China Could Attract More Global Firms with Relaxed Insurance M&A Rules

China’s decision to partially relax mergers and acquisition rules in the insurance industry could see global insurance firms expand their footprint in the $288 billion market.

Beijing would allow insurers, including Chinese-based foreign insurance firms, to buy stakes in more than one peer that competes in the same market segment, according to a statement on the China Insurance Regulatory Commission’s (CIRC) website and dated last Friday.

The old rules prohibit insurers from buying stakes in more than one peer that competes in the same products.

The move marks another step in the gradual liberalization of the country’s vast insurance industry in recent years, and would allow stronger domestic and foreign insurers to invest in weaker players.

“Some insurance players are not in such great shape, and this allows them to be taken under a warm and cuddly arm and nursed back to health by another insurer,” said Keith Pogson, managing partner in financial services Asia Pacific at Ernst & Young.

The changes are expected to help boost the small presence of foreign insurers, who have long struggled to expand in China due to strict regulatory curbs. Indeed, heavy-handed regulations have seen overseas insurance firms’ market share decline to 4.3 percent in 2012 from 8.9 percent in 2005, CIRC data showed.

Europe’s AXA and Allianz, and Canada’s Manulife Financial Corp. are among the global insurers operating in the world’s second biggest economy via domestic joint ventures.

Foreign firms are currently prohibited from owning more than 49 percent of a domestic insurer.

China’s $288 billion insurance industry is dominated by domestic companies, such as China Life Insurance Co., Ping An Insurance Group Co. of China Ltd.

The sheer size of these top Chinese insurers has made it hard for new entrants, both domestic and foreign, who found the strict rules on mergers and acquisitions made expanding their geographical reach difficult.

“This is a positive move for the opening up of China,” said Linda Sun-Mattison, senior analyst at Bernstein Research. “Previously insurers couldn’t buy into another insurer without sacrificing what they already have in the country.”

Bernstein research said in a recent report that the rapid growth in China’s insurance industry and investment into risky local infrastructure and housing projects have weakened the position of smaller insurers in particular.

In October 2012, CIRC broadened the range of markets into which insurers can invest, increasing their ability to generate financial returns. But smaller firms lacking scale have struggled to thrive, losing market share and hemorrhaging cash flow. The new rules could allow them to be taken over in an orderly manner, granting foreign and local players equal opportunity to consolidate their grip in a particular market.

“The new rules are aimed at promoting an optimal structure for the insurance industry and enhancing competitiveness…,” a CIRC spokesman said in a separate statement on the website.

(Reporting by Lu Jianxin and Pete Sweeney in SHANGHAI and Lawrence White in HONG KONG; Editing by Mark Bendeich & Shri Navaratnam)