By Hao Yansu

China's premium income statistics have been exaggerated and industrial "bubbles" have depicted a misleading picture of the Chinese insurance scenario.

According to the China Insurance Regulatory Commission (CIRC), the country's top insurance industry watchdog, China's premium income reached 388.04 billion yuan (US$46.8 billion) last year, with 301.1 billion yuan (US$36.3 billion) coming from personal insurance, up 32.4 percent year on year.

The high-rate growth, however, may just be an ostensible prosperity.

While the overall assets of the insurance industry are up and the number of market players and the amount of premium incomes are on the rise, what we should care about is whether the Chinese people are receiving better guarantees from the industry.

Last year, US$36.3 billion worth of personal insurance premiums accounted for 77.59 percent of total premium incomes. Premiums from participating insurance products were 167 billion yuan (US$20.2 billion), 55.48 percent of the personal insurance premiums. Other sorts of insurance premium incomes were 134.1 billion yuan (US$16.2 billion).

Through analyzing the participating insurance products, we find that most of them fail to provide high-level guarantees for their policy holders.

The highest-level, claim-settling payments, if the holders become ill or die, is often just a little more than the total premium paid by the policy holder. Such insurance practices are not true "insurance" in accordance with internationally accepted statistical methods, but a variant of wealth management tools. Therefore, such amounts of insurance should not be counted as insurance premium incomes, but those of a trust fund.

To get accurate statistics of the premium incomes, we peel off revenues that do not belong to insurance premium incomes, including non-insurance premium incomes from investment-oriented link insurance and universal life insurance. After the deduction is made, the premium income is substantially reduced to 221 billion yuan (US$26.6 billion).

Based on the new figure, China's real insurance density, or per capita premiums, were 163.73 yuan (US$19.7), 123.7 yuan (US$14.9) less than the official figure. In other words, 43 percent of the per capita premiums are nothing but "bubbles."

If we further cut the 9.4 billion yuan (US$1.13 billion) worth of universal insurance and link insurance from the premium structure, then the real insurance density would be adjusted down to 156.77 yuan (US$18.9) and the "bubble rate" would rise to 45 percent.

The insurance density reflects a country's per capita payment level on insurance premiums, which mirrors the level and quality of insurance guarantees for its people.

The high rate of bubbles in the insurance density, therefore, is misleading and may easily make people think the Chinese people have sound insurance awareness and the commercial insurance companies are improving their services and expanding insurance coverage. It may mislead the government and the public, as well as the media.

The overall premium incomes, if we take into consideration the bubbles, should also be readjusted.

China's social security network has yet to become mature enough to cover all its citizens. In this situation, the commercial insurance system, which is backed up by private investment from people, has failed to improve substantially despite its registered high rate of growth in recent years. Worse, its false prosperity has prevented the government and the public from knowing the true scenario in the industry.

The wrongful policy-making by insurance companies are behind the bubbles.

For a long time, whether the insurance industry should base its operational profits on undertaking insurance or making investments has been a controversial topic in the international insurance industry. Since the second half of last century, the booming capital markets in Western countries have tilted insurance theorists toward the investment-oriented theory.

The domestic insurance managers, however, just copied the theory and applied it to the domestic market without seriously examining domestic realities. In devising insurance products, they put too much emphasis on expanding premium scales and investing premium incomes in the capital market. Instead of sticking to the business of providing insurance for policy holders, they blindly hold that the more premium incomes they have, the more resources they will possess to invest in the capital market to offset insurance input and make profits.

As a result, wealth management products have become a major business for many insurance companies, especially life insurers, whose business agents often tout the possible high profit rates of their products instead of their guarantee functions.

The capital market, including the bond market, however, remained bearish last year, which affected the profits of insurance products. The dividend rate of life insurance companies were just slightly more than 1 percent, even lower than interest rates of bank deposits.

The dangerous trend is there is no sign that insurers will stop their wrongful policies and return to the guarantee-based operational mode. Among the 18 new Chinese insurance companies approved by the CIRC this year, none is a re-insurance company that focuses on security.

In the Chinese context, the first policy offered to its citizens should be the security-guaranteeing type, not that based on wealth management. Although we do not discriminate against wealth-management-based insurance products, the time is not ripe for China to launch such services on a large scale given the overall low income levels of the nation's people. Insurance products based on wealth management should target only a small group of high-end wealthy customers.

Whether a country's insurance market is healthy or not should be judged on the basis of the long-term life insurance policies held by its citizens. Such insurance products are the backbone of a country's long-term stability and development.

The rampant short-term insurance products in the domestic market mean, from the perspective of economics, great waste - just like unnecessary disposable products.

Insurance is a culture. And an insurance culture that does not cherish the value of long-term security guarantees is dangerous.

Note: The author is dean of the Insurance Department of the Central University of Finance and Economics.

(China Daily November 18, 2004)