The Queensland floods and Cyclone Yasi provided painful evidence of the need for insurance – and the need to be clear on exactly what coverage you have. By late June, member companies of the Insurance Council of Australia had received $3.64 billion in claims – 68,300 individual claims due to Cyclone Yasi, and 56,200 from the floods – and had paid out $1.93 billion. But for all of those who had received payments in order to rebuild their lives, there were plenty who had never been covered for flood in particular; their plight continues.

With insurance so clearly in the national consciousness, it is a good time to reward those products that look after their customers with clear, reliable policies. With our partners Rice Warner Actuaries, we give awards in three categories (income protection, term/TPD and trauma), alongside the overall life company award detailed earlier in this section.

Rice Warner looks at three key elements of insurance products: price, features, and the financial strength of the insurer, based on Standard & Poor’s ratings. It gives points for particular features, weighted according to the importance of that feature to the life insured; price is assessed across a range of ages, occupations, sums and insured and other rating factors such as sex and smoker status. “The scoring methodology recognises the trade-off between price, features and financial strength,” our judges explain. “A product with only basic features can still win if it is very cheap, and a product that has strong features can win even if it is relatively expensive.”

OnePath – also the winner of the overall life company award – won our income protection category with its OnePath OneCare Income Secure Standard policy, seeing off competition from AIA and BT. The judges praised the strong balance of features and price, as well as the fact that, having been sold to ANZ, it has an even stronger financial rating than before. In particular, Rice Warner says it “includes a winning list of benefits and options on the ‘standard featured’ product”, including the premier accident option, serious disability premium waiver, and conversion to living expenses cover. On top of that, the standard featured product is relatively cheap, “across a wide spectrum of occupations from professional to heavy manual, and across different ages.”

At One Path, Gerard Kerr, head of retail risk, marketing and reinsurance, says he expects income protection to continue to be a popular product. “Whether you’re single or in a family, it’s a necessary product line,” he says. “You could call it a selfish product: something every individual should do to protect themselves.”

Its popularity is going to be driven by changes in the way we tend to work. “We see more and more of us going to age 70 as expiry [of the policy] – that’s becoming the new benchmark,” says Kerr. “It’s moving up because people are having to work longer.” He also sees an uptick in policies suited to spouses, students and older people, keen to protect their independence.

In term life/TPD, Zurich Protection Plus Death Cover took the award, beating Asteron and OnePath. Rice Warner admired its combination of features, price and a solid insurer financial strength rating. “It is strong across all feature assessment factors and includes a comprehensive list of benefits and options,” our judges said, noting accidental injury benefit, buy back death benefit, the double TPD option and partial TPD benefit.

Marc Fabris, national manager – sales strategies and research for life risk at Zurich, says that the market has slowed down in terms of new policies, after “tremendous growth in the prior 12 to 18 months.” What happened was that after the global financial crisis, a national mood of risk aversion pushed life policies up dramatically, but that growth has now stabilised.

Within that, there are distinct patterns. Fabris notices that Zurich has almost doubled the proportion of its business in the 50-60 age bracket, and that the average age from which applications appear has been increasing every year. “It makes sense when you realise that people are retaining debt when they’re older, taking on new debt, and having families much later,” he says. “This means people have a greater need for cover at older ages.”

Zurich continues to try to improve its policy, and recently announced a number of new measures, including further reductions in price. Within that 50-60 area, for example, it has sought to reduce costs in order to make insurance affordably at older ages. Across the industry, one approach to the challenge of affordability later in life has been to develop hybrid insurance policies, in which premiums drop down as needs decline and some premiums are returned. But Fabris does counsel against making things too complicated. “Yes we need to continue refining, but the more complex we seem to get, the more it becomes confusing. At the end of the day the fundamentals don’t change drastically.” Kerr at OnePath makes a similar point about simple necessity. “Term/TPD is going to continue to be a core component, because it’s the base essential cover that people need to have. The more people who take it up, the better: it’s all eating into the insurance gap.”

Zurich has also tried to focus on process, efficiency, and electronic services and applications. “The market has come leaps and bounds from the paper-based industry it once was,” Fabris says.

Our trauma category was won by CommInsure’s Total Care Plan Trauma Cover. AMP and Asteron were the other finalists. Once again, Rice Warner was attracted by the combination of features, price and financial backing; it’s notable that all three of our winners are backed either by a big four Australian bank or a global powerhouse.

The CommInsure product, allowing a sum insured up to $2 million and full cover up to age 80, covers a wide range of claim events such as heart conditions, cancer and stroke, and allows more than one claim for partial payment on angioplasty. It also offers a full range of policy upgrade options.

Is use of trauma insurance increasing? “Yes, but very slowly,” says Tim Browne, general manager for retail advice at CommInsure. “It is often the last type of insurance purchased, after death cover, total and permanent disablement, and income protection. Due to the cost of the risks covered, it is often the most expensive.” Browne says less than 5% of the working population owns a trauma insurance policy – very low, considering that more than 50% have death cover held inside or outside of superannuation.

Browne believes the key to a good trauma policy is user friendly insurance, with relevant and easily understood definitions; reasonable premium; and good service and claims experience.

For the insurance industry generally, it’s a time of some uncertainty: regulatory change will have an impact on the way that insurance is sold, but at the same time, the industry doesn’t yet know exactly how. Nevertheless, providers say the dynamics for insurance are strong. Browne points to “an increased awareness for the need for security post-GFC, the potential for wider access to advice, and a large relatively untapped market – there are still far too many Australians that are underinsured or have no insurance at all.” Increasing customer awareness about types of insurance will boost take-up, and whatever happens with new legislation, customers will still require advice on insurance, he says.

Insurance is, after all, fundamentally a simple business. “It’s taken the GFC and everything else that has been thrown at it, but it’s quite resilient: it’s been around for a hundred-odd years and a couple of world wars,” says Kerr. “But that makes sense. We’re all terminal, so why wouldn’t you do this?”

Boxes:

INCOME PROTECTION

OnePath – OneCare Income Secure Standard

Features

Benefits include rehabilitation and retraining expenses benefit, unemployment benefit, and many options including increasing claim option, accident option and priority income option.

Sum insured

Up to $60,000 per month (amounts insured over $30,000 are limited to a two year benefit period)

S&P rating

AA

Age cover provided

Depends on the benefit period selected.

What the judges say

OnePath OneCare Income Secure Standard has a strong balance of features and price. It is very competitive in price across the wide spectrum of occupations and ages.

Highly Commended

BT Income Protection and AIA Australia Income Protection Plan

TERM/TPD

Zurich Protection Plus – Death Cover

Features

Benefits include advancement for funeral expenses, financial planning advice, future insurability, and premium freeze. Options include premium waiver, business future cover, and ADL.

Sum insured

Unlimited; up to $5 million for TPD.

S&P rating

A+

Age cover provided

Up to age 99 for TPD (TPD benefit eligibility changes after age 64)

What the judges say

Zurich Protection Plus Death Cover has a winning balance of both features and price across all ages and occupations. It includes a comprehensive list of benefits and options with a very competitive price.

Highly Commended

One Path OneCare Life Cover, Asteron Life Cover

TRAUMA

Comminsure Total Care Plan – Trauma Cover

Features

Benefits include financial planning, loyalty bonus and trauma cover buy back. Options include business safe cover and child cover.

Sum insured

Up to $2 million

S&P rating

AA

Age cover provided

Full cover up to age 80 (benefit eligibility changes after age 70)

What the judges say

CommInsure Total Care Plan Trauma is a well featured trauma product matched with a very competitive price provided by a strong financial institution.

Highly Commended

Asteron Recovery Stand Alone and AMP Trauma Cover Optimum

Does your house insurance really have you covered?

Are you covered for flood? Yes/No

We all know why it’s so important to ask this question now. Many of the Queenslanders who have suffered so much in recent months will have been uninsured, because there are large swathes of Australia for which it is impossible to get flood cover – for the simple reason that insurers know these places will inevitably, and frequently, flood. (Insurers, in turn, say they have long advised developers not to build in certain areas, and have been ignored.) Availability of flood cover depends very much in the place you’re in, and on data on how frequently it is likely to be inundated. Be sure you have checked your policy and are clear on what is and is not covered.

Do you think your contents insurance is adequate? Yes/No

There is a marked tendency to understate what you own – and even if you get it right at the start of a policy, it is human nature to accumulate, so for most people it doesn’t take long for contents coverage to become inadequate. If you really want to be able to get everything back in the event of disaster, it pays to take stock and look afresh at the value of what you own.

Do you have documents to prove what contents you own? Yes/No

Having coverage is only half the battle. Being able to convince your insurer that you ever owned the things you are claiming for – that’s a whole other challenge. Receipts clearly help enormously, or valuation certificates where appropriate; and why not take pics? Digital photography is free (and easy to back up somewhere other than your home). Keep in mind that if there is a fire, there’s not much use if your receipts were right next to the items you were hoping to prove ownership of – the receipts will be the first things to take light. Store them at a family member’s home instead.

Are you covered for your household items when they’re not in your house? Yes/No

As more and more of us tend to blur the lines between home and work, we also tend to take a lot of stuff out of the house and the office too. The prime example is the laptop computer. Be clear on whether you’re covered if you lose or damage your goods in transit – not on an overseas trip, which you will likely have covered separately in a travel policy, but from day to day.

If you’re letting your property out, do you have landlord insurance? Yes/No

This is the classic example of the cover you don’t know you need until you really need it. If you have a tenant who suddenly refuses to pay or to budge, you have a world of trouble ahead: the legal process of sorting that out is very onerous and in the meantime you have a mortgage and no rental income to cover it.

Will your household cover really let you rebuild? Yes/No

Home owner policies come in a number of flavours. The most comprehensive are called total replacement policies, or a further variation, extended replacement policies. These not only cover the projected cost of a rebuild of a house, but up to 30% above it, in case, for example, the cost of building materials have moved up dramatically during the course of your policy. At the other extreme are indemnity policies, which are much less likely to cover a full rebuild, because they depreciate. Then there are sum insured policies, covering a flat fee, which are likely to be left behind by inflation; insurers may offer an option to index these to inflation (or more usefully to the cost of building materials). ASIC’s FIDO consumer website has an excellent section helping you pick your way through your policy wording if you’re not clear what sort you have.

If you have to rebuild, are you covered for where you’ll live in the meantime? Yes/No

Another area that’s easily overlooked in a new policy but is crucially important: are you covered for alternative accommodation when a rebuild is necessary, and what precisely is the nature of that accommodation? Is it a set weekly fee, or is there an explicit statement of the quality of the accommodation?

And how about for other costs? Yes/No

Other easily forgotten elements of a rebuild include demolishing what’s left of the original home, removing the debris from the site, and lodging rebuild plans with local council. Again, this will vary with the policy.

Are you comfortable with your exclusions? Yes/No

Few policies cover everything. Some, for example, will pay out less if you have left your home vacant for an extended period. Some, in high-crime areas, will have caveats over coverage for crime (which might come down to, for example, an expectation of a minimum standard of locks). Some cover defined events, embracing storm, theft, fire, earthquake and so forth, while some instead take a blanket approach to accidental loss or damage. The point is to be very clear on what you are covered for and to be comfortable with whatever is missing.

Are you meeting your own obligations in your home? Yes/No

For example, most household policies require you to maintain your home to a certain minimum good condition. More specifically, this might include keeping your roof in good shape, sorting out blocked drains as soon as you notice them, and complying with any changes in fire safety regulations.

Mostly yes: You’re covered. Sleep soundly.

Mostly no: There’s no point having insurance if it’s not going to cover you when you need it. Take a fresh look.

Takaful is probably the area of Islamic finance that has received the least attention in Malaysia, but its rate of growth has been impressive. The net contributions income to takaful operators was RM1.12 billion in 2004; by 2008 it had almost trebled to RM3.03 billion. Over the same period takaful fund assets doubled from RM5.03 billion to RM10.57 billion.

Today there are eight registered takaful operators in Malaysia, compared to four in 2004; the latest batch of financial liberalization in April allowed for two more family takaful licences (licences fall into two categories, family and general) to be granted in 2009 to “players that can offer significant value proposition to Malaysia to spur the development of the takaful industry and reinforce Malaysia’s position as an international Islamic financial hub,” according to Bank Negara Malaysia. Bids are due in at the end of October.

One institution that has watched this growth with interest is Syarikat Takaful Malaysia, which was incorporated in 1984 and listed in 1996 – the first of its kind. Its incorporation came about because of the recommendations of the Task Force on the Study for the Establishment of an Islamic Insurance Company in Malaysia set up by the government in 1981. This task force concluded that a takaful company based on the principle of al-Mudharabah – one of several models in Islamic finance allowing for an equal allocation of profits from an underlying fund – would be a viable venture. Today, it is majority owned by BIMB Holdings, which is also the majority shareholder in Bank Islam Malaysia, the first Islamic bank in the country.

Asked what Takaful Malaysia has seen over that period, Dato’ Mohamed Hassan Kamil, the group managing director, says: “The most significant development over that time is the growing interest of foreign parties in Islamic finance and the development of the comprehensive regulatory framework.” Indeed, the regulatory environment for takaful is as comprehensive in Malaysia as it is for mainstream banking or capital markets. But the potential for growth is perhaps greater still. “The level of penetration is still low – below 10% compared to conventional, where penetration is almost 50%,” he says. But “the industry will continue to attract a lot of interest and will grow faster than the conventional industry for the next five years.”

The growth of takaful is being closely watched by the country’s fund management industry. Takaful houses in Malaysia are obliged to conduct all of their investment in Shariah-compliant assets although, to the disappointment of foreign houses, they tend to do so domestically. “We invest only in Malaysia, mainly in Shariah bonds, property and Islamic money market instruments,” says Kamil. Still, it’s likely that as takaful operators become more international in their approach – it would not be a surprise to see them expand in Indonesia, for example – they will need to invest overseas too in order to match the diversity of their business mix with their funding.

A structural shift is taking place in the way takaful products are put together. Again, Takaful Malaysia is illustrative of the trend. In December it unveiled a series of products called MyMedicare, MySiswa, MyImpian and MySinar, a range of life, medical and health products using the Wakalah structure.

This was an interesting step since until then, it has used the Mudharabah model. All Takaful Malaysia’s general takaful products will continue to operate on that model, while all other new products will migrate to Wakalah.

What’s the difference? In Mudharabah, contributions are credited into a fund called the Participants’ Risk Fund. The surplus generated from that fund is then distributed evenly between the participants and the company.

In wakalah, all the contributions and the Wakalah fee are credited into the fund, with the fee covering commission and expenses allocated up front. Then the surplus generated from the fund is distributed at certificate termination. This is the more common approach in the Middle East, and has also been adopted by a number of other takaful operators in Malaysia.

“A mudharabah product is based on profit sharing to cover the acquisition expenses, including commissions,” says Kamil. “This model does not work for an agency type distribution model. Thus, we have switched to wakalah to enable payment of commissions to intermediaries. We believe the Wakalah model can work better for growing the retail business which is dependent on agents for distribution.” He believes agency and bancassurance are the two best methods of distribution for takaful in Malaysia.

A look at Bank Negara statistics shows why this structure is becoming more and more popular. While the number of employees in takaful operators has remained almost static between 2004 and 2008, the number of agents has quadrupled, from 14,370 in 2004 to 60,197 in 2008. Any model that allows payment of commissions to those agents is obviously going to become the norm.

China  report– insurance

There are few sectors of the Chinese economy that look as promising as the insurance industry. Use of insurance tends to grow dramatically in any country experiencing rapid urbanization and wealth creation; the pace of economic growth and individual wealth is rapid in China and there are more potential customers – a 1.3 billion population – to aim at than anywhere else in the world.

Already, growth is impressive. The industry received RMB597.55 billion in premium revenue in the first half, a 6.4% year on year increase, according to the China Insurance Regulatory Commission. Property insurance in particular rose 15.84% year on year.

But it’s the headroom for future growth that is most exciting. Surveys tend to put life insurance penetration in China at around 2.5 to 3%, compared to around 7.5% for the insurance industry globally and 12% in developed markets such as the UK. That’s the potential.

“In the near term, the industry will still be undergoing all sorts of challenges, but over the longer term the room for expansion in China’s insurance market is immense,” says Louis Cheng, executive director and group president of Ping An Group. “As the level of personal income rises, the demand for integrated financial services will grow. The potential for growth in China’s domestic market is exponential.”

While this is partly about rising wealth and awareness of insurance, there is also an age demographic to consider. “We will start to have an ageing population by 2015,” notes Ning Ma, an analyst at Goldman Sachs. “I think insurance is one of the most promising industries in China. In fact, we think long term the insurance sector will have better growth than the banks.”

Cheng says that at Ping An, the average age of customers is below 40. “As their income levels increase over time, accumulating more wealth along the way, so will their needs for financial products.”

It’s interesting to see how China’s major insurers have gone about this opportunity in different ways, particularly the two biggest, China Life and Ping An. China Life, which has around a 40% market share in life insurance, has stuck exclusively to that line of work. It has done very well from doing so: gross written premium and policy fees were RMB135.33 billion in the 2008 financial year, a 20.9% year on year increase despite a global financial slowdown. It does own a 20% stake in Guangdong Development Bank, but so far appears to have been a passive investor and has not become involved in its management.

Ping An, by contrast, has set out very clearly to become, as Cheng describes it, “a leading integrated financial group in the world.” In insurance, it covers not only life insurance but property and casualty (P&C); and beyond that, it is increasingly active in asset management and banking. Today, Cheng says, insurance is about 80% of group revenue, and asset management and banking 10% each. In five years time, though, Cheng would like to see insurance account for 50% and the other two 50% between them. “And then we hope to achieve in the following decade the balanced development of our three pillar businesses – insurance, banking and asset management.”

Achieving this ambition has involved some serious headwinds along the way, none more so than the acquisition of a 4.99% stake in Fortis, a deal that had originally involved Ping An acquiring half of Fortis’s asset management unit. That part of the deal was subsequently unwound, but the decline in value of the Fortis stake required a write-down that almost wiped out Ping An’s 2008 full-year profit: it incurred almost RMB23 billion in impairment write-downs, reducing full-year profit to just RMB873 million – a 94.4% decline in what would otherwise have been an exceptional year.

Ping An’s domestic acquisitions have been far more successful, and earlier this year it announced a two-stage deal that will conclude with it owning 29.95% of Shenzhen Development Bank. SDB is not huge – it is the 11^th largest joint stock bank in China, with total assets of RMB521.9 billion at the end of 2008 – but it gives Ping An banking scale in its home market of Shenzhen and is a clear statement of intent. Cheng calls it “a win-win transaction that offers key benefits in a number of areas,” including an improved capital base for SDB and a platform for long term development of banking for Ping An.

Ping An believes in this multi-pillar approach because it is committed to the idea of cross-selling. Its results demonstrate there is some merit in this approach: for example, when it entered the credit card business, 83.3% of sales in 2007 and 50.5% in 2008 came through cross-selling. In 2008 RMB 3.86 billion of property and casualty insurance premium income came from cross-selling, 14.2% of the total.

One of the curiosities of Ping An is that it is almost unique in being permitted to build a business across different areas of financial services. Generally, insurers, brokers and banks are kept apart: the only other obvious example is Citic, which has powerful banking and securities arms, although there too they are housed in separate legal entities. Victor Wang, a China banks analyst at UBS, believes Ping An is something of a test case. “I think the regulators will allow deals on a case by case basis,” he says. “They will allow specific names to buy into relatively smaller players. But I don’t think in the next two years we are going to have a major merger of big players in different business areas.” For one thing, there is too much inequality in the relative size of the industries: as he points out, ICBC, with about RMB10 trillion in total assets, is more than twice the size of the entire insurance industry at RMB4 trillion, which in turn is far bigger than the total securities industry.

The biggest short term impact on the health of insurers will be the performance of the stock market. That’s because all insurers invest their policy premiums, and in China the local stock markets tend to account for 10 to 15 per cent of those investments (see table). So, when the A-share market drops 65%, as it did in 2008, that hits overall earnings badly; when it then increases 62%, as it did in the first half of 2009, it boosts them considerably. “Market movements should have a positive impact on 1H09 earnings for all of the listed China insurance companies reflecting capital gains on equity assets,” says Mark Kellock at Macquarie Research. Kellock expects China Life’s equity exposure to have gone from 8% to 12% between December 31 and June 30; Ping An from 10 to 15%; and PICC, the third largest insurer, from 8 to 11%.

Christopher Esson at Credit Suisse sees similar positives. “What a difference six months can make,” he says. “After a dismal 2008 as far as investment returns go, the 62% rebound in the Shanghai Composite Index should provide a tailwind for the insurers in terms of earnings, book value and EV [embedded value] in the [first half] results.” Further ahead, he argues, “equity market gains should provide improved flexibility for insurers to realize investment gains in future results, paving the way for a solid reported earnings profile.”

Looking at the numbers, you’d be forgiven for thinking China’s insurance industry had hit a rut in a period of otherwise extraordinary expansion. Penetration in the life insurance industry is still around 2%, just as it has been for several years, compared to over 12% in the UK. New business margins are under pressure, industry premium growth has become modest and share prices have tumbled. But it is, in part, an illusion: it’s just Chinese insurers getting smarter.

“Earlier this decade, we saw an acceleration of penetration, driven by very aggressive selling of lower-margin, single premium products in the style of deposit replacements,” explains Chris Esson, director of research for insurance companies at Credit Suisse. “Subsequently the major insurers, and China Life in particular, have become much more focused and disciplined in improving their business mix to higher margin products. So industry premium growth has moderated and penetration seems to have stalled, but that’s misleading: on a value basis, growth has been quite solid.”

The insurance industry in China has immensely powerful drivers behind it – starting with that exceptionally low penetration rate. If China was to move to the 10% life insurance penetration common in developed markets, or even in many Asian nations like Taiwan, then that would mean the sale of policies to 130 million people – twice the UK’s entire population. Rising income is obviously another driver, as is urbanisation. On the property and casualty (P&C) side, the driver is even simpler: people own more things that need insuring. “You’ve seen pretty consistent growth in penetration in P&C, and I expect that would continue just as the amount of physical assets that needs to be insured grows,” says Esson. “Trends like rising car ownership and private ownership of property are driving demand as well.”

Another agent for growth has been changes in distribution models. Dorris Chen, analyst at BNP Paribas in Shanghai, says recent industry growth has been driven “not so much by initiatives on the insurance company side, but by changes in the banking sector and regulation. There’s not much difference in the product offerings from insurance companies, but distribution of life insurance has changed a lot because of the listing of China’s state-owned banks, who can put massive distribution networks into households.”

Chen notes that all of China’s major state banks, as they have listed, have followed the global trend of trying to shift away from a reliance on interest income, and towards fee income. That motivates them to sell mutual funds, wealth management and insurance products. In recent years that hasn’t made a huge difference to insurers, because from a bank’s perspective, it’s easier to sell mutual funds in a bull market. But with Chinese domestic stock markets falling more than 30% so far this year, the picture is changing. “The obvious acceleration for this year is insurance products, because banks have a much higher motivation to push insurance in a bearish stock market,” Chen says. “For banks, it doesn’t make much difference for them to push mutual funds versus insurance: one dollar of fee income is one dollar of fee income.”

Particularly on the P&C side, regulation is also pushing policy sales. The law now requires that almost all vehicles – and, most significantly, four-wheelers – must be insured for third party cover. “That roll out is pushing volume growth, but only for the top line,” says Chen. And indeed, while the dynamics on volume are very positive, the bottom line figures do look rather different in all areas of insurance.

Here, insurers are facing margin compression for the first time in years. On the P&C side, the government pushed insurers to implement a 10% drop in premiums in compulsory auto liability coverage in the second half of last year – but at the same time insurers were also obliged to double the coverage for that liability. “So a driver can pay only 90% of the old price to get 200% of the coverage,” says Chen. “The motivation to buy additional coverage for their auto is significantly reduced,” so from a bottom line perspective, “P&C is clearly on a downward trend.”

Also, while bank channels have increased the reach of life insurers into households, they bring a side-effect too. When an insurer sells a product through a bank instead of its own agency force, that limits the complexity of the product, because bank staff are doing the selling rather than trained agents. “It means the insurance company can only sell simple products and cannot structure them in a way to guarantee their margin,” Chen says. “Bancassurance has a much lower margin than the normal longer-term product that is distributed by individual agents.

“Imagine the scenario,” she adds. “Someone walks into a bank outlet, facing a broad selection of different products. It’s easy for them to compare the return for insurance, versus bank products, versus money market or trusts. Insurers in this environment are forced to push up insurance returns.”

Insurers have adapted to these new challenges in different ways. There are five insurers of interest to foreign investors, all of them listed in Hong Kong. China is dominated by two, China Life and Ping An, with three others, People’s Insurance Company of China Group (PICC), China Insurance International Holdings (CIIH) and Ming An, attracting increasing interest. China Pacific Insurance, the second biggest property insurer in the country and third biggest life insurer, is listed on the mainland but has not yet conducted an H share listing in Hong Kong.

China Life is the biggest. Its merits divide analyst opinion: while Credit Suisse rates it outperform, Citi rates it hold and downgraded its price target and future earnings in March. It certainly has scale – its agent force is 638,000 people, which according to the US census is bigger than the whole population of Boston. Still, an institution of this size has to work hard to stand still, never mind grow: it has RMB50 billion of maturing policies in 2008 alone. Citi analyst Bob Leung is “concerned over China Life management’s lack of acknowledgement of the need to transfer investment spread risks to policyholders as new business margin continues to compress for traditional and participating policies.” Leung feels the focus on these traditional businesses is a bet on lower growth market segments, and would like to see it move to universal life policies and unit linked products.

Chen at BNP Paribas things it is “lagging”, but that it should be seen in the context of being the largest state-owned company in its sector. “It has to have extra caution,” she says. “Lots of insurance companies are launching unit-linked products, for example. But China Life hasn’t done that because it has to balance the impact in the market of a leading state-owned company doing something like that.” That said, viewed from the west, it might seem extraordinary to criticise the growth profile of a company that logged a 94.8% increase in net profit in 2007 over 2006, to RMB38.879 billion.

Ping An, while smaller, could certainly not be accused of standing still. For several years now it has been building out a strategy to become a full service financial services business, covering insurance, banking and investments. In 2007 life insurance accounted for 56.6% of net profits, and P&C insurance another 10.8%, but the other segments of the empire are growing rapidly: banking went from 0.9% of net profit in 2006 to 8% in 2007; securities increased modestly to 7.8%; and other businesses climbed from 7.1% to 16.8%. (Net profit overall was up an extraordinary 140.2%, to RMB19.219 billion). Ping An is smaller in insurance than China Life – its own sales force, of 302,000, is merely equivalent to the population of Pittsburgh – but it has grown in banking through its Ping An Bank and the acquisition of Shenzhen Bank (now merged into a single banking entity), and in investments through securities, trust and asset management businesses.

Ping An really hit the headlines in March when it agreed to acquire a 50% stake in Fortis Investments, the global asset management arm of Fortis, which is in the midst of integration with ABN Amro Asset Management. It paid Eu2.15 billion for the deal and in doing so became a presence in global asset management, as well as gaining a platform for its Qualified Domestic Institutional Investor (QDII) program, through which Chinese institutions are permitted to offer international investment products to local investors within strict limits. Leung, more of a fan of Ping An than China Life and with a buy recommendation on the stock, says the deal “completes the back end of the wealth management value chain and represents a significant step for Ping An’s global asset management ambition.” He thinks it might just be the start, too, with similar partnerships possible in insurance and banking in Asia; Fortis does, after all, own a 24.9% stake in Taiping Life and all of Fortis Insurance in Hong Kong.

Esson likes the Ping An model. “There will be sceptics who point to the underperformance of some financial services supermarket approaches elsewhere in the world. But in the Asian and Chinese context there are some important differences, particularly the household balance sheet,” he says. “It seems the household is much more liquid in China; there is a much greater weighting in bank deposits and so the scope for cross selling and synergies is high. They are trying to position themselves across the value chain so they service and manufacture for a quite high value customer base.”

He adds: “The financial industry in China is evolving. Investing in things like securities, asset management and trusts does possibly position Ping An quite well in terms of the development of the industry.” For her part, Chen calls the Fortis acquisition “a brilliant move” which will produce fee income of RMB6 to 7 billion a year without a significant increase in risk or balance sheet leverage.

China Life has not been ignorant of these opportunities, but has chosen to do it in a different way. Instead, it takes stakes as a strategic investor in businesses like Guangdong Development Bank, or in China’s first homegrown private equity firm, Bohai Industrial investment Fund, rather than being an owner operator of those businesses. “From their public statements, that is the strategy they will continue to pursue: more strategic investments,” says Esson.

Foreign insurers are doing their best to take advantage of the opportunities in Chinese insurance. PricewaterhouseCoopers recently conducted a survey of these groups, interviewing 24 different companies who between them employ 14,818 people, and who project a 133% increase in that number, to more than 34,000, by 2010. Between them they operated 99 branches in 2007 and expect to more than double that, to 211, by 2010. Remember, too, that this isn’t the whole industry: most of the respondents expected there to be more than 55 foreign insurance companies in China by 2010.

They don’t, yet, have a big chunk of the market; even by 2010, the PWC respondents only expect foreigners to have around 10% of the market on average. The 15 life insurance companies who provided data on their agency teams had a combined 79,500 agents between them, less than one sixth of China Life alone.

“Foreigners will grow gradually over time,” says Esson. “They’ve been pretty sensible in how they have allocated and spent capital, and the approach of regulation has been to allow for this gradual expansion, only allowing one or two approvals for branches each year.” That has two impacts: it helps to protect domestic companies, and also the health of the industry overall.

One reason for that is staff. “One of the key constraints for all insurers in China is the availability of staff, be it technical, sales or management,” he says. “The problem they face is, if they allowed open slather, there would be an incredible increase in competition for a very narrow pool of human resources. You would end up with unhealthy inflation in terms of salary costs and it wouldn’t be helpful for anyone.”

For the moment at least, there is plenty of work for all of them to build sustainable businesses. That’s the appeal when you’ve got 98% of the population uninsured, growing in awareness, and getting wealthier.

Investors have weathered the storm of sub-prime, the credit crunch, a possible US recession and falling local and global stock markets. But they’re not out of the woods yet. The next thing to worry about: monolines.

 Monolines are global bond insurers. They came into being in the US to insure US municipal bonds against credit losses. The best known are MBIA, AMBAC and FDIC and until recently they were seen as some of the strongest and most impregnable financial institutions in the world.

 Over the years they have expanded from their original market guaranteeing municipal bonds, and have started to ensure bonds issue by other groups such as utilities, toll road operators and other infrastructure assets. Since monolines have always had AAA ratings – the highest there is – they offered a simple proposition to bond issuers: involving a monoline raises the creditworthiness of the whole deal, and hence lowers its cost. In return, issuers pay a fee to the monoline itself.

 For the monolines, the AAA rating is everything. Without it, they don’t really have a lot to add because the economics no longer work: a lower rating would not improve the creditworthiness for a bond issuer, and so would not reduce the pricing enough to make it worthwhile to use the monoline in the first place.

 But now, the monolines have been caught up in the same sub-prime problems that have blighted the world’s investment banking industry over the last 12 months. They have had exposure to sub-prime collateralised debt obligations, which are basically bonds packaged together out of lots of low-quality assets, and this exposure is now coming back to haunt them.

 FGIC was the first to take a hit when Fitch Ratings, one of the three key rating agencies, downgraded the AAA rating from FGIC’s bond insurance arm. Then, on January 31, MBIA, the biggest of them all, posted its biggest every quarterly loss, of US$2.3 billion. At the time of writing, MBIA was fighting to convince rating agencies that it should keep its own AAA rating. And if it doesn’t, then the ratings of all the securities it guarantees – US$652 billion – are also put in jeopardy.

 This might all seem distant from Australia, but investors are increasingly worried that the effects will be felt here too. “For a number of infrastructure projects in Australia, in particular toll roads, various parts of the funding have been insured by the monolines,” says Matthew Hegarty, senior equity analyst at Global Value Investors in Sydney. “They bring their credibility and the triple A rating, and it also means for the arranger that the pricing is more competitive because the monolines have lent their reputation to it. But if their credibility is shot – and potentially it is irreparably damaged forever – then that will create a global crisis in being able to attract funding. It’s going to put up pricing for many transactions, and make it more difficult to source funds at competitive rates.”

 So one impact is that the construction of infrastructure in this country becomes trickier, because it’s harder to get the funding. But there’s a clear potential impact on stock markets too. “You would want to look closely at various sectors in global equities,” Hegarty says. He’s been going through his global portfolio to look for utilities companies who have monoline guarantees. “You also want to be steering clear of companies worldwide which have to roll significant funding, because they may not be able to roll that debt.” Many companies use a short term form of debt called commercial paper, which typically comes due within a year; in a healthy environment it’s easy to refinance that from year to year, but it credit suddenly stops being available they risk going into default. And if that happens, naturally the share price would plunge.

 In Australia, listed infrastructure vehicles and property trusts are obvious areas to look, particularly where heavy gearing through short term debt is involved (this is part of the reason Centro Properties hit bad times late last year). Financial companies are vulnerable too, although it’s the ones with weak capital positions who are the most vulnerable, and on a world scale Australia’s major banks are quite strong in the balance sheet.

 Whatever the knock-on effect, monolines, who have been a key part of the financial services industry for 30 years, will never look the same again. “This is an industry that has never recorded any significant losses,” says Hegarty. “And now, for the first time, it has losses and they are potentially catastrophic.”