China’s move to remove limits on foreign ownership in the life insurance business, effective this month, has far reaching implications going beyond the sector, as global players bring skill sets into what is estimated to become the world’s biggest insurance market by 2030, catering to a rapidly aging population.

The China Banking and Insurance Regulatory Commission has allowed foreign investors to raise their stakes in life insurance companies to 100% from January 1, 2020, from the previous ceiling of 51%.

“Greater participation from institutional investors focused on long-term investment outcomes will help diversify the domestic capital markets and reduce dependency on retail investors,” said Mark Konyn, group CIO at AIA.

“This will create longer-term market stability and improve market efficiency. Life insurers will also be seeking ways to manage and hedge investment risks [and that] should help deepen the derivative markets. Again this will reinforce market efficiencies and help strengthen the Chinese financial system.”

Chinese insurance companies collected premium aggregating 3.96 trillion yuan (US$574.3 billion) in the first 11 months of 2019, growth of 11.8% on year, according to CBIRC.

“International companies’ home markets are growing at a low rate and China, despite the economic slowdown, remains an attractive market from a growth perspective,” said Clarence Wong, Swiss Re Chief Economist Asia.

“We are projecting that China will be the largest insurance market in the world by mid-2030s. The foreigners will bring risk management, corporate governance and capital management expertise. They will in turn benefit from the Chinese insurance market’s strong underwriting, use of technology and digital payments.

“It will also lead to new products like investable infrastructure and insurance-linked securitization.”

He said foreign insurers had better expertise in risk management, being able to survive in low-rate and even negative-yielding environments. Their ability to confront volatile markets and adverse macro conditions will teach valuable lessons to domestic companies.

A Mckinsey report published in May 2019 said developing APAC is the fastest-growing market in the world, growing by 25% and 21% in 2016 and 2017. Global markets grew at a much slower 1% and 3%. While the pace in APAC is expected to slow in the coming years, it will still be a robust 10%.

This frenetic pace of growth is much needed in a fast-aging country. By 2050, it is estimated that 330 million Chinese will be over the age of 65.

“The growth in China’s life insurance market was fueled by the previously unmet protection needs of the population (such as for pension products), and the aggressive sales of high-yield, mid- to short-term investment products,” the report said.

Besides size, there are qualitative differences between China and the rest of the world as well.

“Foreign life insurers generally focus on margin and value creation and are more prudent in risk management. The removal of the ownership limit will give foreign investors the chance to buy out their local shareholders, which will give the foreign companies greater or full flexibility in determining and implementing their strategies,” said Fitch Ratings in a report published last month.

“This should reduce internal conflicts between foreign and local shareholders as well as the cost of internal communication.”

Moody’s Investors Service said increased foreign participation will enhance the industry’s product scope and asset and liability management capabilities, in particular in underserved segments such as retirement and pensions. Over time, this will facilitate the industry’s development of its own risk management framework and talent pool.

“And while stronger foreign participation could raise market competition, the current regulatory focus on product design and interest rate risk will limit the risk of foreign insurers starting a destabilizing price war,” said Frank Yuen, analyst at Moody’s.

Foreign companies would also learn from Chinese markets.

“The foreigners will bring risk management, corporate governance and capital management expertise. They will in turn benefit from the Chinese insurance market’s strong underwriting, use of technology and digital payments. It will also lead to new products like investable infrastructure and insurance-linked securitization,” said Swiss Re’s Wong.

But there are challenges as well since the recent change of opening up the sector will only impact the life insurance market, a market linked  to local consumer behavior.

“The China market will still be challenging for international players, particularly involving local digital platforms,” said Ellen Yang, Director, Institutional Client Group, Greater China at Deutsche Bank.

The challenges extended to financial market tools as well.

“At the moment, there is limited capital tools available for insurers to manage their asset and liabilities, both in terms of interest rates (duration ) management and credit management” said Deutsche’s Yang.

“The unique nature of insurance investment can be challenging in the current market as quality financial institutions are not natural counterparties to insurers. That is, long duration assets are mainly sourced from government primary issuance, and the secondary market’s liquidity is very limited, while the bond futures market is not open to the insurance sector.

“Over time, regulators will gradually tackle these structural challenges, particularly as regulators prepare for China’s aging population.”