Regulators try to tame the unruly parts of an important industry
At the moment the government covers roughly a third of medical expenses and insurance companies less than a tenth, leaving individuals to pick up more than half the tab themselves, according to Enhance International, an insurance consultancy. That is an especially heavy burden, naturally, for the elderly.But excessively rapid growth, built on flimsy business models, risks doing more harm than good. There have been plenty of worrying signs. The most aggressive firms have scaled up by offering guaranteed returns of 6% or more on short-term investment products, an extremely risky strategy for what is supposed to be a sober and reliable industry. To deliver these returns despite a lacklustre stockmarket, they have piled on debt and cut into their own margins. Moreover, these short-term products do not necessarily help investors through retirement: people are free to cash out when their policies mature, leaving them with no coverage against death, illness or accidents.
This month regulators turned their attention to some of the insurers that have been among the boldest in expanding. First they sent inspectors to Sino Life Insurance Co, which has run down its capital in recent quarters. Then they went to Anbang, which has increased its assets some 50-fold over the past two years. That inspection was a particularly important signal about the clout of regulators. Many observers had assumed that Anbang would receive preferential treatment, thanks to strong political connections (its chairman is married to the granddaughter of Deng Xiaoping, a revered former leader). But regulators blocked its $14 billion bid earlier this year for Starwood, a big international hotel chain, and now seem to be clipping its wings at home.
http://www.economist.com/news/finance-and-economics/21699170-regulators-try-tame-unruly-parts-important-industry-safe-or-sorry
What do you guys think of this insurance industry regulation in China? Is this kind of significant and fast regulation possible because China is still under a single-party?
I think that regulation is a good idea since many people are buying insurance for the wrong reason. Insurance's purpose should be to serve as a form of protection, and not treated like an investment. Furthermore, it is generally a good idea to make sure that rapid growth doesn't get out of hand.
ReplyDeleteI completely agree with Anthony. China's insurance indsutry is still in its infancy and it will take time for the government to iron out the problems in this massive sector. It's good to see that China is taking actions to impose further regulations during this incredible boom.
Delete6% sounds too good to be true. I wonder if the Chinese government would fund these insurance policies if these private companies were to become insolvent. There is never such thing as a guarantee regardless if its a public or private pension.
ReplyDeleteKenny, I agree with you completely. 6% is an extremely difficult return to achieve, especially given the fact that China's economy is performing much lower than that as of late, and they are claiming that these are short-term investments. Also, every good investor knows that there's no guarantees in any investment.
DeleteI agree with Kenny and Mario, first of all there is almost no such thing as a guarantee in investing (although some investments can come close), and a 6 percent return is especially hard to believe. I cannot see how the Chinese government could fund these insurance policies if the companies became insolvent.
DeleteAlso I think that this report of a guaranteed 6 percent return on investment shows that insurance industry in China is not being regulated and used properly and needs stricter rules.
Obviously, the Chinese government knew that this rapid growth in insurance industry will result in something terrible. By implementing this policy, the government successfully precluded insurance companies' risky actions in the future. I guess because China has a single party rule, which was effective in enacting this policy. If it had more than one party, there could be a gridlock or longer deliberation for this policy.
ReplyDeleteI agree with Jen. I believe the one party system is not able to figure out the flaws in a plan because they all believe in the same thing or are forced to. As much as our two-party system sucks it does occasionally bring out flaws in policies one side might not have seen. I also think that China is a very interesting case. They have such a large population that their policies are going to have to be different than the United States and will be effected differently because of the communist party. I do not think this policy is a good idea and people will probably lose money, but this is a different country so we never know.
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