EDITOR'S note:

China's economy has been regaining some steam in recent months after growth was hit by weak external demand and domestic tightening in the previous three quarters. As we embrace 2013, Shanghai Daily now runs a year-end series to track policy and market changes as well as their influence on different sectors for next year.

The year-end staff parties, bonuses, client dinners and gift-giving are a ritual with China's insurance industry, but beneath all the gaiety lurks a somber mood.

"Christmas, New Year and the upcoming Chinese New Year are all perfect times to visit old and new customers, offer discounts, give presents and hopefully extend existing contracts or sign new ones," said Joe Huang, an agent at a domestic life insurance company. "This has been a difficult year."

China's insurers, who need to convince more people to buy insurance, probably weren't very happy to see CCTV, China's central television, recently air a program warning the public to beware of scams and tricks of the trade in selling.

The China Insurance Regulatory Commission said on Monday that insurers operating in China took in a combined 1.42 trillion yuan (US$227.2 billion) in premium income in the first 11 months of this year, up about 7.5 percent from a year earlier. The double-digit growth of the past seems a distant heyday nowadays.

Analysts said they expect life insurers to struggle next year amid weak capital markets and more skeptical consumers. Non-life insurers are expected to do better, but only just.

The regulator has been trying to help the industry by expanding investment channels for insurers in sectors such as bonds, real estate, trusts, wealth management and financial derivatives. Though some of the new avenues may provide better returns, higher yields mean higher risks.

"Domestic insurers have been relying heavily on investment and are weak at creating profits from insurance products," said Joyce Huang, a director at ratings agency Fitch. "New investment options, such as wealth management products, asset-backed securities and real estate, will bring new risks to the companies."

Slowdown in car sales

Terrence Wong, another director within the Fitch group, said auto insurance poses the greatest challenge for the non-life sector of the industry because of a slowdown in car sales growth and more competitive pricing mechanism. That, along with natural disasters, may drag profit growth down among non-life insurers, he said.

The industry regulator opened compulsory auto insurance business to foreign insurers last May, but it will take some time before they are up and running to take full advantage of the new opportunity, he said.

Government policy support and the performance of the stock market are still considered key to an insurance industry rebound in 2013. Analysts are predicting an improved investment environment next year as the nation's economic outlook stabilizes. At the same time, hopes are that pilot trials of China's tax-deferred pension program could begin in 2013 after five years of planning.

"In terms of life insurers, the return on their products is still unattractive, and the efficiency of their sales teams is worrisome," a report from GF Securities said.

"The real solution to increasing premium income is the long-pending, tax-deferred pension program."

High priority on urbanization

In a huge market such as China's, insurance is still a relatively untapped sector that hasn't yet caught on in a big way with the public.

As China's leaders place a high priority on urbanization as an economic driver, the insurance sector is poised to expand.

Xiang Junbo, head of the insurance regulatory commission, said last week that insurers should take advantage of urbanization to expand their services, especially in commercial pension products and healthcare insurance.

Consultant McKinsey & Co predicts that China will surpass Japan and become the world's second-largest life insurance market by 2020, backed by an older and wealthier population.

But Chinese insurers need to lift their game to take advantage of the potential in the market.

"Chinese life insurers emphasize premium growth since that is the metric used to rank the domestic industry," said Stephan Binder, a director at McKinsey. "To ensure sustainable growth, the insurers should shift their focus from scale to value."

One way to gauge the market is to examine the performance of foreign insurers. In the past year, some have thrived, some have scaled back and some have withdrawn.

Shanghai is the birthplace of foreign insurance companies such as American International Assurance and American International Group, but the market has been tougher as it grows. Foreign life insurers took a combined 4.3 percent market share in the first three-quarters of this year, slightly higher than last year's 4 percent, according to a report from PricewaterhouseCoopers. Still, those are low figures compared with the 8.9 percent share they seized when the market was first opened to them in 2005.

Foreign insurers in non-life sectors only hold about a 1.2 percent market share, nearly unchanged for the past seven years.

Larger market share

"Compared with the rest of Asia, China remains an underinsured market," said Tom Ling, PwC leader for China insurance. "Insurance penetration remains extremely low, at around 2 percent, and the same is true in the property and casualty sectors. There's no doubt foreign insurance companies would like a larger market share in China."

The majority of foreign life insurers operating in China have projected their share will return to 5 percent in three years, betting on the wider offering of products and slower growth among domestic rivals. Their peers in the non-life sector expect market share to remain between 1 to 2 percent, considering the difficulty of tapping the auto market, according to the PwC report.

HSBC's recent sale of a 15 percent stake in China's Ping An Insurance Co sparked concern about the outlook for the industry.

Although the move was largely the result of financing needs of the bank after it became engulfed in a US money-laundering scandal, the sale sent a negative signal to the insurance market as a whole.

"It usually takes a long time to turn investment in insurance companies, especially life insurers, into profit," said Wong. "Companies may adjust their portfolios on concerns over short-term investment returns, but it doesn't mean they are losing confidence about the market in the long term."

He noted that many foreign companies remain positive about China's insurance market, as evidenced in the recent Hong Kong listing of People's Insurance Co (Group) of China. The IPO attracted considerable interest among both domestic and foreign companies, including AIG.

"The sheer size of China's market is still attractive to foreign players," Wong said.

AIG China, which operates only in the property sector, reiterated its commitment to China in November by making the country a top investment destination among emerging markets.

Jose Hernandez, president and CEO of AIG Asia, said the company is dedicated to expansion in China and will open one new branch in a province every year.

German-based Allianz also announced plans to team up with PICC to sell healthcare insurance products on the mainland.

"The 31 foreign insurers that we spoke to made it very clear that China very much remains their hunting ground," said PwC's Ling.

"In fact, their commitment level is at its highest since 2008. It's a hard market to crack, but it is not impossible."