Monday, October 13, 2008

China's Insurance Industry Before 1949 (part 2)

Although domestic insurers began to develop their market share, they were at a disadvantage in competing with the foreign insurance companies. China's foreign trade was controlled by foreign firms and consequently, it was very difficult for domestic insurers to expand their business. Furthermore, they had to rely on their foreign rivals for reinsurance because of their weak financial strength. As a result, foreign companies continued to dominate China's insurance market and earn substantive profits. For example, the return on equity of the Hong Kong Fire Insurance Company, established in Hong Kong in 1868 by British businessmen, was about fifty percent (Ye, et al. 1998, p. 27).

The Revolution of 1911 not only ended the Qing Dynasty, but also stimulated the development of industry and commerce in China. Consequently, insurers began to expand their business to other trade ports and inland trade cities. Again, foreign insurers maintained their dominant position due to their predominance in capital, technology, experience, and ability to accept ceding business.

It should be noted that American businessmen became heavily involved in China's insurance industry after World War I (WWI). Cornelius Vander Starr, an American entrepreneur, founded an insurance agency called American Asiatic Underwriters in Shanghai in 1919 and then Asia Life Insurance Company in 1921. In the 1930s, American insurers gained an equal position to their British associates and foreign insurance companies thus had about seventy-five percent of China's insurance market (Ye, et al. 1998, p. 120).

Following the War against Japanese Aggression (1937-1945), the Chinese People's Revolutionary War (1945-1949), and the founding of the People's Republic of China in 1949, China's insurance industry was quite volatile as China's economy fluctuated greatly in time of the war. In turn, foreign insurers began to exit the market. Furthermore, people, unable to anticipate the unstable economy and in need of economic security, did not purchase life insurance coverage. Therefore, insurance premiums were mainly collected from trade-related businesses and operations subsequently became concentrated in the trade centers.

To sum up, modem insurance was introduced to China by the West, which controlled China's insurance market profitably for a long period of time. This may have contributed to the concern that China's insurance industry might again be controlled by foreign capital and the prudence in granting foreign insurers licenses to operate in China, which was shared by many people even at the end of the 20 century.

Also read: China's Insurance Industry Before 1949 (part 1)

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