Chinese regulators pledged continued support for bancassurance on Friday, insisting the sector had huge potential despite a slowdown in its once-rapid growth.

Officials said the business of banks selling products for insurance companies not only helped insurers reduce distribution costs but also brought commissioning benefits for the banks involved.

"The China Insurance Regulatory Commission (CIRC) will continue to encourage insurance companies to promote bancassurance and deepen their co-operation with banks," Wei Yingning, vice-chairman of CIRC, said on Friday at a forum co-sponsored by the Beijing bureaus of the CIRC and China Banking Regulatory Commission (CBRC).

"We will strengthen supervision to propel the development of bancassurance," he added.

In previous years China's bancassurance market showed lightening growth as insurers explored the new distribution channel for faster premium growth. Sales through banks totalled 4.5 billion yuan (US$542 million) in 2001, surging to 79.5 billion yuan (US$9.6 billion) last year, accounting for 25 per cent of all life insurance premiums.

But as competition between insurance companies increased, commissions for banks grew substantially, squeezing profit margins for insurers and causing some to suffer losses.

Many insurers started cutting back on bancassurance last year to focus on more profitable products, bringing down sales growth in the entire life insurance sector.

Growth in China's life insurance sector fell from double-digit rates last year to its current level of only around 7 per cent year-on-year, dropping 19.5 per cent in the first quarter from a year earlier.

"Bancassurance has reached a critical stage," Wei said.

As well as the erosion of insurance companies' profits, another reason for bancassurance's falling growth is its lack of diversity, said Chen Wenhui, director of the CIRC's Life Insurance Supervision Department.

"The products currently available do not reflect the core competitiveness of life insurance," he said.

More importantly, officials say the low-levels of co-operation between banks and insurers makes both sides focus on the short-term.

While insurers need to work harder at market segmentation and designing products that are more complementary to bank services, equity ties need to be built between banks and insurers. "Although there are legal obstacles," Chen said. "Adding ties would be desirable if banks could own equity stakes in insurers or the two sides could form joint ventures to sell insurance products."

Chinese banks, insurers and securities firms are outlawed from entering one another's markets, although there has been a trend for the forming of financial holding companies that own more than one type of financial business.

(China Daily June 4, 2005)