By staff reporter He Shan

Struggling with the worsening economic climate and hurt by falling profits, China's insurance companies should still have the confidence to compete globally but must pay close attention to risk management.

"Insurers need to understand both the upsides and downsides of globalization before they begin to play globally. They need to keep an especially careful eye on systemic risk," Peking University Professor Sun Qixiang said on Tuesday at the 2009 China Center Forum on Insurance and Social Security Forum.

Although weak performance across the financial sector has raised doubts about the strategy of diversification, Professor Sun remains an advocate of both diversification and portfolio investment, so long as solid risk management is in place to minimize potential losses.

"[Insurers] should use sound risk-management tools to ensure they remain financially healthy," she said.

In a move to reduce risk in the industry, the China Insurance Regulatory Commission last week specified the percentage of funds insurers are allowed to invest in stock markets and on infrastructure projects.

In 2008, most Chinese insurance companies posted steep declines in profits as a result of deteriorating economic conditions.

The biggest drag on insurers' earnings in 2008 came from failed investments. Ping An Insurance Co. of China Ltd., the world's second-biggest insurer by market value, reported a second straight quarterly loss, hit by its investment in failed European financial group Fortis.

Analysts, however, see brighter prospects for Chinese insurers, who are expected to benefit from a stabilizing stock market, one of the world's best performers so far this year, and rapidly growing premium income.

"The biggest issue for them now is to draw lessons from the financial crisis that caused the collapse of AIG, the largest insurance company in the United States," said Sun.

Although they face competition from international insurers like MetLife and AIG who entered China as the government eased restrictions on investment, Sun said there is still a great untapped market in China for domestic insurers.

"Domestic insurance companies should first focus on their own back yard before seeking a presence in the global market," said Sun.

(China.org.cn April 15, 2009)