Physical loss or damage to property is very common in China and generally underinsured. Though companies often insured assets according to their properties’ “book value”, in the event of a loss, the compensation received from insurance companies have historically been insufficient to adequately replace or repair the loss. In 2008, Chinese companies lost billions of dollars to fire and natural disasters such as earthquakes, floods, snowstorms and typhoons. And the losses do not just end there - if there is a damage to a physical property, it often leads to a business interruption, meaning another source of exposures. It is often the case that business interruptions and loss of profits/revenue can easily surpass the cost of repairing the physical damage.

Third party liability is an area that has been receiving growing attention. The only reason why this is not a huge problem is because the culture and the legal environment in China is not highly litigious like the US. If it were, lawyers would be having a field day in China! Still, recent events such as the Mattel toy recall and the dairy product scandal have focused attention on consumer rights and liability issues. Whereas the toy scandal impacted overseas markets, the dairy problem moved the issue of consumer rights into the domestic arena. In addition, as Chinese companies increasingly raise money (through IPOs etc.) and do business overseas, it is in their interests to protect themselves against exposures to a range of third party liability risks. Chinese companies, used to different accounting systems, and unfamiliar with the practices of the countries they are venturing into, are getting into conflicts with overseas regulators.

In 2007, a class action law suit was filed against seven Chinese companies. Most of these were within the first 12 months of their being listed in the US. Judicial proceedings can stretch for many years and even if companies are able to successfully defend themselves, legal costs can be up to many millions of dollars.

Trade credit risk refers to the risk that debtors may not pay their debts within a reasonable timeframe or in a worst case scenario, not pay at all. This risk has been made real due to increasing domestic and international trade, further exacerbated by the times we are living in. A company’s liquidity is paramount to its survival, and bad debt and late payment are commonly the main threats to liquidity. Historically, market capacity for trade credit covers, specifically for domestic sales, has been limited. This is due to a lack of credit information on buyers. While the situation did improve a few years ago, the current financial crisis has once again raised concerns among insurers and banks about borrowers’ credit worthiness. Companies need the help of brokers to sell the risk effectively to insurance markets.

Many companies in China today are purchasing simple, standard types of insurance covers. Policy wordings are not broad enough to effectively cover all the various exposures. For example, a company may buy Property Insurance or cover for perils such as fires, windstorms, floods or explosions, but not buy earthquake cover, either because they are not aware that they can purchase this cover, or they decide to self-insure this risk to save the premium.

Part of the problem is the level of market knowledge among insurance buyers, especially since they rely only on insurance companies for information. The use of insurance brokers who are able to provide insurance buyers with independent and much broader market intelligence is a relatively recent phenomenon in China.

For example, during the recent Sichuan earthquake, there were companies that suffered massive losses that could easily have been insured. These companies had purchased Property Damage insurance, but the policy did not include earthquake cover.

Many companies are under the impression that earthquake cover is a standard exclusion. This is not true. You can obtain the coverage through a number of ways. One way would be to obtain cover under a Property Damage All Risks Insurance policy. Another way would be to purchase a standalone earthquake insurance policy. Recently insurance companies have also started providing standalone earthquake insurance policies. Companies may buy insurance but often, they are not exactly sure what they buy. For example, they may have bought Property Damage Insurance, but not Business Interruption Insurance or Liability Insurance.

When insurance companies are not able to offer a certain type of cover, they may advise clients that such a policy is not available in the market. I have even heard from our clients that before they engaged JLT Lixin, they were not aware of concepts such as Loss of Profit or Business Interruption Cover - both of which are very critical to protecting profits/revenue and to the continuation of the business.

Companies need to move away from the mindset of meeting insurance requirements and regulations as an overhead to meeting the intent of the insurance itself – which is to protect the financial health of the company.

However, due to several recent and unfortunate natural disasters, this state of affairs is now changing for the better. We are increasingly consulting for companies, identifying their unique exposures and providing comprehensive programmes to minimise this risk.

A customised property programme, covering the company’s unique exposures, will reflect the needs of the company. The good thing is that you do not have to pay more for better wordings – that is one of the key value-added services of a broker. Better wordings actually end up saving costs for the company, by reducing the risks of excluded losses and reducing the premium rates.

Obviously, there are limits to what better wordings can achieve. Specific types of covers – i.e. for earthquakes, business interruption or product liability – will of course come at a price.

How can companies know if the premiums quoted by insurance companies are the most competitive or that the wordings on the policies are the most comprehensive? A broker will not only liaise and negotiate with insurance companies to obtain the best premium rates, they will also review policies to ensure that clients benefit from the best wordings.

A lot of companies in China are highly decentralised, with each department or subsidiary buying insurance individually. This means that they are not leveraging the benefits of bulk purchase or Economies of Scale. We have seen a number of cases where we have been able to identify duplications in cover, as well as gaps in cover among subsidiaries and divisions. When we eliminate the duplications and fill the gaps, the net benefit is often decreased costs as well as an insurance programme that is more comprehensive.

Acting on behalf of the company, and in negotiations with multiple service providers, we not only have better bargaining power, we are also able to customise insurance programmes to address the unique needs and exposures of the company.

Risk management is an area that many companies in China are not focusing on. The various product scandals are an illustration of this. The huge reputational losses that companies suffer can seriously affect or impair companies’ ability to do business.

The dairy products scandal is a case in point, where the damage to the brand has been irreparable. These events are compelling companies in China to put a lot more focus on quality and better risk management. Companies are no longer thinking of just the short-term profit targets and are taking a more holistic approach to risk management.

One of the challenges to innovation in insurance is to tie it with responsibility. At the moment, regulators are more focused on insurers’ solvency margins (understandably under the current environment), than in approving innovative products and covers. Regulators also believe that insurance companies need to acquire experience in underwriting and operational compliance before they can dabble with more innovative insurance concepts.

I think innovation happens in markets when they are more mature. The insurance market in China is at a developing stage, and given the other priorities such as solvency, ability to pay claims, trading practices and so on, it is perfectly understandable that innovation in the market place has been pushed to the sidelines. If the current economic crisis has taught us anything, it is that we must get the fundamentals right first, and product innovation should not be at the expense of good risk management, something that regulators appreciate very well.

The regulator is closely monitoring how insurance companies transact their business, as well as how responsible they are in terms of clients’ risk management. Until it comes to a point where regulators are comfortable with insurers’ operational compliance as well as how responsibly they are counselling clients with regards to their risk management, innovation will continue to be an afterthought .

There is a gap between local and international brokers in terms of knowledge and experience. We have to remember that insurance brokers in China are relatively new entities, with less than 10 years of experience. It was only in 2000 that the regulator granted the first insurance broker license in China. International brokers are much more experienced in terms of their ability to structure a good insurance and risk management programme.

The regulator has been highly interested in how international brokers conduct their business, their best practices and compliance standards. In fact on two occasions the regulator requested me to speak at the annual insurance industry meeting - on internal compliance and on transacting business in a legal and compliant way.

One other advantage that the international broker has is its international network of brokers, and ability to draw upon their experience to find the most appropriate solutions. As Chinese companies increasingly venture abroad, international brokers will be sought out for their ability to place regional programmes in a cost-effective way.