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Insurers Weighing Up Benefits of Shanghai Free Trade Zone

The creation of a new free trade zone in Shanghai looks set to benefit insurers as the Chinese government pushes ahead with its programme of market reform.

The zone, know officially as the China (Shanghai) Pilot Free Trade Zone or the FTZ, is being used as a testing ground for a number of economic and social reforms.

These reforms range from allowing companies unrestricted foreign currency exchange, to the sale of video game consoles. However, initial reports that people will be able to access Facebook in the zone have proved to be untrue.

Overall, 18 different industries, including the financial services sector, will benefit from more relaxed policies within the zone, including an easing in the restrictions on foreign investment.

11 square miles

The FTZ covers 11 square miles and takes in four existing bonded zones, including the Pudong Airport Comprehensive Free Trade Zone and the Yangshan Free Trade Port Area.

But the boundaries of the zone, which opened for business on 1 October last year, remain nominal, with people able to move freely in and out of it.

Shortly after the State Council issued its Master Blueprint for the FTZ, the China Insurance Regulatory Commission published a statement containing eight initiatives in the zone for the insurance industry.

Although its statement was light on specific details, the initiatives aim to promote reform and innovation to enable Shanghai to become an international finance centre.

Among the highlights was a new rule enabling wholly foreign owned health insurance companies to operate in the FTZ, removing the previous 50% cap on foreign ownership in China.

Kevin Xu, PwC's financial services leader for Central China, says: "Foreign insurers are now able to have fully owned healthcare insurance operations in the FTZ. This is a huge opportunity for healthcare insurance providers."

He adds: "Healthcare is quite a significant area for China, with demographic changes and people getting older it is quite a big market."

Insurers who set-up branches or subsidiaries in the zone will also be allowed to carry out renminbi cross-border reinsurance business, while the government also wants to support the research and exploration of catastrophe insurance schemes.

Encouraging innovation

The zone also aims to encourage product innovation, particularly in the areas of marine and cargo insurance and liability insurance.

Ultimately, the government aims to have a marine insurance pricing centre, reinsurance centre and insurance funds operation centre set up in Shanghai.

The insurance industry has welcomed the initiatives.

Lynn Yang, a partner at Norton Rose Fulbright, says: "It gave a very positive message to the insurance industry. These policy initiatives aim to create new opportunities across the insurance industry."

The new rules are particularly significant for foreign health insurers looking to move into China, as the lifting of the previous 50% foreign ownership restriction offers them an easier route into the country.

US giant Met Life has become the first foreign insurance company to win approval to operate in the FTZ, through its joint venture Sino-US United Met Life Insurance.

The group sees significant benefits in setting up operations within the FTZ, as businesses in the zone will be allowed unrestricted foreign currency exchange and a 10-year tax-free period, to simplify the process of foreign direct investment.

Foreign invested companies will also be allowed to make foreign exchange capital account settlements at their own discretion or open RMB special deposit accounts.

Simon Smith, vice president and head of corporate communications, Asia at Met Life Asia, says: "The measures in liberalising the yuan capital account and easing controls over foreign currency conversions for foreign direct investment will offer greater flexibility, convenience and efficiency for foreign invested enterprises in capital management."

He adds: "This is appealing to multinational companies to establish foreign exchange asset pools in the FTZ."

Mixed messages

However, other insurers are adopting a wait-and-see approach.

Yang says: "These initiatives are a more general blueprint and still subject to detailed implementation rules, which are yet to be issued by CIRC and are without a detailed timetable."

Smith agrees: "More reforms are on the way and it is understandable that it takes time to formulate policies and measures when this is a pioneer scheme. We believe rules and policies will become clearer over time."

Manuel Bauer, Allianz board member responsible for growth markets, sees the FTZ as another positive sign of further economic liberalisation in China.

"We are interested in opportunities which we can add further values to the stakeholders. We look forward to knowing more details on the respective policies and regulations," he says.

However, Xu emphasises that the FTZ is just one small pilot project.

The government had planned to roll out further FTZs across China, but has now pulled back on this initiative.

There are also still uncertainties about how the FTZ will operate.

Xu says: "A lot of details have yet to be clarified, such as whether companies can distribute policies outside of the FTZ or if people have to travel to it. It is not clear."

The initiative will also do little to change the ongoing challenges insurers operating in China face, including the low market share of foreign insurers, which stands at just 1% for property and casualty insurers.

Xu says: "Another major challenge is that distribution channels for insurance companies are quite limited. Also a lot of competition is on price not proposition."

He adds: "Insurers need to take a step-by-step approach. It is not an easy job to be successful in China, you need a lot of patience."

Xu also does not expect the new zone to have a big impact on other regional financial centres, such as Hong Kong in the short term.

He says: "The final goal for the Chinese government is to have an international finance centre like London or New York, but it will take a long time. Hong Kong has a very long history and, in the short term, I don't see it having any impact on Hong Kong."

He makes this caveat: "In the long run it is possible, but it all depends on the content of the [FTZ] pilot, and whether the government can turn this concept into something that can be replicated elsewhere in China."