The long-standing problem of excessive competition between Chinese property insurance companies has now reached such a level that few can still afford to procrastinate.

They did not conceal their eagerness to end the problem at last week's national insurance conference where top regulators heard half-yearly reports from both domestic and foreign insurance companies.

"Property insurance premium rates have reached the point dividing profit and loss," said Fang Shengping, chairman of the Hua'an Property Insurance Company.

The situation worsened dramatically after the September 11 terrorist attacks in 2001 in New York, which significantly pushed up premium rates in many countries as insurance and reinsurance companies became increasingly aware of the destructiveness of terrorism.

But premium rates continued to slide by as much as 10 per cent in the Chinese market, falling from levels higher than the international market to far below. The rate for domestic construction project insurance, for example, now stands at 0.1749 per cent, as compared with rates above 0.4 per cent in the international market.

"That has directly led to difficulties in commercial reinsurance," said Tang Yunxiang, general manager of the People's Insurance Company of China (PICC), the country's largest non-life insurer.

Chinese property insurers are required to cede part of their contracts, currently at 15 per cent, to a State-owned reinsurer. They still also give commercial reinsurance to foreign reinsurers to share the risks.

"The reason is just low-level, primitive competition," said a senior industry analyst who preferred to remain anonymous. "It is endangering the entire industry and should have the attention from both regulators and the industry."

Premiums at PICC rose year-on-year by 2.8 per cent in the first half of 2003 to 33.4 billion (US$4 billion), but profits fell by 4.41 per cent to near 5 billion yuan (US$600 million).

The problem is most evident in auto insurance, which generates more than 60 per cent of the country's total property insurance premiums.

Cut-throat competition forced many smaller insurers to cut rates to attract clients, ignoring uniform rates set by the China Insurance Regulatory Commission (CIRC).

Competitive irregularities increased rapidly in late 2001 when a rate liberalization reform was trialed in Guangzhou in South China's Guangdong Province and the neighbouring boomtown of Shenzhen, creating chaos and crippling the industry with widespread losses.

A self-regulation agreement was signed late last year among 10 major property insurers in an effort to prevent a price war after they were allowed at the end of the year to sell policies with rates set by themselves.

The agreement, however, failed to work as expected, as many regional branches of those companies, under pressure to meet premium targets, went out on a limb to undercut one another although top executives at their headquarters typically disliked internecine price wars, analysts say.

"Premium rates are close to the point between profit and loss," said an insider. "But the situation is better than it was in Guangzhou last year."

Tang of the PICC told the conference: "The situation where price wars dominate market competition should be ended quickly. We suggest the China Insurance Regulatory Commission strengthen regulation."

Tang's company holds more than 70 per cent of China's auto insurance industry and is presumably the biggest victim of undercutting.

The total insured value in auto insurance soared by 30.6 per cent in the first quarter, but premiums rose by only 9.6 per cent.

In corporate property insurance, which accounts for more than 20 per cent of the industry in terms of premiums, intensifying rivalry has resulted in climbing piles of receivable premiums, or overdue premium payments.

Many of China's struggling State-owned enterprises, which are the majority of corporate property insurance buyers, have difficulty paying their premiums promptly. But insurance companies continue to underwrite in pursuit of rapid premium rises, which, in many cases, add credit to senior executives' personal records.

"Many enterprises are three or four years late with their payments, but still get insured," said the senior industry analyst.

And the problem seems to have come to a head. "The share of receivable premiums is rising, and the problem has put many companies on the verge of crisis," said Chen Xiao, deputy general manager of Tokio Marine and Fire Insurance Co's Shanghai branch.

Analysts say overdue premiums, which stand on the balance sheets as profits, spell a huge risk for Chinese property insurers, as they still need to pay a 33 per cent income tax, a 7.5 per cent business tax, cede 15 per cent of the premiums in mandatory reinsurance and spend an average of 15 per cent of their profits in expenditures.

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