1. Forbidden City, Beijing Joy A. Schwartzman, FCAS Principal & Consulting Actuary The Property – Casualty Insurance Market in China Casualty Actuaries of Greater New York – Spring Meeting 2004

2. 2 China has been liberalizing access to its insurance market in the past two years following commitments under terms of its World Trade Organization (WTO) ascension (December 2001). China has been liberalizing access to its insurance market in the past two years following commitments under terms of its World Trade Organization (WTO) ascension (December 2001).

3. 3 Outlook of Chinese insurance industry demonstrated when China’s two largest state-owned insurance companies listed on Hong Kong Stock Exchange Outlook of Chinese insurance industry demonstrated when China’s two largest state-owned insurance companies listed on Hong Kong Stock Exchange China Life and PICC stocks were oversubscribed by 743 and 136 times, respectively! China Life and PICC stocks were oversubscribed by 743 and 136 times, respectively!

4. 4 Source: China Statistical Yearbook, 1999. Since 1978, China’s economy has boomed as a result of sweeping economic reforms.

5. 5 China’s economy continues to grow rapidly, with a GDP real growth rate of 8% annually China’s economy continues to grow rapidly, with a GDP real growth rate of 8% annually Property and Casualty insurance premiums have been growing at 13% per annum Property and Casualty insurance premiums have been growing at 13% per annum 2002 premiums 78B RMB ($9.4B), 0.7% of GDP 2002 premiums 78B RMB ($9.4B), 0.7% of GDP China’s population of 1.3B is 4 times the US. China’s population of 1.3B is 4 times the US. 2002 US P&C premiums $370B, 3.5% of GDP 2002 US P&C premiums $370B, 3.5% of GDP

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7. 7 PICC first Chinese P&C company to go public (October 2003) PICC first Chinese P&C company to go public (October 2003) Raised $693M with AIG taking 9.9% share Raised $693M with AIG taking 9.9% share Premiums continue to grow as the market grows Premiums continue to grow as the market grows But PICC market share is declining with smaller companies aggressively pursuing business by undercutting rates But PICC market share is declining with smaller companies aggressively pursuing business by undercutting rates Accident period loss ratios have been on the rise Accident period loss ratios have been on the rise On a calendar period basis, deteriorating loss ratios are masked by PRC GAAP accounting conventions On a calendar period basis, deteriorating loss ratios are masked by PRC GAAP accounting conventions

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9. 9 Foreign Insurers (“FI’s”) < 1% share of market Foreign Insurers (“FI’s”) < 1% share of market FI’s confined to Shanghai and few other provinces FI’s confined to Shanghai and few other provinces FI’s confined to policies for foreign companies operating in China FI’s confined to policies for foreign companies operating in China FI’s limited to branch operations or 51% stake in joint-ventures FI’s limited to branch operations or 51% stake in joint-ventures 2002

10. 10 FI’s can write insurance in most major provinces FI’s can write insurance in most major provinces FI’s can set up 100% owned companies FI’s can set up 100% owned companies FI’s can write insurance for both foreign and Chinese companies for some lines of business FI’s can write insurance for both foreign and Chinese companies for some lines of business Beginning December 2003

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12. 12 All local companies reported profits in 2001 and 2002 on PRC GAAP basis All local companies reported profits in 2001 and 2002 on PRC GAAP basis However, PRC GAAP results mask true profitability However, PRC GAAP results mask true profitability PRC GAAP limits IBNR reserves to 4% of net claims paid PRC GAAP limits IBNR reserves to 4% of net claims paid This amount is generally inadequate This amount is generally inadequate UEPR calculated as 50% of written premium UEPR calculated as 50% of written premium This is inadequate for small high growth companies This is inadequate for small high growth companies PRC GAAP close to cash accounting which overstates profits for fast growing companies PRC GAAP close to cash accounting which overstates profits for fast growing companies Profitability and Reserves

13. 13 Change in the accounting treatment of reserves required Change in the accounting treatment of reserves required Companies are just beginning to analyze reserves on an accident period basis Companies are just beginning to analyze reserves on an accident period basis Appropriate historical data has to be developed from scratch and does not reconcile to audited financials Appropriate historical data has to be developed from scratch and does not reconcile to audited financials Profitability and Reserves

14. 14 CIRC (China Insurance Regulatory Commission) is discussing requirements for an actuarial review of loss reserves – no timetable specified CIRC (China Insurance Regulatory Commission) is discussing requirements for an actuarial review of loss reserves – no timetable specified China law mandates that 20% of all premiums written are reinsured by China Re. This practice must cease within 4 years of WTO entry (by December 2005) China law mandates that 20% of all premiums written are reinsured by China Re. This practice must cease within 4 years of WTO entry (by December 2005) New Traffic Law effective May 1, 2004 mandating compulsory third party insurance New Traffic Law effective May 1, 2004 mandating compulsory third party insurance Insurance companies will have to submit rate filings Insurance companies will have to submit rate filings Milliman appointed by CIRC to comment on rate filing system and review submitted filings Milliman appointed by CIRC to comment on rate filing system and review submitted filings Driving record being introduced as a rating variable in 2004 Driving record being introduced as a rating variable in 2004 Legal and Regulatory

15. 15 Fastest growing companies are undercutting rates to compete for market share and are not recognizing the true profitability of their business Fastest growing companies are undercutting rates to compete for market share and are not recognizing the true profitability of their business Foreign strategic partners who report profits using international accounting standards are imposing some discipline on local companies who seek capital for growth Foreign strategic partners who report profits using international accounting standards are imposing some discipline on local companies who seek capital for growth Elimination of China Re reinsurance monopoly appealing to worlds largest reinsurers Elimination of China Re reinsurance monopoly appealing to worlds largest reinsurers Huge market growth is very appealing to outside investors – but current profitability may not be! Huge market growth is very appealing to outside investors – but current profitability may not be! What’s Next?