commission (CIRC), who was also the chairman of the Audit Committee of the International Association of Insurance Supervisors (IAIS), brought China's insurance industry up to speed with international standards.

In China the finance and insurance industries mainly look to Europe and the United States, and a Chinese-style supervisory control system is just taking shape. China is now designing its own actuarial examinations and a supervisory mechanism with auditing capacity to develop a system with distinct Chinese features.

What are the special features of the Chinese system?

Since China is a rapidly growing economy, the development of the insurance industry would be hampered and capital would be wasted if regulatory capital controls were too strict. Therefore, we need to develop our own Chinese supervisory system under the general supervisory framework of Europe and North America.

Insurers Running Retirement Homes

Taikang also wants to do one very important thing, namely, combine life insurance with senior housing communities by selling insurance products that are linked with retirement homes.

If citizens buy retirement insurance from us, they will be able to move into our senior housing communities in the future. The point is that China is turning into an aging society. So should this innovative idea prove successful, it will change the business environment of the life insurance industry worldwide.

After Taikang came up with this concept, China's insurance companies all followed suit.

The biggest difference from traditional hospitals is that the retirement homes of the future will be able to run and manage themselves. We divide older people into the four following categories, which all constitute different markets: active seniors, seniors requiring assistance, seniors requiring care, and seniors with dementia. It means that we need to cater to different target groups.

The most important background behind this innovative idea is China's economic development, because this market only emerged thanks to the rise of the middle class. I call this the cradle-to-heaven model.

For this type of insurance policy, the insured person needs to pay 300,000 renminbi in annual premiums for a period of ten years. To do that you need to be economically secure.

The biggest advantage of this model is that it ends the isolation and loneliness of people who grow old in their homes. Several friends can move to these retirement homes together. They can also make new friends there. They won't be lonesome.

The other innovation is that these places are managed by life insurance companies. In the United States institutions for the elderly are all run by real estate companies or charity organizations. The biggest advantage of letting life insurers run such homes is that it creates new avenues for insurance capital utilization.

New Relaxed Capital Controls

China's insurance industry has already completely caught up to international standards, particularly when it comes to utilizing insurance capital. We call this appropriate relaxation of controls the "new Xiang Junbo policy." (Xiang Junbo is the incumbent CIRC chairman.)

The important thing is that more channels were opened up for the insurance agency and brokerage business as well as capital utilization. This gave insurers more autonomy, and it made processing, examination and approval faster. In the past every single case had to be approved. Now a simple filing system has been introduced which allows insurers to be more proactive in investing.

The core of capital utilization is still basic infrastructure and alternative investments. Such investments – basically, investments earning fixed income or generating stable mid- and long-term income – foster the development of insurance companies.

Presently, Taiwanese insurers face a negative interest spread in the current low-interest environment, because they sold high-interest policies in their early days. China's insurance industry went through the same experience much earlier.

When the Southeast Asian financial crisis hit in 1997, China also saw its interest rates plummet from more than 20 percent to around 8 to 7 percent. Now the rate stands at just a little over 4 percent.

Back then when the interest rates plummeted, the Chinese insurance industry was inexperienced and also sold a large number of high-yield insurance policies. My estimate is that China's entire insurance industry holds policies with a negative interest spread that are worth hundreds of billions of renminbi.

This represents a huge challenge for the Chinese insurance industry, but also promotes the speedy transformation of products and the abandonment of fixed-interest products. We quickly appropriated Western methods of bonus payments. In this regard, we're ahead of Taiwan once again.

Moreover, our rapid economic development allows insurance companies to list on the stock exchange and raise money from the capital markets to quickly eliminate products with a negative interest spread. Therefore, this is no longer a serious problem.

In the past Taikang was a small company, so we focused on expansion and developed very fast. Now that we have reached scale, we need to go for value. Our insurance premiums posted negative growth of 8 percent this year, but the value of new policies increased by 5 percent. This is the fastest and highest growth of all insurance companies. We are already past the stage of seeking market share. Now we need to create value.

This is because we have witnessed how big an impact the emergence of the middle class has had on the insurance industry during the last five years.

China's insurance coverage rate stands at only around 50 percent. On the average only every second person has an insurance policy. In Taiwan it's already more than two policies per person, whereas the rate stands at over six or seven policies in Europe, North America and Japan. As the Chinese economy shifts to a domestic-demand driven one, there is still great potential for the development of the insurance industry.

Translated from the Chinese by Susanne Ganz

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Taikang Life Insurance

1996
Chairman and CEO: Dongsheng Chen
Insurance premium revenue: 54.2 billion RMB in the first 10 months of 2012, fifth highest revenue in the Chinese insurance industry
Total assets: 380 billion RMB
Total assets under management: 410 billion RMB

Dongsheng Chen

Position: Chairman and CEO, Taikang Life Insurance Co. Ltd.
Academic background: Ph.D. in economics from Wuhan University, China
Experience: Founder of Taikang Life Insurance and China Guardian Auctions;
Deputy editor-in-chief at monthly Management World, official organ of the Development Research Center of the Chinese State Council.