China's first specialized health insurance company was established yesterday, blazing a new trail for accelerating the growth of the nation's hugely promising health insurance sector.

The PICC Holding Company, which controls PICC Property and Casualty Co Ltd, China's largest non-life insurance operator, has a controlling stake in the PICC Health Insurance Co Ltd, it said.

DKV, Europe's largest private health insurance company, and three other Chinese companies, including China Huawen Investment Holding Co Ltd, are also shareholders, a PICC Holding executive said, while declining to give other details.

PICC Health is the first of China's newly-approved four specialized health insurance providers to complete establishment procedures, which regulators expect will help augment commercial health insurance in the local market to complement a weak social medicare system.

"It's a very good move," said Huang Huaming, an insurance professor at the University of International Business and Economics. "It will benefit the Chinese people."

The demand for health insurance is tremendous in the world's most populous country. As high as 65 per cent of Chinese residents list illness as one of their three greatest concerns, PICC Holding officials said.

According to unofficial estimates, the market may grow to 300 billion yuan (US$36 billion) by 2008.

Yet despite the huge growth potential, commercial health insurance is still playing a minor role in the local market, covering only a meagre 10 per cent of local residents' total medical expenditures.

Nearly all local health insurance providers are frustrated with the high risk in the business. Loss ratios for health insurance amount to as high as 200 per cent for some insurers in recent years.

Some even reportedly suspended the sale of health insurance products earlier this year. All local life insurance companies are allowed to write health insurance policies. Property insurers were allowed to sell short-term health insurance last year.

Analysts say a variety of problems are hindering the growth of health insurance, including moral hazards, high medical expenditures, serious price competition, low pricing standards and poor services.

However, "the root cause is the lack of specialization," Huang said, adding that health insurance, which is hugely different from life insurance in terms of actuarial analysis, risk control and others, must be operated by specialized providers.

Local insurers mostly operate health insurance the same way they deal with life insurance, which resulted in improper underwriting practices and weak claims appraisals that Huang said contribute to the high loss ratios.

A lack of product diversification and high premium rates - partly a result of high loss ratios - have also constrained demand.

"When premium rates are high but coverage is quite limited, who would want to buy?" Huang said.

The new insurer knows clearly what lies ahead. "We have a fairly sober understanding of the market we are entering," said Liu Jian, president of PICC Health. "What lies in front of us is not just huge room for development, but huge market risk and intense competition."

PICC Health will stick to professionalism in all aspects of its operations, and aims to build a good reputation by combining the expertise of its partners and established PICC's brand name, Liu said.

The company will also seek to build strategic alliances with medical service providers, social security operators and other industries to complement its operations, he said.

Specialized health insurance companies will also have to devote energy to other areas such as seeking greater government support and building a special database for actuarial purposes, analysts caution.

"As long as they stick to the path of specialization, the future for health insurance will be bright," Huang said.

(China Daily November 19, 2004)