Tuesday, March 28, 2006

Manulife Covets China's Uninsured as Health-Care Costs Soar

Bloomberg, Le-Min Lim, 28 March 2006

Lu Yahu decided to buy health insurance from American International Group Inc. four years ago after his mother, a retired factory worker, caught a cold and spent half her $124 monthly pension on a single hospital visit.

``Medical charges in China are so ridiculously high these days, you really can't afford to get sick,'' says Lu, 31, the founder of Shanghai Good Faith Translation & Consulting Co., who pays about 30 yuan ($3.74) a month for his policy. ``I buy health insurance from AIG so I can get treatment when I need it without worrying too much about costs.''

Overseas insurers, including AIG and Manulife Financial Corp., are vying for customers in China, where 90 percent of the 1.3 billion people lack health-care coverage. Medical bills are rising as changing lifestyles push up rates of diseases such as cancer that are the costliest to treat. China's private health- insurance market will swell 14-fold to $56 billion by 2020, estimates John Wong, Boston Consulting Group Inc.'s Asia chairman.

``Medical insurance should become very attractive to middle-class families in China because they really don't want to undertake that risk themselves,'' says Wong, 51, who's based in Hong Kong.

New York-based AIG, the world's biggest insurer, is betting on China's undeveloped market.

``We see double-digit growth in the China health business,'' says Barry Stowe, 48, the Hong Kong-based head of AIG's global accident and health unit.

Rising Burden

By contrast, U.S. health-insurance premiums probably grew 6.8 percent in 2005, slowing for a third consecutive year, according to the Centers for Medicare and Medicaid Services, a unit of the U.S. Department of Health and Human Services.

The health-care burden on China's households has risen as the communist government, shifting toward a market economy, dismantles its cradle-to-grave welfare system. The state began cutting hospital subsidies in the early 1980s, and by the mid- 1990s covered just 20 percent of urban state hospitals' costs, says Hana Brixi, a Beijing-based adviser to the United Nations' World Health Organization.

That leaves patients such as Cha Guoqun, who works odd jobs on building sites in the eastern city of Hangzhou, vulnerable. Cha, 46, visited a state hospital in November after a cut on his leg got infected and prevented him from working.

The doctor gave him two options: Pay 1,000 yuan a day for treatment -- his entire monthly income -- or have his leg amputated. He ended up seeking treatment at a Christian charity hospital and was cured with a six-day course of medication that cost 250 yuan.

`I Was Lucky'

``I was lucky this time,'' Cha says. ``But on the whole, medical treatment is too expensive for people like me.''

In China, the majority of the uninsured -- most of them rural residents -- avoid going to hospitals for treatment because they can't afford it, says Brixi, 38. Most treat themselves with over-the-counter drugs, she says.

Premier Wen Jiabao pledged at this month's National People's Congress meeting in Beijing to narrow the widening income gap between China's urban and rural populations by spending more on health care, agriculture and education. Twenty- five years of economic growth averaging 9.8 percent annually has mostly benefited China's towns and cities, leaving behind rural areas that are home to 70 percent of the population.

About 130 million people in China have health insurance, leaving almost 90 percent of the population without coverage, says Guan Ling, a Beijing-based executive secretary at the China Insurance Regulatory Commission's health and life insurance department. About 16 percent of the U.S. population lacked coverage in 2004, according to U.S. census figures.

Cancer, Heart Disease

Chinese patients paid an average of 56 percent of their own medical costs in 2003, up from 21 percent in 1980, according to the Health Ministry.

In the five years through 2003, the average cost of a hospital stay climbed 67 percent to 4,123 yuan, a ministry survey shows. During the same period, per-capita disposable income in urban areas rose 45 percent to 8,472 yuan, according to the China Internet Information Center, a government Web site.

``Private health insurers will definitely take a bigger role in helping defray rising health-care costs in China,'' says the insurance regulator's Guan.

Cancer and vascular ailments such as heart disease are now the country's leading causes of death, fueled by cigarette smoking and a lack of exercise, according to a study published in September in the Waltham, Massachusetts-based New England Journal of Medicine.

Costlier to Treat

In 2003, cancer was the leading cause of death in rural China, according to the Health Ministry. In 1999, respiratory disease topped the list. Cancer costs dozens of times more to treat because it requires longer hospital stays, says He Yansu, 47, an insurance professor at Central University of Finance and Economics in Beijing.

In response to these changes, AIG plans to expand its 23,000-member China sales force and may start advertising on television and billboards, Stowe says, without giving details.

AIG, founded in Shanghai in 1919, is China's No. 2 overseas insurer by premiums after Trieste, Italy-based Assicurazioni Generali SpA knocked it from the top spot in 2005.

Unlike Generali and other rivals, AIG doesn't have a license to sell group policies in China, so it relies solely on individual customers. AIG withdrew its group license application last year pending a Chinese regulatory probe into whether its agents in Hong Kong illegally sold products in mainland China.

10 Percent Profit Margin

The company's health-insurance unit wasn't implicated in the accounting scandal that prompted the resignation of Chairman and Chief Executive Officer Maurice Greenberg in March 2005.

AIG's 1.5 million health-insurance customers in China paid $100 million in premiums in 2004, about 1 percent of the company's global accident and health business, Stowe says. The unit has a profit margin of about 10 percent, matching the companywide average, he says.

While overseas insurers charge less than $5 a month for some policies, they limit costs by offering capped payments rather than unlimited coverage.

Manulife-Sinochem Life Insurance Co., a venture of Toronto- based Manulife Financial and government-controlled chemical trader Sinochem Corp., charges 500 yuan a year for a standard policy. Hospitalized policyholders receive a one-time payment of 4,000 yuan plus 150 yuan for each day spent in the hospital. Outpatient treatment isn't covered.


Health-care costs in China are a fraction of those in developed markets, which also limits expenses for insurers, says Wong of Boston Consulting. For example, a hip replacement costs about $400 in China and more than $10,000 in the U.S., he says.

To succeed in China, overseas insurers must overcome entrenched domestic rivals.

Local insurers such as Beijing-based China Life Insurance Co. and Shenzhen-based Ping An Insurance Group Co., the two largest, control more than 90 percent of the overall market, according to the insurance regulator.

China Life had 663,000 sales agents as of June 2005, while AIG has 23,000.

Hong Kong-traded shares of China Life have risen 46 percent this year, compared with a 6.3 percent gain in the benchmark Hang Seng Index. Shares of Ping An have gained 43 percent.

``Size matters when you're an insurance company trying to grab market share,'' says Dorris Chen, a Shanghai-based insurance analyst at BNP Paribas Peregrine Ltd. ``Foreign insurers have an edge over domestic rivals in risk assessment, but that doesn't make up for their lack of size.''

Medical Fraud

Widespread fraud in medical claims is another pitfall, says Boston Consulting's Wong. Doctors commonly prescribe unnecessary medicines and longer hospital stays to pad their incomes, according to a November report by the World Bank.

In 2004, patients admitted to Shanghai hospitals stayed an average of 17 days, compared with eight days in Hong Kong, according to Manulife-Sinochem.

``You can't control what the hospitals do in terms of the medicine they prescribe and the number of days of hospital stay they recommend,'' says Edmond Lee, 42, a Shanghai-based vice general manager at Manulife-Sinochem, China's No. 6 overseas insurer by premiums. ``The government should do more gatekeeping to keep costs down.''

Manulife-Sinochem plans to expand its 4,200-person sales team in China by 20 percent a year to tap rising demand for health coverage, Lee says.

Restrictions Relaxed

Overseas insurers are expanding more rapidly as China relaxes restrictions to comply with World Trade Organization rules. The government in December 2004 let non-Chinese insurers operate nationwide rather than in select cities, and allowed them sell to companies as well as individuals for the first time.

Copenhagen-based International Health Insurance Danmark A/S, which doesn't yet have a China license, expects the country to become its biggest health-insurance market in Asia within a decade, says Niels Haaber, 31, the company's Hong Kong-based Asia chief. Hong Kong is currently IHI's biggest Asian market.

``All foreign health-care insurers are looking at the Chinese market,'' Haaber says.

International Health, a unit of London-based British United Provident Association Ltd., the world's No. 1 specialized health insurer, is in talks with Ping An to form a venture, Haaber says.

China's state medical insurance plan covers about 130 million people, mostly company employees in cities, according to the Ministry of Labor and Social Security.

Lax Enforcement

The plan covers fewer than half the nation's 300 million urban workers, even though all are legally entitled to it, because many employers fail to offer coverage and enforcement is lax, says Wang Guojun, an insurance professor at the University of International Business and Economics in Beijing.

A 35-year-old worker in Beijing is required to contribute 1 percent of his salary to a health-insurance account, and his employer must pay 4 percent. Workers can use that money to buy prescription drugs and cover hospital costs. After draining their accounts, they have to tap their savings.

Shen Jiai, a financial planner at the government-run Shanghai Taxi Management Bureau, says relying on state health insurance alone is foolhardy.

Shen bought an AIG policy for her husband in 1994 and recently bought Ping An policies for herself and her 18-year-old daughter. The AIG and Ping An policies each cost Shen, 44, about 30 yuan a month, and the state plan costs about 20 yuan.

``State insurance is only good for minor ailments,'' Shen says. ``It leaves you financially vulnerable if expensive illnesses like cancer strike.''
KN News Desk, 28 March 2006

Shanghai-based Manulife-Sinochem Life Insurance Co Ltd (MSL) is planning to move beyond supplying only individual life insurance coverage and expand its scope to include group insurance, bancassurance, as well as opening up more outlets throughout the country. China's first joint venture insurer has already launched group insurance services aimed at small and medium-sized enterprises (SMEs) in Shanghai, Guangzhou, Beijing and Ningbo. The company plans to continue making group insurance a business focus this year.

Arthur Lin, company vice-president and general manager of the MSL Beijing branch, told China Daily that the insurer's target customers for the group insurance would be SMEs and foreign-funded companies. "It is more difficult to evaluate large enterprises' group insurance risks. Moreover, they usually have had a steady co-operation with other insurers," Lin said.

"The quality, or rather scale, is our major concern," Lin said. The 10-year-old company is also thinking about developing bancassurance, which is a challenging sector for the insurer.

"Bancassurance business has a big market but low profit margin," said Lin. "This is due to the dynamic competition between banks and insurers. If the insurance products sell well in the bank, the bank is likely to raise the commission. On the other hand, if the products sell badly, the insurer will go to another bank." In addition to venturing into a new business sector, MSL is also speeding up its network expansion. The company got nine outlet licences last year and expects to have 20 licences total by the end of this year. "The Yangtze Delta and Pearl River Delta were our major targets last year, and we are taking more efforts to explore the market in Sichuan, Shandong and Fujian provinces this year," said Lin.

MSL has got the licence to enter Sichuan Province from the regulatory authority, and the Sichuan branch is expected to start business in June, Lin added. Thanks to the rapid expansion in the past two years, the insurer posted 700 million yuan (US$87.5 million) in total premium income in 2005, an increase of 17.5 per cent over the previous year. The company's premium growth outpaced the market average in Shanghai last year, but lagged behind the rate posted by the city's foreign-invested insurers.

The joint venture insurer's Chinese parent company is China Foreign Economic and Trade Trust & Investment Company, a member of the State-owned chemical industry giant Sinochem Corporation. Manulife Financial holds a 51 per cent stake of MSL, while Sinochem holds the remainder. MSL has entered into 12 cities in China, with additional applications being processed.