The Chinese insurance market is continuing to be a tough challenge for foreign insurers, with banks entering the market and domestic competitors getting favourable treatment from regulators.

Moody’s Investor Services says only 11 of 46 foreign insurers in China made a profit in the 2010/11 financial year, and the profits were negligible to their global operations.

“Foreign firms have made little headway in the Chinese insurance market and to this day still suffer from low market shares and low profitability, despite significant growth opportunities,” says Moody’s Hong Kong-based VP and Senior Credit Officer Sally Yim.

Ms Yim says the industry has enjoyed strong growth since 2001 when foreign insurers were allowed into China as a condition of its admission to the World Trade Organisation.

Foreign firms had high hopes of China, expecting to bring expertise in exchange for access to a huge emerging market. But Ms Yim says they now have to ask themselves whether it is worth competing in such a difficult market.

The foreigners had to form joint ventures with local partners, and could not hold more than 50% of the operation. In recent times some of them have scaled back their shareholding, leading to speculation that foreign interest in China is waning. Other entrants, such as IAG, have bought stakes in Chinese insurers rather than taking their own brand to the country via a joint venture.

PricewaterhouseCoopers (PWC) in its fifth annual survey of foreign insurers in China found the 28 companies surveyed had less than 1% of the property and casualty market and 5% of the life market.

Respondents listed major challenges as regulation, the entry of banks into insurance and competition from domestic insurers.

Of the 18 life companies, all wanted the 50% ownership restriction removed and most believed some Chinese joint venture partners wanted to leave the relationship.

Foreign firms have been locked out of third-party motor vehicle cover and although the Beijing government is letting them into the segment, it has not set a date and many of PWC’s respondents do not see it happening next year.

The foreigners find it much harder than domestic insurers to get approval to open new branches, which will make it difficult for them to sell third-party motor cover.

They are also encountering increased competition from banks offering insurance products.

Among all this, the China Insurance Regulatory Commission (CIRC) has forecast the market will grow by 15% compound annually over the next five years.

It says China accounts for nearly 4% of global insurance premiums, up from 1% a decade ago.

The reinsurance segment is also growing. Aon Benfield says China’s reinsurance premiums have risen 70% since 2005, although it is considered that catastrophe insurance and reinsurance have developed slowly despite China’s increasing natural hazard exposures.

China has suffered five of the top 10 deadliest natural disasters in history, with recent events affecting over 70% of the land area and more than half the population, Aon says in its China Property and Casualty Insurance and Reinsurance Market Report.

Aon Asia Pacific CEO Malcolm Steingold says China cannot be overlooked, but adds: “When we look beyond the macroeconomic growth, underlying opportunities and challenges are not necessarily what they first appear to be.

“For example, a detailed analysis of the property market shows that growth has been more in line with gross domestic product than with the faster overall market growth, which is largely driven by motor business.”

The CIRC’s latest five-year plan includes the creation of a national natural disaster risk transfer program, improved loss models and data, which Aon says could increase demand for catastrophe insurance and reinsurance.

It is estimated that only 5% of China’s catastrophe losses are covered by insurance. But as the experience of foreign insurers has demonstrated, huge opportunities do not necessarily translate into profitability.