China’s transition from bicycles to cars in urban areas has ignited the country’s automobile insurance market. Commercial and personal auto insurance premiums are likely to increase at a compound annual growth rate (CAGR) of 24 percent from 2006 to 2010, compared with 18 percent annually during the previous five years.1 But the industry’s profitability is lagging behind growth as managers of Chinese insurance companies chase short-term revenues without developing discipline in underwriting and managing claims—skills needed to bolster the bottom line.
In 2006 we examined China’s auto insurance market. Our study, which included a survey of 1,600 consumers and interviews with important industry stakeholders, found that management practices taken for granted in developed insurance markets have made few inroads among local companies. Most carriers have yet to invest in business processes that would let them distinguish between high- and low-risk customers or profitable and unprofitable distribution channels. Also absent are centralized and specialized claims-processing systems that help carriers control costs—standard in developed markets.
Part of the problem is that information on drivers’ claims and on the performance of different distribution channels is difficult to obtain. What’s more, many insurers don’t understand the impact this information could have on their...