1. Asia-Pacific Insurance Outlook 2006 - 2007
Connie Wong
Director, Financial Services Ratings
Standard & Poor’s
Copyright © 2006 Standard & Poor's, a division of The McGraw-Hill Companies. All Rights Reserved.

2. Ready for the Next Down Cycle
More so now than the last down cycle
Stronger balance sheets
Regulatory enhancements (RBC, reserving)
Improved ALM
Stronger corporate governance/risk management
Greater underwriting discipline

3. Asia-Pacific Insurance Market Characteristics
Mature, with satisfactory profitability and capitalization
Developing, with reasonable profitability
Emerging, with low profitability and capitalization

4. Regional Insurance Markets Penetration (Premiums/GDP)
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

5. Industry Risks - definition
Analysis of industry risk is an important element in insurance rating analysis.
Standard & Poor’s gauges the dynamics of the insurance industry and to what extent those dynamics lead to more or less risk from the policyholders’ or creditors’ point of view.

6. Economic and Industry Risk in Asia Pacific Life Insurance Markets
Economic Risk
Very high
High
Moderately high
Moderate
Moderately low
Low
Australia
Singapore
Hong Kong
Malaysia
Taiwan
Japan
New Zealand
China
Thailand
India Philippines
Indonesia Vietnam
Industry Risk
Table good snapshot of relative riskiness of various insurance markets
Markets in transition include
Thailand (good growth; consolidation, too many players, (govt support mkt but not nec all players i.e. tax incentive to encourage 100%usage, but cost be tariffs and likely consolidation )
Taiwan (FHC convergence with FI, pricing pressures, reinsurance covers (inc retention & changes to policies – flirt with fin re) ALM issues
China (young market many structural changes)
Movers: Aust & Korea - recently lowered our assessment of the risk of Aust & Korea non-life
- reflecting structural changes – competition etc
Singapore – low risk but experienced first failure (Cosmic Ins) illustrating insurance is a risk business and are no safe havens
NZ – back from the brink in early 1990’s
Japan – facing challenges with deregulation etc – 10 years ago would have been 1-1
High risk markets
China, Philippines, India, and Indonesia

7. Outlook Regional Life Insurance Markets
Negative
Stable
Positive
Philippines
Australia
China
New Zealand
Japan
Hong Kong
Korea
Singapore
Thailand
Taiwan
Most markets in Asia are confronted with both Structural and Cyclical issues. Outlooks encompass both. Outlook indicate whether we believe the fundamental industry risk will improve, deteriorate or remain stable.
Some general themes in Asia (before looking at specific outlooks)
Sound underwriting performance (partly due to contraction in reinsurance capacity, higher retentions and higher pricing) – seeing pricing discipline dissipate
Consolidation among domestic participants – still too many players
Regulation
Dismantling of protection
Risk based supervision
Push governance & transparency – is it a fad
Reserve strengthening
Volatile investment markets – positive outlook but still skittish
No. of life markets are confronted with negative outlook.
Markets on negative outlook
Yr on yr trend improving – recovery of equity markets and eco activity.
Japan life confronted by large neg spread (Taiwan mid.term feature)
Japan & NZ – growth remains an issue
Aust & Taiwan life – neg outlook moderating
China – market in transition structural changes – IPO’s; new entrants; emerging market
HK Life Pos outlook – reflect mandatory growth

8. Regional Life Insurance Trends
Outlook: Stable
Supported by more favorable operating environment
Expect stable operating performance in 2006/7
Strengthened balance sheet
Good mortality experience
Main growth driver: wealth management type products
Growing markets
Supported by more favorable operating environment
Expect stable operating performance in 2006/7
Strengthened balance sheet
Good mortality experience
Main growth driver: wealth management type products
E.g. bancssurance, investment linked
Growing markets
Except Japan, most market reported good growth. For emerging market, it was due to underpentration. For mature markets, supported by new products lines e.g. investment linked or other wealth mgt type and also due to change of customer nees

9. Regional Life Insurance Trends
Challenges
Top line growth for more developed market
Negative spreads burden in some life insurance markets
Enhancement of asset and liabilities management
Limited capital sources for rapidly growing markets

10. Economic and Industry Risk in Asia Pacific Nonlife Insurance Markets
Economic Risk
Very high
High
Moderately high
Moderate
Moderately low
Low
Australia
Japan
New Zealand
Korea
Taiwan
Hong Kong
Singapore
China
Thailand
Malaysia
India Philippines
Indonesia Vietnam
Industry Risk
Table good snapshot of relative riskiness of various insurance markets
Markets in transition include
Thailand (good growth; consolidation, too many players, (govt support mkt but not nec all players i.e. tax incentive to encourage 100%usage, but cost be tariffs and likely consolidation )
Taiwan (FHC convergence with FI, pricing pressures, reinsurance covers (inc retention & changes to policies – flirt with fin re) ALM issues
China (young market many structural changes)
Movers: Aust & Korea - recently lowered our assessment of the risk of Aust & Korea non-life
- reflecting structural changes – competition etc
Singapore – low risk but experienced first failure (Cosmic Ins) illustrating insurance is a risk business and are no safe havens
NZ – back from the brink in early 1990’s
Japan – facing challenges with deregulation etc – 10 years ago would have been 1-1
High risk markets
China, Philippines, India, and Indonesia

11. Outlook Regional Nonlife Insurance Markets
Negative
Stable
Positive
Philippines
Australia
China
Japan
Hong Kong
Korea
New Zealand
Singapore
Malaysia
Thailand
Taiwan
Most markets in Asia are confronted with both Structural and Cyclical issues. Outlooks encompass both. Outlook indicate whether we believe the fundamental industry risk will improve, deteriorate or remain stable.
Some general themes in Asia (before looking at specific outlooks)
Sound underwriting performance (partly due to contraction in reinsurance capacity, higher retentions and higher pricing) – seeing pricing discipline dissipate
Consolidation among domestic participants – still too many players
Regulation
Dismantling of protection
Risk based supervision
Push governance & transparency – is it a fad
Reserve strengthening
Volatile investment markets – positive outlook but still skittish
No. of life markets are confronted with negative outlook.
Markets on negative outlook
Yr on yr trend improving – recovery of equity markets and eco activity.
Japan life confronted by large neg spread (Taiwan mid.term feature)
Japan & NZ – growth remains an issue
Aust & Taiwan life – neg outlook moderating
China – market in transition structural changes – IPO’s; new entrants; emerging market
HK Life Pos outlook – reflect mandatory growth

12. Regional Nonlife Insurance Trends
Outlook: Stable
Expect stable performance in 2006/7
Strengthened balance sheet
Growth markets – related to upturn in regional economies
Increased reinsurance support

13. Regional Nonlife Insurance Trends
Challenges
Heightening competition
Weak market discipline in some markets
Need more advance technical know-how in some markets
Less stringent reserving practices in some markets
High focus in personal lines
Changing claims pattern, especially in some developing markets

14. Regional Nonlife Insurance – Recent Pricing Trends
Expect to remain in soft cycle in coming two years
Particularly noticeable in profitable and non-tariff business lines
Sign of stabilization in some markets (regulatory intervention, market adjustment expectation of low profit margins)
Why?
Weak market discipline
Increased reinsurance capacity and softer pricing (except property catastrophe)
Increasing competition

15. by Connie Wong Director Financial Services Ratings Standard & Poor’s
The Next Milestones for China’s Insurance Industry
by Connie Wong
Director
Financial Services Ratings
Standard & Poor’s

16. China’s Insurance Market: Outlook and Industry Risks
Outlook: Positive
The credit profile of the overall industry is expected to improve over the medium term
However, some smaller or financially weak companies may face financial stress under disruptive conditions
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

17. China’s Insurance Industry
Supporting factors
Improving operational fundamentals
Strong and sustainable growth potential
Proactive regulatory development
Change in management focus
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

18. China’s Insurance Industry
Improving operational fundamentals
Focus on shareholder value
Profitability vs. underwriting control
Asset and liability management
Pursuit of technical reserving
Solvency awareness
Corporate governance
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

19. China’s Insurance Industry
Challenges
Weak operating performance
Weak capitalization
Increasing competition
Adequacy of reserving
Increasing complexity of risk
Investment restrictions
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

20. China’ Insurance Market Potential Growth
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

21. China’s Insurance Market: Potential Growth
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

22. China’s Insurance Market: Potential Growth
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

23. China’s Insurance Market: Life Insurance Sector – Top 10
Rank
Company name
Market share in terms of premiums May 2006 (%) 1
China Life Ins and its group
53.6 2
Ping An Life
16.5 3
China Pacific Life
8.7 4
New China Life
6.6 5
Taikang
5.0 6
Tai Ping Life
2.9 7
Generali China
149 8
AIA
1.41 9
Sino Life
0.95 10
CITIC-Prudential
0.32
Domestic sub-total
98.6
Foreign sub-total
1.4
Total
100
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

24. China’s Insurance Market: Nonlife Insurance Sector – Top 10
Rank
Company name
Market share in terms of premiums May 2006 (%) 1
PICC P&C
48.3 2
China Pacific P&C
11.7 3
Ping An P&C
10.2 4
China United
8.9 5
Tianan
3.7 6
China Continent
3.6 7
Yong An Ins
2.3 8
Anbang Ins
2.2 9
Sinosure
1.9 10
Sinosafe
1.8
Domestic sub-total 95
Foreign sub-total
Total
100
Dominated by domestic players
Domestic players have extensive branch network
Foreign players’ grew fast

25. China’s Insurance Market: Foreign Entrance
Barriers to foreign entrance have been relaxed. However the playing field is not level compared with conditions for domestic companies
Foreign entrance may raise the sophistication of the industry and bring in new capital
Contributes to increasing competition
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

26. Looking ahead A more sophisticated market
The Chinese insurance market is moving from the development stage to a more established stage:
A more sophisticated market
One of the leading insurance systems globally
More foreign participation
Improved balance sheets
Improved market discipline
Still heavily regulated but more flexibility
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

27. China Nonlife Insurance Sector Performance
Combined ratio below 100%, with hidden risks of under-reserving
Under-pricing
Dominated by motor class, which is highly competitive
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

28. China Life Insurance Sector Performance
Return on average assets was about 0.3% in 2004, below international standards
Leading insurers had a better performance
Investment performance is relatively poor, restrained by under-developed asset and liability management
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

29. China Insurance Market Performance - Nonlife
Insurance company name
Loss ratio (%)
Expense ratio (%)
Combined ratio (%)
PICC P&C
76.8
24.6
97.5
China Pacific P&C
59.5
33.2
92.7
Tianan
54.4
41.8
96.2
Huatai
58.6
43.5
102.1
Tai Ping Insurance
85.0
59.0
139.0
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

30. China Insurance Market Performance - Life
Company name
ROAA%
2004
China Life *
2.3
Ping An Life*
1.4
China Pacific Life
-0.4
New China Life
-1.1
Taikang
0.3
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based
*2005 HK GAAP

31. China Insurance Market Soft, but improved, capital level
Capitalization of the major players has significantly improved followed their listing and restructuring
However, the capital strength of insurance companies in the sector remains thin in relation to their rapid expansion
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

32. China Insurance Market Capitalization
The rapid growth of the system over the past decade has built on a fundamentally weak capital base
Although the listing of a few major insurers has helped to reduce the system’s weakness, the system’s overall capital base remains soft
The regulator has allowed insurers to issue debt to help regulatory required solvency (Standard & Poor’s does not considered subordinated debt to be part of a company’s capital)
Hidden charge for capital: inadequate reserving
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

33. China Nonlife Insurance Market Capitalization
Company name
Shareholders funds/ NPI ratio (%) 2004
PICC P&C (2005)
33.8
China Pacific P&C
47.8
Tianan
26.5
Huatai
215.7
China Re
20.6
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

34. China Life Insurance Market Capitalization
Company name
Equity/Assets (%) 2004
China Life (2005)*
14.3
New China Life
2.7
Taikang
3.8
*2005HK GAAP
Young and relatively unsophisticated market, poor market discipline
Developing infrastructure e.g. regulatory framework, accounting practices, actuarial practices, intermediaries and other technical support)
Strong growth with 44% in 2002
Historical burdens include:
negative spreads
under-reserving
thin capital based

35. Business vs. Financial Profile Scatter Diagram
Criteria:
Business profile: include market position, competitive advantages and distributional channels
Financial profile: include operating performance, investment, capitalization and financial flexibility

36. Business vs. Financial Profile Scatter Diagram

37. Appendix Global Ratings Criteria Issues Update

38. Our Recent Criteria Initiatives
Purpose/Changes
Enterprise Risk Management (ERM)
To enhance processes by increasing our analytical focus on insurers’ risk management practices
Updating Capital Model
From existing risk base capital model to “target capital” based on insurers’ risk profile
Property Catastrophe Criteria
Catastrophe charges: net aggregate 1/250 year property PML for in/reinsurers