CASE STUDY 1

In 70’s , the concept of insurance was virtually unknown in China. Deng Xiaoping Era reform in the 80’s
stimulated the growth of privatelt-owned manufacturing and trade businesses. Then they created the
need for more sophisticated insurance businesses. As a result, the government started reforming the
financial service sector which allowed domestic competition to enter the insurance market in 1988. To
reduce the gap in international insurance companies, China opened some cities to foreign companies
“on an experimental basis”.

In 1992, American International Group (AIG) was back where it all began in Shanghai. Within less than 2
years, AIG captured a significant stake in the life insurance market in Shanghai, and basically rewrote the
history of insurance in China.

STATUS AND DEVELOPMENT OF THE CHINESE INSURANCE INDUSTRY BEFORE THE ENTRY OF AIG (1992)

Until 1949, the insurance industry in China was dominated by foreign, mostly British companies. Among
these companies was AIG, which was founded in 1921 by Cornelius Vander Starr, former ice-cream
parlor owner. Already in the early Twenties, AIG focused on selling life insurance to the Chines
community in the Shanghai Area.

After the communist take-over in 1949, all foreign insurance companies were forced to leave.
The government created the People’s Insurance Company of China (PICC), a subsidiary of the banking
regulatory body, the People’s Bank of China (PICC). PICC was the only insurance company authorized to
operate in China. The development of PICC came to an end during the unrest period from 1959 to 1979.
“The cultural revolution” put an end to most of the insurance business and limited PICC’s activities to
mainly international (Sino-foreign) marine cargo and aviation insurance. The domestic business had
basically ceased to exist, and life insurance could not be developed.

Little Emperors

China had a new mini-dynasty of so-called “little emperors”, the doted-on only children policy of
China’s one child policy. This led to a behavioural change in the area of life and health insurance. The
child is question needed to be preserved at all costs, and parents of average financial circumstances
were turning insurance to guarantee their ability to pay medical and school bills. The second
consequences of the one child policy was that parents who, in more prolific generations may have been
able to rely on at least one of their many offspring to care for them in old age, no longer had the same
family support rely on-another reason for the growth of the life/health insurance market.

Economic deregulations

Chinese state-owned enterprises were beginning to see that they could not depend forever on
the state to support their social welfare obligations, because employers and privately-held enterprises
were excluded from the state pension system.

International Relations
 China would like to have become one of the founding members of the World Trade
Organizations (WTO). Preconditions for China entering GATT included the opening of its financial
markets to outside participants.

GDP per capital growth

GDP remains constant up to a GDP per capita of approximately US$ 1,000 to US$ 1300.

AIG POSITION AND STARTEGY IN ASIA PRIOR TO IT’S ENTRY IN CHINA

 AIG makes over half of its revenues in Asian Markets

 One of the big success factor of AIG was localized management. By the time other insurers
entered AIG had already built a strong domestic management and were more familiar with local
market conditions .

AIG WAY TO GET A CHINA LICENSE AND TO MAINTAIN A UNIQUE POSITION

The fact that AIG was the first insurance company to return to China was mainly the merit of
one man: Maurice R. “Hank” Greenberg, CEO of AIG.

In 1980, the China-American Insurance Company was founded as a joint venture between AIG and PICC.

Two years later, in the fall of 1992, AIG obtained the first license to sell insurance in China since 1949.
Evidently, AIG invested a lot in China, and contact with Zhu Rongji, who was at the time vice-prime
minister had some impact, but those were not only factors that distinguished AIG from other
multinational insurers.

AIG supported local reform efforts and demonstrated a deep understanding of the Chinese culture.

AIG INTERNATIONAL COMPETITORS IN THE CHINESE MARKET

The attractiveness of the Chinese insurance market is so great that it is no surprise that other
international insurer followed in the footsteps of AIG. The first company to follow was Tokyo Marine
and Fire.