Casualty Actuarial Development in China
By Alex Zhu, Member, Asia Regional Committee
Powered by the dynamic modernization of the Chinese economy and society, casualty actuarial practice is being rapidly integrated into insurance company operations in China. The Chinese Actuarial Association (CAA) became an independent actuarial organization in December 2007 after the final government registration process was completed.
Economic Growth Fuels the P&C Insurance Market
China is the fourth largest economy and has the largest foreign currency reserves in the world. For the first time, the World Bank predicted that China will become the largest contributor to the global economic growth. China has become a powerful developing country with increasing global influence. Starting in the 1980s, the communist government under Deng Xiao Ping pursued far-reaching changes that expanded commercial and technical ties to the industrialized world and increased the role of market forces in stimulating urban and rural development. The Chinese economy has achieved around 10% average annual growth in GDP since 1979.
China’s accession to the WTO in December 2001 has also contributed to the growth in foreign trade and foreign direct investment, while further intensifying the domestic corporate restructuring process. In 2002, China surpassed the U.S. to become the country that absorbed the most foreign direct investment in the world. The growth story continues with the economy expected to grow 11.5% in 2007.
Rapid economic growth, coupled with strong foreign investment, has resulted in substantial wealth creation and accumulation in China. As disposable incomes rise, consumers have looked to insurance policies to protect their assets.
China’s property/casualty (P&C) insurance market is the 11th largest in the world. The following table sets forth the insurance premium received by P&C insurance companies in China from 1997 to 2006.
While the Chinese P&C insurance market has experienced rapid growth, it remains significantly under-penetrated when compared to more developed markets in Asia as well as the U.S. and Europe. In 2006, total P&C insurance premiums represented only 1% of China’s GDP, compared to about 2.2% in Japan and 4.8% in the U.S. The comparatively low penetration rate suggests potential for further growth in the Chinese insurance market.
Roots of the Casualty Actuarial Profession
In 1988, a joint actuarial program between the Society of Actuaries (SOA) and Nan Kai University kick-started actuarial education in China, introduced modern actuarial concepts and practices to the Chinese insurance industry, and prepared the first wave of young actuaries in China. Focused on life actuarial practices, today the graduates of the SOA-Nan Kai University program work in many life insurance companies in China. The 1995 insurance law mandating that life insurance companies in China employ actuaries gives a major push to the budding actuarial profession and attracts a number of bright candidates into the actuarial career. In 1999, 43 actuaries were awarded the rank of Fellow after passing qualifying exams by China Insurance Regulatory Commission (CIRC), China’s national insurance regulator. In 2001, the Society of Actuaries of China was formed under the China Insurance Association.
Before 2000, casualty actuarial knowledge in China was generally limited to life actuarial education’s coverage of the subject. Around 2000, a few internationally qualified casualty actuaries visiting China and academic professors started to preach the gospel of modern casualty actuarial knowledge and practice, such as the powerful roles they played in the operations of multinational P&C insurance companies and in casualty insurance companies in the U.S, U.K, and Australia. These enlightening activities and subsequent educational efforts took place spontaneously across China, bringing the audience to a new world beyond the chain-ladder method.
To solve the problem of an acute shortage of qualified casualty actuaries, the national regulator administered special casualty exams. On March 26, 2007, for the first time in history, Casualty Fellowship certificates were awarded to 22 casualty actuaries in China after they successfully completed the exams. These Fellows became the founding members of the CAA.
Regular CAA Associateship exams, a separate track under the Chinese actuarial exams, were first offered in 2005 and are given twice a year in spring and fall. The first five exams are required of both life and P&C actuarial candidates, and P&C candidates need to take another four casualty topic exams to complete Associateship exams. The Chinese exams aim to be similar to Casualty Actuarial Society exams in the breadth and depth of the subject. Instead of being composed of numerous essay compilations, Chinese casualty actuarial exam materials are textbooks written by commissioned university professors based on a syllabus developed by a committee of regulators, practicing actuaries, and academics. Fellowship exams are in an early stage of development. Quite a number of candidates are taking CAS exams.
After an extensive study of casualty actuarial science and practices, the national insurance regulatory officials at CIRC led the effort to include in the 2003 Insurance Law a provision requiring P&C insurance companies to employ casualty actuaries. On July 1, 2004, a regulation was implemented requiring each P&C insurance company to designate a qualified actuary as appointed actuary, subject to regulatory approval. Actuaries qualified under Chinese exams and internationally qualified actuaries, such as CAS Fellows, are eligible to be appointed actuaries for P&C insurance companies in China.
Appointed actuaries are required to sign product filings, actuarial statement of reserves opinions, and solvency reports. Casualty actuaries are primarily engaged in pricing and reserving activities, with some playing leading roles in investment and company risk management. Actuarial sophistication varies tremendously from one company to another.
In addition to the standard loss ratio and pure premium methods, some pricing actuaries use Emblem and SAS as their primary pricing software. Actuarial reserving based on GAAP became mandatory starting January 1, 2007, as part of the 2006 Chinese accounting standard developed for all industries, which is similar to International Financial Reporting Standard 4. The accounting standards for P&C insurance companies in China are quite close to U.S. Statutory Accounting Principles, including not allowing deferred acquisition costs.
Rapid Growth = Increased Demand
With the rapidly growing business and the increasing number of P&C insurance companies, the demand for sophisticated casualty actuaries is intense, and there is a severe shortage of qualified actuaries. The tasks of establishing actuarial practices in an environment lacking clean data and of educating non-actuarial colleagues are formidable challenges. Because of the dedication and enthusiasm flowing through this young profession and the remarkable results achieved within a short span of time, the P&C business is growing up very fast in China—and CAS Fellows have played a leading role in its development.
Alex Zhu is chief actuary for Ping An Property & Casualty Insurance Co. in Shenzhen, People’s Republic of China.
The Players: P&C Companies in China
China’s P&C insurance market is currently dominated by The People’s Insurance Company of China (PICC), China Pacific, Ping An, and China United, which together control over 70% of the market in terms of gross written premiums in 2006. PICC is by far the largest P&C insurance company with over 40% of market share and was formerly the monopoly insurer in China. There are 43 P&C insurance companies licensed in China, 27 domestic and 16 multinational. Multinational P&C insurance companies take 1% of the market share. The five largest multinational insurance companies in terms of gross written premium are AIU, Tokyo Marine, Sumitomo Mitsui, Samsung, and Allianz.