How Foreign Investors

enter to China Auto Market?

The Challenges and Opportunities of China’s

Auto Insurance Reforms

Angie Wang

May 12, 2014

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Table of Content

1 Executive Summary_____________________________________2

2 Current Market Situation________________________________2-3

3 SWOT Analysis_________________________________________3-5

4 Critical Evaluations of Marketing Situation____________________6

5 Market Mix strategies__________________________________7-10

6 Recommendations____________________________________10-12

7 Conclusion_____________________________________________12

8 Reference_____________________________________________13

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1 Executive summary

The aim of this paper is to evaluate the current challenges and

opportunities of China’s Auto insurance reforms, and how foreign investors

navigate and succeed in a complex regulatory and competitive market. This

report uses the SWOT analysis to identify the potential market opportunity

and apply Niche Market and Marketing Mix Strategy to position the right

customers and seek the possible market space in the competitive market

environment. At last, Recommendations for foreign insurers to develop

local project team, strengthen relationships with governmental offices,

Invest in technology and develop claims modeling and leakage

management, improve the customer relationship management are strongly

suggested.

2 Current Market Situation

China is the largest auto insurance market in the world and the daily sales

reach 40,000 vehicles, and china will continue maintain this position,

however, a recent survey conducted by the professional-services firm

PricewaterhouseCoopers International Ltd showed that foreign insurers'

market share in China has not changed greatly in recent years. Life insurers

now have about 5 percent of the market and property and casualty insurers

about 1 percent - the lowest such proportions found in Asia.

In the past decades, foreign insurance companies are only allowed to sell

Motor commercial insurance (optional) but are prohibited from selling

mandatory third party liability (MTPL) .The majority of drivers tend to

choose the same insurer for both optional and compulsory coverage,

therefore foreign firms has been effectively blocked from the he country’s

entire auto insurance market by China’s restriction. On May 2012, the

compulsory third-party auto insurance has been open to foreign companies

by china, which means China has given foreign insurers full access to its $32

billion auto insurance market, allowing them from this month into a

segment of the business that was earlier reserved for domestic players in

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the world's biggest automobile market. This action will help foreign

companies to boost their market share in the non-life segment Industry and

give foreign sellers of insurance a great development opportunity in China

auto insurance market. The local insurers have to improve own products

and services to survive and compete with their counterparts in the

competitive market.

With the liberalization of motor pricing and opening of compulsory motor liability insurance to foreign insurers, China non-life insurance market will continue to evolve rapidly, at the same time, foreign Insurance industry will inevitably face the increased demand and higher expectation of services from consumers.

As China’s economy continues to grow and the urbanization accelerates, China government has committed to provide key support to grow the insurance sector. All these factors will create the enormous challenges and opportunities, highly favorable conditions for sustained growth of the China non-life insurance market.

3 SWOT Analysis

(Strengths, Weaknesses, Opportunities, and Threat Analysis)

3.1 Strengths

Foreign Auto insurance can be focused on 2 strengths.

Rich experience

The decades of experience in data processing, underwriting and pricing will

bring the standard practices in mature markets and improve the

performance of mandatory third party liability automobile insurance

market as well as the whole auto insurance market.

Advanced products and supporting technology

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3.2 Weakness

Limited networks

Foreign insurers’ limited (or non-existent) networks could impact their

performance negatively, in spite of the advanced products and supporting

technology they can offer.

High commissions and risk management

High commissions and risk management could be major difficulties when

entering the Chinese auto insurance market.

Lack enough Market Exposure and promotion

The challenges of distribution and limited market share compounds the

need for improved brand awareness among foreign insurers. Foreign

Insurer generally lack enough market exposure and promotion in the high

growth China market, so foreign companies should place more attention to

the China Auto distribution management and branding recognition.

3.3 Opportunity

Policy

Third-party auto insurance fully access to foreign firms, this change will

stimulate foreign non-life insurers' business and help them to acquire

future market share in China.

Increasingly strong after-sales service awareness

In this day and age, Chinese customers gradually realize the importance of

after-sales service after experiencing the poor after-sales service and claim

system provided by local insurance company. Foreign insurers should take

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this opportunity to enhance own after-sales service and claim management

system to win more potential customers.

3.4 Threat

the Threat of Competitors

The primary competitors to the foreign insurers are the large domestic

insurers. China local insurance company are equipped with mature

distribution system and networks, so they are able to compete effectively

with their counterparts ( foreign insurers) in the domestic market and

recognize that the foreign companies represent no threat to their market

dominance and control.

The restriction of Insurance regulator

Foreign non-life insurers also need time to introduce new products and

obtain approvals from insurance regulator, so the insurance regulation

restricts their market development and business exposure.

SWOT analysis

STRENGHTS

1,Rich experience

2, Advanced product and technology

WEAKNESSES

1, Limited networks and sales channel.

2, High commissions and risk management

3, Lack of market exposure and promotion

OPPORTUNITIES

1, compulsory third-party auto insurance

open to foreign companies

2, Increasing strong after-sales service

awareness

THREATS

1, the Threat of Competitors

2, The restriction of Insurance regulator

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4 Critical Evaluations of Marketing Situation and Niche Marketing

Given the above situation analysis, we are certain that China’s motor

insurance development will continue to thrive and become one of the

world’s most important non-life insurance markets. With the open of

compulsory third-party Auto insurance to foreign companies, foreign

insurers will be able to full access to china auto insurance market, which

provide foreign insurers a equal market competition opportunity with

domestic business in the world’s biggest automobile market. Foreign

insurance companies should take this opportunity to develop and expand

own network and business channel, using Niche Marketing to target the

upper-class luxury Auto market to find possible market space, in the

meanwhile, reducing out-bound telesales and focusing more on internet

sales, in-bound telesales, cross-selling, and claim service quality

improvement.

It is challenging for foreign insurance companies to compete with major

players in China Auto insurance market, such like Ping An, PICC, CPIC Auto

insurance, so foreign insurance company should pursue higher margin

niche markets and develop targeted insurance products by giving full play

to its own advantages and taking advantage of government policy support.

Foreign insurance company should not only define the market segment by

cars but also focus more from the consumer types. The right market

segment and brand positioning will provide the completive advantage to

foreign insurers. Taking AIG for example, AIG should target the luxury car

users market and consistently focus on the brand positioning as “high

quality and service” in the upper-market, strengthening and improving

branding, product and service management.

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5 Market Mix Strategies

5.1 Product Strategy- Product innovation and differentiation

Product Strategy is defined the combination of the goods and services of

the company offers to the target market (Armstrong & Kotler, 2009, P.51).

It is generally believed that nothing adds value more effectively than

marketing a good quality product. Product innovation refers to developing

new products and service models targeting selected consumer segments

with unique features, by focusing on customer needs and innovation, and

to help build your brand (Armstrong & Kotler, 2009, P.51).

The current severe problem in the Auto insurance industry is that products

offered by different insurers are identical, which lead to the “war Price’’ in

the Auto insurance market. Each insurance company offer cheaper price to

compete with their counterpart and try to acquire more market share. In

terms of this situation, foreign insurance company should focus on the

product differentiation strategy, offer the products with high quality and

service, and constantly engage in product innovation, introduction and

diversification.

5.2 Pricing Strategy:

Price is the amount of money customers must pay to obtain the product.

For these years, in order to improve the market dominate position and

popularity, domestic insurance players use high discount, low price and

expand the insurance service range to attract the potential customers and

acquire the market share. This phenomenon is inevitable in the short-term

time and pricing will gradually become market-driven. Foreign insurance

companies should continue invest in more sophisticated pricing,

underwriting, marketing, customer retention, and claims management

models, in order to improve management decision-making and gain

advantage in an increasingly competitive market; what’s more, foreign

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companies should also focus on developing new products line and service

to develop its up-market, then using the Value-added pricing with a higher

price to gain the customers in the up-market.

5.3 Distribution--Booming new distribution channels:

It has become imperative for foreign insurance companies to gain a better understanding of customer behavior, developing the multichannel distribution systems and booming new distribution channels to reach more potential customers.

5.31 Telesales

Insurance telesales has been expanding rapidly in China since 2007, when Ping An Property & Casualty first introduced motor insurance telesales products. The telesales recorded the highest growth rates for three consecutive years from 2010 to 2012, and the premium income generated by motor insurance telesales rocketed by an average annual rate of 150 percent from RMB 5 billion in 2009 to RMB 78 billion in 2012. The percentage of motor insurance premium generated by telesales also leaped from 2.4 percent in 2009 to 19.5 percent in 2012. Despite the impressive growth rate of motor insurance telesales, there is still great potential for

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the development of direct marketing in China as compared to western economies such as the UK and USA, where the percentages of direct marketing ranges from 25 percent to 45 percent (Finance News, 2013).

5.32 Internet sales

The scale of internet sales of motor insurance products is still modest compared with the rapid growth of telesales. With the increasing percentage of 30- to 40-year-old car owners and the rise of e-consumption, insurance purchase via internet is gaining popularity. Young car owners tend to be more sensitive to price and coverage differences of motor insurance, which gives rise to price comparison websites that help car owners identify the most cost-effective insurers and the most suitable product package.

Internet sales is currently processed at insurers’ own websites or through third-party websites. Eight out of top 10 non-life insurers have established their own internet sales platform. A number of leading insurance groups have even started integrating group resources to set up internet sales entities offering non-life insurance, life insurance and other financial products. Internet sales platform of motor insurance products can offer quick quotes, online premium discounts and recommend the most suitable product based on the information provided by car owners. Some party websites, such as baoxian.taobao.com, baoxian.com etc, Distribute motor insurance products of several insurers and are able to help car owner identify the best product by comparing offerings from various insurers. Foreign insurers should take the advantage of own technology and mature overseas experience to develop internet sales.

5.33 Cross sales

Cross-selling is also becoming increasingly popular in the motor insurance

sector and a key driver in enabling large insurance groups to achieve better

than industry growth rates. Selling motor insurance through channels such

as subsidiary banks, life insurance agencies etc, has already generated more

than 10 percent of their premium income. Encouraged by policymakers,

large automobile manufacturers and car dealers are also setting up their

own professional insurance intermediaries. Foreign insurance company,

take AIG for example, should strengthen the motor insurance distribution

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system management, cooperating with more car dealer and manufacturers,

building up auto club to focus on the potential customers and develop the

cross –selling, positioning the right customers to sell the auto insurance

when selling them the cars.

5.34 New branches

Foreign insurers can seek the ability to expand their branch networks more

aggressively to exposure customers in more cities in china. Centering the

first-tire city in china, such as Beijing, shanghai and Guangzhou, and

gradually expand more networks to the second and third tire cities.

5.35 Buying stakes in

Acquiring or forming a strategic partnership with domestic insurers will

continue to be another option for foreign insurers to rapidly expand their

market share.

5.4 Promotion-Increasing brand awareness

An important challenge is the low level of brand recognition for the foreign insurers, so strengthening branding recognition by car users will be a key to acquire more market share in the competitive market. Foreign insurers can use social media such as micro-blog, RenRen website (equivalent to facebook), Auto club forum etc to develop the branding awareness in the public. Furthermore, using TV commercial, China local website (sina, sohu, 163 etc) would be another options to promote own brands and services.

6 Recommendations

According the analysis of China Auto insurance market, a number of

recommendations are suggested.

6.1 Developing local project team

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Foreign insurers should develop ideally Chinese speakers with experience in Chinese and international market and companies, and thorough understanding of Chinese business culture and needs, deep understanding of local market and regulatory requirements.

6.2 Development of good relationships with governmental offices, especially CIRC

6.3 Investment in technology

Investing in technology, analytical database development can achieve data analysis and risk segmentation by data collection and analysis. This will allow better risks to be targeted and poor risks to be avoided. Even in the current regime pricing variation based on risk profile can be applied to aid risk selection.

6.4 Developing more sophisticated and innovative motor insurance products and pricing models

Developing more sophisticated and innovative motor insurance products and pricing models has become a major trend in developed insurance markets in recent years, For example, telematic devices installed in vehicles, are coupled with GPS and mobile communication technologies to collect, transmit, and analyze driving behavior data in order to calculate an accurate and fair premium.

6.5 Using external advisors

External advisors with strong capability and extensive experience can provide insurers with a wide range of consulting services related to motor insurance, such as pricing tools/software, data review, gap analysis, model validation, automatic underwriting systems, process streamlining, internal

risk control, and training etc.

6.6 Improving Customers’ Relationship Management

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Making strongly commitment to customer satisfaction making many company successful (Article base, 2005-2008); collecting and processing more customers satisfaction surveys including using the questionnaire and customers product preferences. The customer relationship scheme is various including regular newsletters, regular phone calls, sales promotions, new product test; as well as the additional information can be sourced through these contacts. A great ability to develop products to customer needs can be done by this scheme, and then a good relationship with customers can be maintained and improved. 6.7 Claims modeling and leakage management There is an increasing need to drive down claims costs, not just to improve results but to allow lower premium levels to the customers. Insurers need to make a goal of significantly improving claims supply Chain efficiency and squeezing ‘leakage’ out of the claims system. More sophisticated use and control of repair networks and partners is called for, and the larger foreign insurers may have the scale to invest in their own repair networks. . 6.8 Developing the Marketing Research and applying Marketing Plan Tool Collecting the marketing information by making good use of the methods-marketing research to o better understand the consumer environment and monitor competitors’ actions to better respond marketing challenge and opportunity. At the same time, applying some marketing plan tool such as CIM’s Marketing Planning Tool, this tool has been developed by CIM to help company set the objective and create the plan.

7 Conclusion:

With china auto insurance reforms, foreign insurers will confront with more challenges and opportunities; therefore, foreign investors should take this advantage, defining the right market segment and marketing strategies to acquire more market share in China Auto insurance market.

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Australia.

Software, Inc (1995-2009), Plan writing for Marketing, Retrieved May 10, 2014, from

http://www.marketing-plan-brs.com/marketing_plan_reviews.asp

The Chartered Institute of Marketing (2008) Welcome. Write your own Marketing Plan,

Retrieved May 11, 2014, from

http://www.cim.co.uk/marketingplanningtool

Articlebase.com (2005-2008) Commitment to Customers Satisfaction, Retrieved May 11,

2014, from

http://www.articlesbase.com/career-management-articles

www.pwchk.com (2011) foreign insurance companies in china, Retrieved

May 11, 2014 from

http://www.pwccn.com/webmedia/doc/634908438005007110_foreign_insurance_cn_dec201