REFORM has been a popular buzzword in almost every facet of the financial industry in recent years. Of late, much of the focus has been on insurance, a sector that has suffered since industrial growth started to ebb two years ago.

Even though China insurers held a combined 7.35 trillion yuan (US$1.18 trillion) in capital assets at the end of last year, ranking the sector after banks and trust, growth of premium income has slowed into the single digits and profits have shrunk.

"Sluggish domestic and foreign economic situations, slower insurance business growth, declining investment returns and the bottleneck in sales channels have underscored the conflicts and risks accumulated through decades of extensive growth," said Shan Peng, deputy head of the Insurance Association of China. "Companies are being forced to shift direction."

The China Insurance Regulatory Commission said premium income in January and February grew a mere 3.5 percent from a year earlier. That compares with 6.5 percent growth in the same period of 2012.

Among the four listed insurance companies, both China Life Insurance (Group) Co and China Pacific Insurance (Group) Co suffered profit declines of nearly 40 percent in 2012 on weak market demands and losses on their investments, according to their annual financial reports released late last month.

Ping An Insurance (Group) Co said its net profit rose 3 percent, helped by its banking unit, and China New Life Insurance Co reported a similar increase, crediting its focus on urban residents and the elderly.

Quality growth

The word "value" keeps popping up in the business plans of the four listed insurers, suggesting a shift to quality growth from a past of rapid expansion at any cost.

Insurers are saddled with strong competition from banks, distrust among customers and huge losses on investments. That has spurred them to develop new sales channels and redesign their products to make them more attractive to all ages of consumers.

On the bright side, the industry stands to benefit from the Internet, the growing middle class, the aging population and talk of product deregulation.

"Sluggish growth in the industry is a combination of tight regulation on banc assurance, the poor reputation of insurance agents and the increasing costs of maintaining sales channels," said Shan of the insurance association. "In China, where the public's insurance awareness is still pretty low, reforming sales channels should be the most urgent task for insurance companies."

A 2010 regulation restricted insurance companies from selling products through banks. To counter that, insurers started to explore other sales avenues. Many turned to the online market.

Last year, all four listed insurance companies launched Internet arms to sell products and accumulate customer profiles.

Ping An has been at the forefront of the trend. In February, the insurer won preliminary approval to set up a venture with Internet giants Tencent and Alibaba, creating a high-profile link among three of China's most renowned rags-to-riches entrepreneurs: Ping An Chairman Peter Ma, Tencent's Pony Ma and Alibaba's Jack Ma.

"Though our company has shown good performance in the past year, I dare not be complacent after witnessing the achievement of my two young friends who share the same surname as me," Ping An Chairman Ma said in the company's annual report. "Alibaba had 19.1 billion yuan in sales on a single day on November 11, and Tencent has more than 300 million users for its WeChat service. The data convince me of huge consumer and the deep changes new technology is bringing to business models."

Younger generation

Ma earlier said that the venture is an attempt to increase insurance penetration among web users and test the waters of demand among the younger generation for online security, such as their game accounts and other virtual belongings.

The new venture won't start operating until it wins final approval from the insurance regulator, and it's not clear how long it may take to see if the idea does impact the bottom line of Ping An.

"We are facing a generation that won't sit down and listen to a sales person," said Sun Jianyi, vice chairman of Ping An. "That's why we need to offer products on the Internet and let them choose for themselves."

Shan of the insurance association said companies need to focus more on the question: What do consumers really want and need from insurance products?

"The insurance sector should improve their analysis, pricing, and redistribution functions, and provide risk management services," he said.

Health care, retirement, agriculture and catastrophic events are the areas with the most potential for the insurance industry, Shan added.

The companies are showing signs of more creative thinking.

China Pacific last year decided to started a joint venture with Allianz to sell healthcare insurance products tap that niche market.

In another example, China Life has been working with the insurance regulator in preparing a pilot project for tax-deferred pension products, which will significantly expand customer basis.

New China Life shifted its strategy in 2011 after Chairman Kang Dian cited urbanization and the aging population as the two greatest opportunities for the company.

Analysts said the strategy helped New China Life outperform its peers in profit growth last year, though the gain was very modest.

As part of the new business plan, the company began offering high value-added products and adopting a performance assessment method that focuses on the potential value created by sales agents.

The company's market share last year rose in population heavyweights like Shanghai, Beijing and the provinces of Jiangsu and Guangdong.

Still, for the industry has a whole, there's no assurance that new initiatives will translate into expanded customer bases and bigger profits.

"Reforms have started and they will be painful," said Tang Shengbo, an analyst with CICC. "Profit margins will be lifted, but it's not likely to offset losses from shrinking business."