China's first new insurance licenses in nearly two years have gone to foreign companies, signaling the beginnings of a long-discussed relaxation of controls on overseas ownership. But taking majority or full control of their Chinese ventures may yet not prove the best approach for those looking to expand their foothold.

Having issued 21 in 2016, China had not approved a new insurance license since early 2017, shortly after it began a crackdown on the entire industry amid concerns over its rapid growth. But on Nov. 25, the China Banking and Insurance Regulatory Commission said it granted Germany's Allianz Group an insurance holding company license, the first of its kind for a foreign insurer in the country. It also recently gave Korean Reinsurance Co. permission to set up a branch in China, the first foreign reinsurance admission since Reinsurance Group of America Inc.'s Shanghai branch in 2014.

A day later on Nov. 26, France's Axa said it would acquire the other half of its property and casualty joint venture, Axa Tianping Property Insurance Co., Ltd., from Chinese partners, pending regulatory approvals. It said the takeover would make it the first foreign insurer to own a "top 20" Chinese P&C company.

License issuance 'highly controlled'

Iris Tan, an analyst at Morningstar in Shenzhen, said the recent moves show that the door is open to "experienced, professional foreign insurers" such as Allianz, but she added that the environment has been getting "even more difficult" for any domestic firm looking for a new insurance license.

"License issuance is absolutely highly controlled as the current regulatory theme is still risk governance," said Wu Tingting, an associate at Debevoise & Plimpton LLP in Shanghai. However, Wu said that because China is seeking to encourage foreign investment, the regulator will approve a handful as examples.

As of Sept. 30, China had 91 life insurers and 88 P&C insurers, of which 28 and 22, respectively, were defined as foreign-owned, meaning that at least 25% of their shares were in the hands of foreign shareholders. They represented 7.2% of China's life insurance market and 1.9% of the P&C market for the first nine months of 2018.

China has been talking about further opening up its financial sector to foreign investors since November 2017, including a plan to gradually phase out the foreign-ownership limit for life insurance companies. In March 2018, China revised regulations to limit a single shareholder's stake in an insurer to one-third from 51%, but excluded foreign-owned insurers from the mandate.

The approvals for Korean Re and Allianz represent a change in regulatory practice, but not in policy — China already permitted full foreign ownership of P&C insurers and reinsurers and never explicitly barred foreign insurance holding companies. Indeed, Axa had a wholly owned P&C subsidiary in China between December 2006 and early 2014 before merging it with Tianping Auto Insurance Co. Ltd. to form Axa Tianping.

Arguably the most significant change is in the life insurance segment, where a foreign shareholder will be allowed to own a 51% stake, up from 50%, in a Chinese life insurer and then move to full ownership in three years' time. There had been little clarity on when the changes would take effect, although sources told Reuters in the week of Nov. 16 that applications would begin to be accepted in the first quarter of 2019.

JVs still the best option for many

Yet even when China allows full foreign ownership across the insurance space, joint ventures may still prove the more attractive option for many insurers from outside China. Shiro Fujii, CFO of Japan's MS&AD Insurance Group Holdings Inc., told S&P Global Market Intelligence recently that the group deliberately chose to have a minority investment in China's BoCommLife Insurance Co. Ltd. because it is better for MS&AD to capture the market growth with local capital.

Elsewhere, Taiwan's Shin Kong Life Insurance Co. Ltd. opted to lower its shareholding to 25% from 50% in its troubled Chinese joint venture instead of increasing its stake, while on the P&C side, Allianz has opted to partner with an affiliate of e-commerce giant JD.com Inc. rather than going solo in the market.

And Axa's China operation had only a 0.04% market share in 2013, before it formed its JV with Tianping Auto Insurance, since when it has grown to be the market's biggest foreign P&C insurer, with a 0.5% share as of Sept. 30.