Foreign insurers gain in China amid scrutiny of riskier local products

* AIA and Prudential among those posting strong China growth

* Regulatory crackdown on risky investments hits local firms

* Foreign insurers to hire up to 40 percent more salesagents

* Foreign insurers expand into smaller cities as demandgrows

By Sumeet Chatterjee

HONG KONG, March 20 (Reuters) - When Zhang Xixi, a25-year-old staffer at an online financial company in China'ssouthern province of Guangdong, decided last year to buypersonal insurance for the first time, he was swamped withoptions.

Local insurers rushed to offer him products with attractivefinancial returns. In the end, he decided on a simpler, "morereliable" product sold by the unit of a U.S. life insurer.

Customers like Zhang are helping foreign insurers quicklygain market share in China, aided by a regulatory crackdown onshort-term investments packaged as insurance that has hurt manyof their local rivals.

The growth of China's middle class and their rising wageshave meant more people are looking for insurance, saidAsia-focused AIA's regional chief executive, John Cai, who leadsthe company in China and some Southeast Asian markets.

"We have the differentiated strategy by focussing on sellingprotection products ... and we reaped the benefit of that," hesaid, referring to a 60 percent jump last year in the HongKong-based company's value of new business in China, up from agrowth rate of 54 percent in 2016.

Foreign insurers, including AIA Group, Avivaand Prudential have been in China for decades,but their collective market share is still below 10 percent as aresult of regulatory restrictions and limited awareness aboutinsurance as coverage rather than an investment.

Current rules limit foreign holdings in Chinese insurancejoint ventures to 50 percent. AIA is the only wholly ownedforeign insurance firm in China as its operations were set upbefore the restrictions were introduced.

Beijing said last year it planned to lift the ownership capto 51 percent for foreign insurance joint ventures in 2020 andremove the limit completely two years later, which would allowfor further expansion.

Both Prudential and Aviva saw new business profit in China,a key measure of long-term profitability, more than double lastyear on the back of higher demand for traditional protectionproducts.

Many foreign insurance companies are strengthening theirpresence in smaller cities, where insurance penetration -measured in terms of the value of premiums underwritten as apercentage of gross domestic product - is lower than the 3percent of GDP figure for the country as a whole.

Insurance ownership in the United States runs at 7 percentof GDP and is at 10 percent in Britain and Japan. China'srelatively low rate and strong economic outlook is the biggestdraw for foreign insurers.

That has led to a hiring binge: leading foreign insurers arelooking to bring on up to 40 percent more front-line salesagents in China this year - twice the rate of recent years,executives and consultants said.

AIA, for example, had close to 35,000 agents at the end oflast year compared with 15,000 in 2014, and Cai expects asimilar hiring growth rate as the company expands into second-and third-tier cities.

The sector regulator in China is also likely to make iteasier for foreign insurers to expand into new provinces, said aBeijing-based lawyer who works with the China InsuranceRegulatory Commission.

LOCAL COMPETITION

Top Chinese firms such as China Life Insuranceand Ping An Insurance Group remain dominant playerson their home turf, collectively holding about 90 percent of thelife insurance market.

But their industry is in the midst of a massiveregulator-driven clean-up of the life insurance sector, theworld's No. 3 market, to limit risk to the financial system.

Last month, Beijing took control of Anbang after keeping itunder the microscope over the past year or so for riskybehaviour.

As a result of those measures, Chinese insurance firms sawtheir net operating cash flow slump 65 percent in 2017, Reutersreported in January, citing data in a government memo. Assetsheld in universal life insurance funds dropped 50 percent.

Rating agency Fitch expects premium growth to remain low in2018 as Chinese life insurers shift from short-term investmentproducts to more complicated products with protection featuresfavoured by the regulator.

"We have traditionally focused on that business, certainlyin the last three or four years, on health and protectionproducts versus competing for savings or bank-type products,"said Prudential Group's chief executive Mike Wells.

Enthused by a surge in demand, growing awareness and risingwealth in smaller Chinese cities such as Foshan, Taizhou andXuzhou, insurers such as AIA and Prudential are stepping uptheir presence in those markets, executives said.

"From the growth rate you can tell the opportunity is there,the market is even less penetrated. However, the wealth effectand the average income is rising," AIA's Cai said, referring tothe smaller Chinese cities. "So we do see similar success willbe coming there."

($1 = 6.3109 Chinese yuan renminbi)(Reporting by Sumeet Chatterjee; additional reporting byBeijing Newsroom; Editing by Jennifer Hughes and Gerry Doyle)