By Maximilian Clarke

The increasing dominance of domestic insurers and the war for talent have overtaken China’s regulatory environment as the key challenge for foreign insurance companies operating in China.

This is according to PwC’s fifth Foreign Insurance Companies in China survey report, which reveals that 2011 was a challenging year for foreign insurance companies in China as they had to contend with increasing competition from domestic insurers and banks encroaching into their traditional marketplace. China’s rising cost of living is also making talent retention and recruitment more difficult.

“It hasn’t got any easier for foreign insurance companies to operate in China,” said David Law, PwC’s global insurance leader. “Regulation and limitations in the number of insurance companies that are able to distribute their products through banks may benefit companies with a good partnership, but others, particularly the smaller insurers, may lose out.”

The new bancassurance rules have resulted in several shareholding changes, with an increasing number of Chinese banks replacing other domestic companies as joint venture partners. Foreign insurers are expressing an interest in taking a share in their Chinese peers, a move they feel will help them in expanding geographically in China. They are also supportive of dual investments, where foreign insurers are allowed to invest in more than one insurance entity.

For the first time in the five years PwC has conducted the survey, the life insurance companies that participated identified increasing competition from domestic insurers and the war for talent as posing the greatest challenges. Their property and casualty (p&c) counterparts still consider China’s tight regulatory environment as the top concern.

The market share of the foreign insurers surveyed hasn’t improved much since 2010, with life insurers hovering at 5% and p&c insurers at 1%, the lowest in Asia. The figures are not expected to change dramatically in the next three years. The announcement in May that foreign insurers will be allowed to enter into the mandatory third party liability (MTPL) market may help boost the market share for property and casualty companies.

“The relatively low market share of foreign insurers in China is both a challenge and significant opportunity,” continued Law. “Premiums are experiencing high levels of growth with low levels of market penetration, showing why China is such an attractive market. Selecting the right business model to capture China’s growth potential will be key. “

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