Background: Life Insurance in the Old Regime

When China United was founded in 1912, Chinese insurance was still in its adolescence. Insurance arrived on Chinese shores in the early nineteenth century, when British merchants based in Guangzhou formed associations to insure shipping interests. In the 1870s, a handful of Chinese marine and fire insurers began to do business under Qing government auspices. Not until after the Sino-Japanese War (1895) and the passage of the first Chinese Company Law (1904) did private Chinese insurers begin to operate. The overwhelming majority of these companies dealt in fire and marine insurance.Footnote ¹⁰

If marine and fire insurance were immature, Chinese life insurance was barely an embryo. Life insurance appeared in China after the Opium War, when two British firms, the Standard and the Oriental, set up shop in Shanghai.Footnote ¹¹ In the late nineteenth century, multinationals like Sun Life of Canada and the New York Life Insurance Company established branches to cater to the growing foreign presence. These Western concerns paid little heed to the Chinese market. Some declined to underwrite Chinese lives entirely. Others limited Chinese customers to endowments with punishing, racially based premiums.Footnote ¹² At the dawn of the Republic in 1912 the only life insurers operating in China were Western companies selling insurance to a Western clientele. There was no sign of indigenization. While a Western life insurance industry operated on Chinese soil, no genuinely Chinese life insurance existed.

The absence of Chinese life insurance was not for lack of trying. In 1898, James Wattie established the China Mutual Life Insurance Company, the first life insurer to seek out Chinese customers. China Mutual was nothing if not active. Over its first seven months, it ran more Chinese-language advertisements in Shenbao than the Standard and Great Oriental ran over the course of about one hundred years, combined. Faure and Köll note that life insurance products in China often took the form of endowments, which were viewed as much as investment products as insurance.Footnote ¹³ This occurred because an endowment pays out in the case of death or in the case of maturity; it therefore has both an insurance and savings component. China Mutual’s advertisements reflect this. Rather than emphasize the need to protect one’s dependents, China Mutual’s ads promise “larger profits to insureds than offered by other companies.”Footnote ¹⁴

Faure and Köll view this strategy as a success, and see China Mutual’s subsequent sale to Sun Life as a sign of healthy market consolidation.Footnote ¹⁵ The underlying story is more complex and the details suggest, rather, that the merger saved China Mutual from an embarrassing public failure. Focusing on endowments did, to be sure, allow China Mutual to expand rapidly. From its founding in 1898, its book of business grew to nearly 30 million taels in force by 1911.Footnote ¹⁶ But rapid growth belied lurking instability. By attracting customers with high-return, short-term endowments, China Mutual depended on what today would be called “hot money”—that is, speculative capital seeking short-term, high yields as opposed to the kind of long-term savings that one might expect a prudent life insurer to attract. By 1912, over a decade of lavish dividends and bonuses had rotted away the company’s reserves.

The archives of the China Mutual paint a stark picture. In March of 1912, just one month after the emperor’s formal abdication, China Mutual actuary S. B. Neill reported that the bonuses paid out over the past five years had greatly exceeded the assumptions used in the valuation of reserves. Neill recommended an immediate reduction in bonuses to roughly one fifth what had been advertised.Footnote ¹⁷ At the time, Arthur Hughes—who would go on to found China United—was serving as China Mutual’s company secretary. Hughes, along with the sales staff, reacted with horror.Footnote ¹⁸ He knew the bonuses were excessive, and had been hired precisely to correct the imprudent dividend and bonus rates that had been offered by his predecessors. Alas, Neill was asking too much. Hughes feared that “[T]o reduce the rate as proposed will result in a widespread lack of confidence in the Company.”Footnote ¹⁹ When the board sided with Neill, Hughes tendered his resignation and left to start China United the following month.

China Mutual barely survived the debacle. Its 1913 shareholder meeting witnessed a policyholder revolt against management in which a number of improprieties were raised. In addition to the profligate dividend policy, it was discovered that China Mutual was discounting its liabilities at 5 percent, as opposed to the 3–4 percent common among Asian life insurers. On the other side of the ledger, investors wondered why China Mutual’s portfolio of Shanghai securities remained flat despite a serious decline in market prices.Footnote ²⁰ China Mutual remained solvent, but it was a spent force. Its reputation never recovered, and its premium income in 1924, when it was merged into Sun Life, had declined by a third from a decade earlier.Footnote ²¹

China Mutual represented an attempt at indigenization in only the most superficial sense. Its management and senior sales force were staffed by British subjects. Even its orientation toward domestic markets was more apparent than real. By focusing on short-term, high-payout endowments, China Mutual took advantage of demand for high-return investments, but failed to cultivate genuine demand for life insurance—indeed, its reckless dividend policy may have prejudiced Chinese urbanites against insurance products. Nevertheless, it was the most notable Qing-era attempt at life insurance indigenization. A handful of Chinese-owned competitors had even less success. Shen Dunhe, a scion of Zhejiang tea merchants who had studied political science at Cambridge, became the earliest Chinese capitalist to attempt to run a life insurer without foreign management. In 1906, he founded the Wah An Life Insurance Company.Footnote ²² Wah An operated for fewer than five years before folding and placing itself under receivership of China United (on whose board Shen continued to serve).Footnote ²³ Other attempts were even less inspiring. The Home Life Insurance Company, founded by China Mutual veteran J. P. Sung,Footnote ²⁴ turned out to be a scam that today would be called a Ponzi scheme.Footnote ²⁵ The China Yearbook would later remark on the “… well-known [life] insurance companies which, purely Chinese in their capital and management, opened with a flourish of trumpets and died an ignominious death.”Footnote ²⁶

Early Republican-era China was a discouraging environment for founding a Chinese life insurer. Hughes and the initial employees of China United—many of whom came from China Mutual—were keenly aware of their failed predecessors, and deeply influenced by their experience at China Mutual. They concluded that China Mutual’s original sin was a lack of technical personnel. Only a company that was founded by competent actuaries, with skilled underwriters and a trained sales force, could market policies deserving of public confidence.

The China United Assurance Society: Foreign Management and Chinese Actuaries

This section explores the challenges that confronted CUAS at its founding. In order to inspire public confidence, it had no choice but to turn to foreign management. At the same time, the Society carried an explicit commitment to indigenization. As such, its first priority was to train a corps of Chinese insurance professionals.

The China United Assurance Society was founded in June 30, 1912, as a limited company with 1,000,000 STls in registered capital, of which 200,000 STls were paid up (the Society would not raise additional share capital until the 1930s). It registered with the Beiyang government, receiving permission to sell life insurance in all Chinese provinces.Footnote ²⁷ Importantly, the company charter committed the Society to a program of indigenization, explicitly restricting shareholders and directors to Chinese nationals of good reputation.Footnote ²⁸ The Western press noted approvingly that “[t]he Board of Directors is composed almost entirely of men who took a prominent part in the Revolution.…”Footnote ²⁹ The list of original board members reads like a Who’s Who of the Beiyang elite. They included General Xu Shaolai, President of the Republic Li Hongyuan, and the future President Feng Guozhang. Among the business elite were Shen Dunhe and Zhu Baosan—a pillar of the Shanghai Chamber of CommerceFootnote ³⁰—with Shen and Zhu serving as chairman and vice chairman, respectively.Footnote ³¹ But indigenization only went so far. Executive control remained vested in foreign management, that is, in Arthur Hughes.

Arthur “A. J.” Hughes was a monocled, owl-eyed bon vivant with a passion for music and lively conversation. Born in Chelsea, England, in 1870, he got his first taste of the life insurance business at the age of twenty when he took up a position as an actuary with Sun Life of Canada in Montreal. After a brief stint at Manufacturers Life, in 1901 Hughes was appointed company secretary for the Crown Life Insurance Company in Toronto.Footnote ³² He resumed his globe-trotting in 1906, moving to Shanghai to run China Mutual as company secretary.

China Mutual’s near failure left a deep impression on Hughes and influenced his strategic thinking at China United. Hughes later wrote that China Mutual was “founded by unqualified and unscrupulous foreigners, even though later on technical assistance was secured, could not retrieve the earlier mismanagement, and the strain of the short term endowments of which, through ignorance, the business in force almost entirely consisted.”Footnote ³³ In short, he was convinced that Wattie’s fatal error had been starting an insurance company without securing actuarial competence. If Wattie had been better credentialed, more honest, and educated in the finer points of actuarial science, China Mutual would not have promised bonuses it could not afford.Footnote ³⁴

Though clearly not all foreigners in early Republican China were technically competent to run a life insurer,Footnote ³⁵ all technically trained life insurance professionals were indeed foreigners. As a result, Hughes insisted on foreign management. The minutes of the first board meeting explain, “owing to the highly technical nature of the business” operations will be “under foreign expert management for the first years of the company.”Footnote ³⁶ There were simply not enough Chinese with the requisite training in insurance. Indeed, there was not a single ethnic Chinese actuary in the entire world. To fill the critical role of company actuary, Hughes hired fellow Englishman and China Mutual veteran Frederick Defries. A native of Finchley, Middlesex, whose toothbrush mustache compensated for a precociously receding hairline, Defries had joined China Mutual in 1909. At CUAS, his chief mission was “to undertake the technical work so necessary, especially in the early days of the Society in the calculation of premium rates.…”Footnote ³⁷

For Hughes, foreign management and public confidence were intimately connected. In his words, “There have been a number of failures of Chinese Life Assurance Cos. mostly due to the fact that there are no Chinese living within the necessary practical and theoretical knowledge to … manage such a complicated business as a Life Assurance Co. is.”Footnote ³⁸ This, in turn, undermined public trust in the integrity of all indigenous life insurance companies. As the China Yearbook wrote a decade later, “… the individual Chinese has unlimited faith in foreign institutions, and though, perhaps out of patriotism, he first supported Chinese insurance companies … he eventually returned and insured his property or life in foreign companies. And it was not without justification that he did so, for, with very few exceptions … the Chinese insurance company has been a ghastly failure.”Footnote ³⁹ The Chinese public once bitten was twice shy; having seen so many failed Chinese life insurers, it was reluctant to trust a new one.

At the same time, CUAS’s commitment to indigenization was genuine, and investment in Chinese human capital was China United’s top priority. Soon after the Society’s founding, Hughes wrote that it “… became apparent that conditions demanded as quickly as possible expert training and experience for a staff of Chinese nationality.”Footnote ⁴⁰ CUAS was especially eager to hire Chinese who had studied and worked abroad.Footnote ⁴¹ One of its most important early hires was Jing Gankun. There is little about Jing in the historical record, save that he joined the Society at its inception and rose to become company secretary by 1932.Footnote ⁴² An equally critical early hire was Zhou Dalun. Zhou graduated from the Cambridge University Department of Mathematics, and commenced training in actuarial science under Defries’s tutelage. In 1914, Defries resigned his position and left Shanghai to fight in the Great War.Footnote ⁴³ Zhou was competent to assume his responsibilities, becoming the first ever Chinese chief actuary of a life insurer. Zhang Deyu was another notable oversees hire. Zhang studied underwriting at the University of PennsylvaniaFootnote ⁴⁴ and became the first Chinese national to be credentialed as a US Certified Life Underwriter. After returning to China in 1926, he managed CUAS’s actuarial department with Zhou Dalun.Footnote ⁴⁵

The star of China United’s actuarial department was Chen Sidu,Footnote ⁴⁶ today honored as the father of Chinese actuarial science.Footnote ⁴⁷ A fashionable young man with parted hair and a pair of no-nonsense wire rim glasses,Footnote ⁴⁸ Chen joined China United in 1928. However, his relationship with the company went back nearly a decade. After graduating with honors from the University of Michigan in 1922, Chen stayed in the United States “under China United auspices” to study American life insurance. Hughes paid for Chen’s education with the understanding that Chen would work for the Society upon returning to China. Chen continued his schooling at Michigan, receiving a master’s in actuarial science in 1925. He went on to work for a number of US companies in New York City, gaining experience at Met Life, New York Life, and Teachers Life Insurance. When he returned to China in 1928, he joined China United as an actuary.Footnote ⁴⁹ In 1932, Chen qualified as an associate of the American Institute of Actuaries, becoming the first Chinese to receive professional actuarial accreditation.Footnote ⁵⁰ Chen’s achievements are impressive. He would go on to organize the Taiping Life Insurance Company in 1933, while continuing to serve as China United actuary. In 1949 he left for Hong Kong, where he consulted for a number of life insurers in Hong Kong and throughout Asia.Footnote ⁵¹

China United’s process of gradual indigenization foreshadowed the post-Deng Xiaoping “haigui” phenomenon. By hiring talent among overseas students, China United was able to replace its foreign actuaries with a corps of credentialed Chinese. Moreover, this talent training had lasting effects on Chinese insurance, with China United chief actuary Chen Sidu going on to found or consult with some of Asia’s most important insurers. However, CUAS was to encounter far greater difficulties in localizing the sales force.

Sales Management: Ethnic Division and the Rise of Chinese Management

This section discusses China United’s sales network. Even as CUAS successfully trained a corps of Chinese insurance professionals, it neglected its Chinese sales agents. Instead, Hughes hoped to place Chinese agents under Western middle managers. This strategy gave rise to a new, far more difficult challenge; it produced a disputative, acrimonious environment and inhibited the Society’s ability to seek out customers. It was in the context of this internal conflict that Chinese leadership in the person of Lü Yuequan began to supplant foreign management. Under Lü’s guidance, CUAS extended its push toward indigenization, and began to train Chinese middle management and sales personnel.

It is tempting to attribute Hughes’s failed strategy to racist assumptions about foreign superiority, and this was undoubtedly a factor. In fairness to Hughes, the Society also faced a hard problem. Literature on contemporary foreign-owned enterprises’ “localization” of staff in China suggests that the key benefits of hiring Chinese staff consist of cost reductions, attracting local talent, and local market knowledge.Footnote ⁵² At the same time, the costs of localization can be considerable. These include “the shortage of skilled local management,” such that localization may not be feasible. Similarly, even when a local manager might suffice for any given position, expatriate managers may possess a wider range of skills, which they can pass on to Chinese staff.Footnote ⁵³ In this light, Hughes’s attempt to build a sales network staffed by Chinese but managed by foreigners appears to stem from a desire to balance the costs and benefits of localization.Footnote ⁵⁴

China United’s formal organizational structure was fairly straightforward. Its board of directors was subdivided into a Shanghai board and a Tianjin board. Shanghai enjoyed managerial authority by virtue of its headquarters being located in Shanghai, but Tianjin held the rights to receive Shanghai board meetings minutes and to request occasional meetings in Beijing.Footnote ⁵⁵ The company bylaws called for an executive committee (zhixingbu) to govern CUAS’s everyday affairs. The executive committee was headed by a general manager with “deep academic qualifications” and appointed by the board. In practice, this meant Hughes. Below the executive committee was the Society’s management department, consisting of managerial staff at the Shanghai headquarters.

The sales network was composed of thirty-four branches throughout the country, and another three southeast Asian branches that catered to overseas Chinese.Footnote ⁵⁶ The branches were run by directors, who supervised a number of sales agents. Branch directors were retained on a fixed salary, and also received commissions on their sales and on sales of their “subagents.” For major branches this was a full-time job. In smaller branches, managers might work as compradors or by selling other products. Indeed, this may have even been an advantage, as such business connections brought a large network of potential insurance customers.Footnote ⁵⁷ Lower level sales agents were retained on shorter-term contracts from six months to two years. Such agents also served markets where the Society did not have its own branch.Footnote ⁵⁸ Hughes envisioned another layer of sales management—“district supervisors”—between headquarters and agency directors. These supervisors were to circulate among the agencies in their district, overseeing agency directors and assisting with closing sales. They were also due commissions on any sales closed within their districts. There is no mention of district supervisors after the 1920s, and it appears the position was phased out for reasons that will become apparent.

At first blush, the organization seems unremarkable. Indeed, it was essentially a transplant of the organizational structure used by British firms since the late 1860s.Footnote ⁵⁹ However, Hughes insisted that Westerners monopolize leadership positions in the sales network, and that Chinese agents be subject to oversight by foreign district supervisors. The business logic is understandable; foreign managers had more experience and there was a paucity of local talent. Hughes wrote as much in a memo penned to the board in December of 1918: “… I am as firmly convinced as ever … the only way to obtain an effective, permanent and profitable agency organization is first of all to divide the country into districts with a trustworthy, capable Head Office travelling Inspector in charge of each. If suitable Chinese can be found to fill such positions, by all means they should be given the preference, but if not Foreigners speaking Chinese in sympathy with the national aspirations of China should when possible be obtained. I am perfectly certain that it is much more difficult, indeed almost impossible, to secure many Chinese suitable for such appointments.…”Footnote ⁶⁰ In other words, Hughes believed the Chinese talent pool was too thin; sales management would have to come from the West. Unfortunately, Hughes’s strategy was a disaster. The strategy stoked intense resentment of Westerners. The Hankou branch offers an illuminating case study. As China’s largest inland port, Hankou should have been low hanging fruit. Instead, it became CUAS’s white elephant.

Between 1913 and 1915, Hughes shuffled through four different managers of the Hankou branch. Lee Chow Ding, who took the job in 1913, was the first disappointment. The head office accused Lee of overspending on rental expenses and laxity in premium collections.Footnote ⁶¹ Lee fired back, accusing the head office of unrealistic expectations, pointing out that any decent location in Hankou was going to run considerably higher than the allotted STls 50 per month.Footnote ⁶² With regard to premium collections, Lee pleaded, “Cash in Hubei is extraordinarily tight.”Footnote ⁶³ Hughes was not impressed. He reminded Lee that he was obligated to find STls 10,000 of business each month and thought Lee “… would probably do better in Shanghai and places nearby … where you could have the assistance of myself or our foreign Superintendent.”Footnote ⁶⁴ A year later Lee was out, and Hughes hired a new manager.

But there was a mix-up. The post was promised to two people, T. Y. Li and P. K. Vee. Hughes wrote to Li apologizing: “… at the time the contract was made with you in Shanghai, our Inspector, Mr. [Lü Yuequan] who was in Hankou, made a contract with Mr. P. K. Vee, not knowing that a Contract had been made in Shanghai.” Hughes opted to hire both. He retained Li as manager and appointed Vee as cashier, with Li entitled to “… an extra five per thousand on all business secured by Mr. Vee.”Footnote ⁶⁵ Vee was to receive a monthly salary of $30 and commissions between 25 percent and 50 percent depending on the product.Footnote ⁶⁶ To keep the chain of command clear, Vee signed his contract with Li, rather than with the head office.Footnote ⁶⁷ It was a messy situation, but Li “set to work in a vigorous manner” to set things aright.Footnote ⁶⁸

What Hughes did next smacks of impatience, racism, and perhaps panic; he hired yet another branch manager. Hoping that a foreigner’s touch might set Hankou aright, Hughes sent L. Strom to Hankou to “… quickly put the Hankou Agency on a proper basis.”Footnote ⁶⁹ Strom was a “young” man who had been with China United for nine months. His only qualifications—if they can be called that—were his “excellent knowledge of the Northern dialect” and the fact that his father was a respected Hankou harbormaster.Footnote ⁷⁰ But Hughes miscalculated. The appointment of such a young foreigner as supervisor incensed the Chinese employees. T. Y. Li left to form his own life insurer and launched a smear campaign against China United.Footnote ⁷¹

Strom’s results came as a shock and disappointment; he racked up enormous expenses even as the head office still had “… not received one dollar in remittances, the Agency having absorbed the entire revenue and now $700 in addition.” This put Hughes in an awkward position vis-à-vis the board. He explained to Storm, “… our Directors are certain to attach some of the blame to a foreign representative. I have on more than one occasion explained to you the anti-foreign fooling that exists throughout China and our Society is no exception to the rule.” Hughes threatened “drastic changes” if the agency could not turn a profit. Hughes was so distressed that he advised Strom to postpone his marriage.Footnote ⁷²

The China United Hankou office exemplifies how not to manage a sales network. Hughes hired too many managers, muddying responsibilities. Rather than keep disagreements with subordinates professional, he personalized them by impugning the abilities of his employees. Worse, he demeaned his Chinese staff with patronizing stereotypes.

Hughes’s mismanagement of the sales network provoked widespread discontent. The rank and file expressed their dissatisfaction through minor acts of sabotage. There are reports of a “Mr. McDowell,” a successful sales agent at China Mutual that Hughes convinced to join CUAS. McDowell soon quit when he discovered his own subagents undermining him. A foreign doctor faced similar obstruction.Footnote ⁷³ Even the directors at times seemed to be working against Hughes. In one letter to the board, Hughes complained about being forced by one of the directors to hire a young man “… whose position was practically that of a spy.”Footnote ⁷⁴

A more serious challenge to Hughes’s management came from the Tianjin directors. In 1919, the Tianjin directors wrote a letter in which they flatly stated that Hughes’s bias was impairing China United: “Mr. Hughes is at ordinary days in favor of but one side that is to say of foreigners and does not thoroughly ascertain into the real conditions of the Chinese employees. He does not quite understand whether the Chinese agents are reliable and energetic or not.” In other words, they did not believe Hughes was competent to manage Chinese agents. They proposed the appointment of a Chinese “business manager” who would take over management of the sales network, and would have broad authority to represent the managing director when traveling on company business. Moreover, they had just the man for the job: Lü Yuequan.Footnote ⁷⁵

Lü Yuequan, a swarthy, baby-faced native of Shachuan County (in Pudong), boasted an impressive résumé with a wealth of experience selling life insurance. He was a self-made businessman, born to a family of boat hands. After only a few years of school, Lü’s uncle brought him across the river to Shanghai’s International Concession to work as a servant in a British household. Lü picked up passable English and earned a reputation for his lively spirit and quick-wittedness. When he turned twenty-five, his employer, a manager at China Mutual, asked him to start selling life insurance. Lü was a quick study, and five years later was put in charge of sales at the Nanjing agency. In 1912, he followed Hughes to CUAS, and became one of the few Chinese to serve as district supervisor.Footnote ⁷⁶

Nevertheless, Hughes protested vigorously against any diminution of his own authority. He wrote back with a letter both self-aggrandizing and patronizing: “I note the very flattering tribute paid in the letter to Mr. [Lü Yuequan].… He has done excellent work, but without my knowledge he could have done very little.… He has a natural aptitude for canvassing, but beyond that knows nothing but what any intelligent Chinese could learn in a few weeks from me.” Hughes went on to cast aspersions on Lü’s “limited education,” and concluded by stating, “The Directors could not propose anything more calculated to work harm to the Society even if they deliberately wished to destroy it.”Footnote ⁷⁷ Though the exact sequence of events remains hazy, the northern directors clearly prevailed. By June the following year, Lü was promoted to business manager, with authority over the sales network. He was serving as managing director by 1922. By the mid-1920s, executive committee meetings were held by Chinese managers, with Lü chairing the meetings and Hughes generally not attending. Although Hughes continued to pen regular memos, attend directors meetings, and provide key strategic guidance, Lü had edged him out as CUAS’s chief executive.

As business manager and later as managing director, Lü set about to indigenize the sales network. He displayed remarkable creativity in training new talent. In 1924, Lü founded a correspondence course in life insurance. The stated purpose of the course was, “[t]o imbue students with the knowledge of life insurance, train specialists in life insurance, and serve the life insurance industry.”Footnote ⁷⁸ The course lasted six months and taught the basic principles of life insurance, sales, and business ethics. Over six hundred students graduated from the course, of which forty-seven were hired by CUAS.Footnote ⁷⁹ In addition, Lü delivered lectures on sales techniques to new agents. He also distributed a pamphlet, China United Agent Manual, with a short “Guide to the Business” (yingye zhinan) written in Chinese.Footnote ⁸⁰ The idea was to give Chinese agents the tools they needed to market insurance in the field.

To keep the sales force motivated, Lü held quarterly sales competitions.Footnote ⁸¹ For example, the 1925 winter quarter sales competition lasted from October to December of that year, during which period any premiums received on new business “counted” toward the competition. Competing agents were awarded financial bonuses and honorary commendations depending on how much business they secured and what agency they worked for. Group A agencies included major commercial markets such as Guangzhou, Fuzhou, Nanjing, and Tianjin. Group B agencies included cities such as Taiyuan, Qingjiang, and Suzhou. Finally, Group C cities included agencies such as Nanchang, Changzhou, and Luoyang. Any Group A agent that scored over ¥60,000 during the competition period would receive a bonus of ¥200, as well “the honor … of having their name and photograph published in the company magazine, as well as a plaque.…” The prize was raised to ¥400 and ¥700 for garnering over ¥100,000 and ¥150,000 in new business, respectively.Footnote ⁸² The requirements were somewhat lower for Group B, and even lower for Group C, “curving” the competition so that agents in less prosperous areas would not be disadvantaged.

Lü and Hughes make for a telling contrast. Hughes foundered in his attempt to balance the benefits of localization and foreign management. Although this was a difficult problem, Hughes’s prejudice inclined him toward using foreigners even when he himself recognized that foreign management was not helping, as in the case of Hankou. The task of managing a localized sales force fell to Lü. Lü’s success in turning around a demoralized sales force and training China’s first-ever entirely Chinese life insurance sales network counts as a more significant achievement than had he merely been the nominal founder of CUAS.

Marketing: Cultivating a Domestic Life Insurance Market

This section discusses China United’s movement along the second axis of indigenization—the orientation of insurance toward Chinese domestic markets. Here, the Society’s’ primary challenge was to cultivate demand for Chinese life insurance products. Fortunately, as its personnel indigenized, the Society demonstrated increasing innovation in product design and market segmentation. This allowed it to reach segments of Chinese society that would have been unthinkable to its predecessors.

CUAS’s initial target market was Beiyang officialdom, particularly elite officials in the treaty ports. This was the business logic behind drafting a board of directors so heavily represented by Beiyang generals and politicians. During its first year of operations, over half of CUAS policyholders were government officials. The insurance products marketed to the officials were similar to the products offered by China Mutual, consisting mostly of endowments. Even so, China United distinguished itself from China Mutual in one important respect; it sold exclusively long-term endowments for periods of ten or fifteen years.Footnote ⁸³ Unfortunately, the political instability of the Republic undermined this strategy. According to a report that Hughes wrote to the board, “… it was only natural that the business connection formed, both as regards Agents and Policy Holders, was to a very large extent with the official class. In ordinary times this would have been a most valuable and profitable connection but the recent political upheaval has rendered it a source of weakness and has been the chief factor causing the loss in renewal premium income.”Footnote ⁸⁴ In other words, with the breakdown of central authority, China United’s reliance on Beiyang political connections turned into a liability.

Unable to rely on premiums from state officials, China United began to exploit the latent demand of China’s emerging commercial elite, professionals, and even working class. Its conscious attempts to cultivate new markets for life insurance became even more apparent after Lü took the reins of sales and marketing. For example, CUAS made careful studies of overseas insurers, and imitated their offerings of educational endowments.Footnote ⁸⁵ The Society also tailored products particularly well suited to Republican-era China. With the expansion of Shanghai industry, the city’s population of laborers grew to over 200,000 factory workers by 1920.Footnote ⁸⁶ CUAS targeted this new demographic by moving into group insurance, marketing health insurance and life insurance to factory workers. Among its larger customers were the Shanghai Commercial Press, Household Industries, and both the worker’s union and professional association of the newspaper Sin Wan Pao, Ltd. Eventually such insurance composed over five thousand lives and approximately 7 percent of the entire book of business.Footnote ⁸⁷

In securing group insurance contracts, Lü’s connections were critical—particularly his relationship with Shanghai underworld kingpin Du Yuesheng. Lü and Du were both natives of Pudong, and were the principal cofounders of the Shanghai Pudong Native Place Association.

Footnote ⁸⁸ In 1934, Du even joined CUAS as a member of the board.Footnote ⁸⁹ This is particularly significant given that the “Green Gangs,” of which Du was the preeminent leader, dominated the Shanghai labor movement.Footnote ⁹⁰ In addition, the founder of Sin Wan Pao, Chen Dazai, was a close associate of Du’s. It is difficult to imagine CUAS securing so many big-ticket union and government contracts without Lü’s connections or Du’s patronage.

Perhaps most innovative were the products that Chen Sidu developed in order to do business with military actors. The military presence was massive in the Republic and represented a potentially lucrative market. However, the adverse selection associated with military personnel in an era of civil war is obvious. Chen’s solution was life insurance with “the critical provision that if while on active duty of military service the insured lost their life, no matter whether this loss of life was due directly or indirectly to military service, and the insurance policy is still within its first year of being in effect, then the company only pays half of the insurance claim.” For every year a policy was in force, the payment owed in the event of death would climb by 5 percent, so after ten years the entire policy was in force.Footnote ⁹¹

In addition to developing new products, CUAS engaged in advertising campaigns to spread awareness and cultivate demand for its products. Though it invested surprisingly little in its advertising—from only 5,000 STls in 1924 to 23,000 STls in 1932, or between 1 percent and 2 percent of premium income—its advertising materials are important because they give a sense of how the products were marketed to China United’s clientele. CUAS advertisements in Shenbao changed significantly over time. The first advertisements scarcely mention insurance at all—they talk, rather, about the national urgency of building industry and accumulating capital, and the need for domestically owned insurance companies to do so. Indeed, they stress that only domestic ownership of insurance championed by China United itself can prevent Chinese capital from going overseas.Footnote ⁹² The emphasis on nationalism echoes Wen-Hsin Yeh’s contention that all business in Republican China had a nationalist as well as a profit motive.Footnote ⁹³ Other advertisements consist of notices from grateful beneficiaries, thanking the company for paying their claims in a timely fashion. Such notices seem calculated to foster trust in the products and become much more common after 1917. Indeed, by the early twenties they almost completely displace the nationalist advertisements. This is striking, as it suggests that the Chinese managers appreciated—more readily, perhaps, than Hughes—that Chinese customers were more interested in building personal wealth than the nation’s wealth.

The Society’s proprietary publications spread similar messages. Its Hua’an qikan (China United Magazine) ran everything from poems and novels to columns asking, “Can a man and a woman of the same surname marry?” When discussing insurance, it also took a stridently nationalist tone. One Hua’an columnist thundered, “In the last 20 years, virtually all life insurers have in fact been organs for distributing the ill-gotten spoils of imperialist extraction.” Fortunately, “the China United Assurance Society has concentrated the capital of the people to prevent loss of our nation’s economic resources and build a bulwark to resist foreign encroachment on our national economy.” At the same time, articles in proprietary publications were more likely to include didactic material, educating readers on the nature and use of insurance. Hence, after stressing the nationalist mission of CUAS, the same columnist goes on to explain “the principles of mutual assistance” on which life insurance is predicated.Footnote ⁹⁴ Company Almanacs, distributed as promotional material, spread similar messages and even included details about educational endowments, wealth endowments, and other products.Footnote ⁹⁵

Still, media advertising only takes one so far in apprehending how policies were truly marketed. Fortunately, Lü Yuequan’s China United Agent Manual offers a salesperson’s view of how to pitch the product. The manual urges agents to think of life insurance as “… a shop with a large amount of capital. Its business is selling life insurance. A sales agent is therefore like a salesperson in the store. Anyone who wants to sell life insurance the product’s value must first clearly understand its usefulness, and its strengths.” The manual explains that only after the agent has grasped the nature of the products, will they be able to explain the products’ social value as well as the benefits that they bring to the insureds. It then goes on to show how to make the sale, stating “What do I need life insurance for?” is the question every sales agent must “thoroughly study.” To this question, there are ten answers that every sales agent should prepare as a ready response: (1) immediate family, (2) relatives, (3) education, (4) retirement, (5) building assets, (6) buying property, (7) continuing a business as an ongoing concern, (8) staying current on loans, (9) reconciling capital and labor, and (10) medicine and funerals. Some of these will strike modern readers as odd, or redundant. For example, responses 1 and 2 seem like instances of the same general case of “protecting dependents,” but may have struck Republican-era customers as distinct concerns.Footnote ⁹⁶

CUAS’s innovative product development, along with its investment in technical expertise and indigenization of its sales network described in the previous sections, were the preconditions for rapid sales growth. After 1918, premiums began to soar, rising from STls 19 million to STls 300 million in 1932.Footnote ⁹⁷ The over two thousand claims paid out over the first two decades of the company built a hard-won public trust that fueled China United’s expansion.Footnote ⁹⁸ In the words of one of China United’s many grateful beneficiaries, “Everyone with wisdom knows the importance of life insurance, and everyone with wisdom knows the outstanding reputation of China United.”Footnote ⁹⁹

Underwriting: Life insurance in a World of Excess Mortality

The final challenge that CUAS faced, even after it proved that a domestic demand existed for life insurance, was how to turn a profit. Though it was quite successful at raising revenue, its underwriting margin remained negative. As late as 1932, Hughes lamented that, “… the China United Assurance Society has not conducted the business of life insurance on a profitable basis, but on the contrary has incurred continuous heavy losses.…” The key problems were high lapse rates and persistent excess mortality—that is, losses from mortality in excess of actuarial forecasts. In 1932, 31 percent of China United policies lapsed after the first premium had been paid, while half of all business evaporated within six years. Hughes attributed high lapse rates to the Chinese sales culture, writing, “The causes are not obscure. Policies are taken under social pressure rather than on account of any conviction that insurance is worth what it costs.…”Footnote ¹⁰⁰ However, he had long since relinquished control over the sales network, and to revert to foreign control would have been impossible.

In addition to high lapse rates, CUAS contended with mortality rates that persistently exceeded its forecasts. In a memo that Hughes penned to the board in 1929, he warned, “The number of deaths is much greater than is provided for in the premiums. If the premiums are increased it would be impossible to secure new business. If they are not increased it will be impossible to realize any profit.” Hughes attributed high mortality to the militarization of society under Chiang Kaishek’s GMD. According to Hughes, “many deaths have occurred which cannot be charged for in the premiums.… These deaths include assassination, execution for political reasons, murders by soldiers or bandits, deaths from exposure when captured by kidnappers, suicides on account of troubles and other violent causes.”Footnote ¹⁰¹ The other problem was poor healthcare and the unwillingness of the Chinese to use Western medicine. In this concern, Hughes was simply following the consensus of Chinese and Western treaty port elites, who feared that poor sanitation and public health was holding China back.Footnote ¹⁰²

Of course, with a high enough premium, an insurer can bear any statistical headwinds. The question remains—why did CUAS not try to raise rates? The major factor here appears to be a spate of new life insurers that entered the market in the twenties and thirties. Among the more illustrious examples are C. V. Starr’s Asia Life Insurance Corporation (ALICO), founded in 1921, Wing On Life Assurance founded in 1924,Footnote ¹⁰³ the Ningshao Life Insurance Corporation founded in 1931,Footnote ¹⁰⁴ and Taiping Life in 1933. CUAS agents complained bitterly of the destructive competition brought by such new entrants.Footnote ¹⁰⁵ The numbers bear this out in several ways. First, a price schedule from the 1930s comparing CUAS premiums to the competition shows that China United’s premiums were slightly higher than most competitors, suggesting it had scant room to raise rates. The schedule suggests that CUAS had, in fact, recently lowered its premiums in order to compete.Footnote ¹⁰⁶ Second, whereas in 1912 CUAS was a first mover in targeting the Chinese market, by the 1930s it was but one player in a crowded field. The Chinese Insurance Yearbook published in 1935 put the total underwritten life insurance in force for that year at roughly 44 million yuan.Footnote ¹⁰⁷ CUAS that year underwrote an estimated 4 million yuan; still a major competitor, but 10 percent of the market in a commodified industry is hardly enough to enjoy any pricing power.Footnote ¹⁰⁸

Competition may explain failure to raise premiums, but one is still left wondering why the Society was unable to reduce lapses or mortality. Certainly, management was aware of the problem. In 1934, the executive committee discussed hiring employees specifically to collect continuing premiums and expanding their second-year premium competitions.Footnote ¹⁰⁹ It is unknowable if these measures would have eventually yielded results had not financial panic in 1935 and then war in 1937 intervened. Excess mortality proved an equally difficult problem. This makes for an interesting contrast with the United States. In antebellum America, life insurers dealt with a lack of mortality statistics by using medical examinations to “driv[e] the rate of mortality among policyholders well below that of the population as a whole.”Footnote ¹¹⁰ CUAS would have liked to follow a similar strategy. A notice sent from headquarters—probably from Lü or Jing Gankun—reminded agents that the China United head office stated, “In terms of life insurance companies’ statistics foundation, nothing is more important than the state of the health of its insured lives. Therefore, in underwriting new business special care must be given toward medical examinations.”Footnote ¹¹¹ Unfortunately, finding qualified doctors proved difficult. Hughes fretted, “Many of our foreign trained examiners have not the experience and efficiency of those abroad.”Footnote ¹¹² This was a major impediment to the firm’s underwriting. “The difficulty in getting qualified medical examiners in the interior has seriously handicapped the progress of life insurance. Even where a missionary doctor is stationed he generally has little time available for insurance examinations.”Footnote ¹¹³ In 1925, the Canton agency complained that a lack of qualified examiners was costing them business.Footnote ¹¹⁴ Still, the head office refused to provide Canton with a salaried doctor owing to the high fixed costs.Footnote ¹¹⁵ The shortage of medical professionals made it difficult to tighten underwriting standards. In Hughes’s words, “The medical examination has been cut down to such an extent that it is little more than a medical inspection of the risk.”Footnote ¹¹⁶ Eventually, the Society seems to have accepted that death was a fact of life—and of life insurance.

This does not diminish the importance of CUAS’s underwriting activities; premium income remained vital as a source of float with which to fund investments.Footnote ¹¹⁷ For CUAS, insurance float played a role similar to bank deposits. Just as a bank pays out interest for the privilege of holding deposits, so CUAS paid out claims for the privilege of holding its float. Moreover, just as a bank extends loans whose interest rate exceeds the rate it pays on deposits, so CUAS sought to invest in assets with a greater return than underwriting losses. In other words, though premium income failed to earn a positive margin, it provided the Society with a source of float. For the years in which complete balance sheets of CUAS are extant, the float financed between 73 percent and 85 percent of assets, and accounts for up to 1,099 percent of paid-in capital.

Investments: Long-Term Investing in a Time of Speculation

Investing proved to be a key solution to the challenges of importing life insurance to China. CUAS’s investment record was impressive, at times even phenomenal, and offered the Society a way to remain profitable as a going concern despite disappointing underwriting results. As table 1 shows, investment income was by far the greatest source of profit in every year for which complete income states are available. Critically, in years when underwriting margins were negative, investment income more than compensated for such losses.

Table 1 Income Analysis

Note: “Report to Board of Directors,” Q336-1-70, SMA (1924 figures); “Memo, 1928” Archives of China United, Q336-1-73 (1928 figures); “China United Assurance Society 1932 Operating Report,” Q336-1-14-77, SMA. Underwriting profit, capital costs, and net income calculated by author.

CUAS’s investment success stemmed from two factors. First, as an individual Hughes was a remarkably talented and clear-sighted investor. Second, the Society benefited from structural factors specific to Republican-era China. That is, Republican-era capital markets in China offered unusually high yields on assets relative to more developed markets. Moreover, as a Chinese insurer CUAS was not bound by statutory regulations or professional conventions that restricted the asset allocation of Western insurers. As a result, CUAS was able to allocate its portfolio far more aggressively, and thereby to take maximum advantage of the high returns available, than a peer institution in London or New York. Ultimately, the ability to earn high returns on investments is the one area in which a fledgling Chinese life insurer was actually at an advantage relative to peers operating in Western markets.

Under Hughes’s investment guidance, CUAS took a long-term view in a Shanghai notorious for short-term speculation. Shanghai from the late twenties to the 1930s was a hotbed of speculation. The early 1920s saw a wave of securities exchanges and trust companies founded to speculate in worthless equities. These companies collapsed in a panic at the end of 1921. A second wave of speculation took the city in 1928. With the advent of Chiang Kaishek’s GMD government, government bond prices became more volatile. This made them attractive instruments for speculation, and by 1937, 98 percent of all trading on the Shanghai Chinese Stock Exchange consisted of GMD debt. A third wave of speculation swept the city in the early thirties, this time centered on credit-driven property appreciation.Footnote ¹¹⁸ The real estate bubble persisted until 1934, when the US Silver Purchase Act sent prices tumbling.Footnote ¹¹⁹ In spite of Shanghai’s heady atmosphere, the CUAS board, and Hughes in particular, focused on long-term intrinsic value—a virtue that was as rare in prewar Shanghai as on Wall Street today.

In the early 1920s, CUAS made the critical decision to invest in property. Prior to this, as seen in figure 1, its investments consisted primarily of government debt and marketable securities. In addition, the Society carried a sizeable loan book of STls 44,558.41 in mortgages and STls 147,697.39 in loans on the Society’s own policies. In 1921, Hughes predicted—correctly—that returns on real estate would begin to outstrip returns on financial securities. His forecast was based on a prudent assessment of relative risk and return, at a level of clarity and insight that is rare even among present-day investment analysts.

Note: Hughes, Operating Report to the Board of China United, 1921, Archives of China United, Q336-1-65 SMA.

Figure 1 China United Investment Portfolio, December 31, 1921.

Hughes reasoned that real estate in much of China was undervalued owing to the high interest rates obtained outside the treaty ports. Hughes wrote, “The value [that is, prices] of real estate in the large [centers] of China other than the Treaty Ports is much less than its actual intrinsic or potential value, owing mainly to the enormous rates of interest Chinese investors expect to receive. Industrial progress and increasing capital must result in an ever-increasing value for such real estate, so that large profits are certain if a proper selection is made from appreciation in values besides a high rate of interest on the original price paid.” In other words, property outside of the treaty ports was just as productive in terms of industrial or commercial capacity as real estate inside treaty ports. Owing to the differential in interest rates, the property outside of the treaty ports traded at a significant discount. Evincing a keen appreciation for what today we would call arbitrage, Hughes believed this discount had to close as time went on, which would mean property appreciation in major, nontreaty port cities.Footnote ¹²⁰

The following year, the Society began to implement its investment strategy. It acquired a plot of land in the Jingansi area that it used to erect a new headquarters.Footnote ¹²¹ The China United Building was a magnificent structure of steel and reinforced concrete, the first masterpiece of architect Elliott Hazzard. It was completed in 1925 and stood nine stories tall, “surmounted by a clock tower crowned with a lantern at a height of 250 feet.” The lantern’s thousand-watt light could be seen twelve miles away.Footnote ¹²² It symbolized Republican China’s fervent, if fleeting, hopes for financial capitalism; no less than half a world away, the Chrysler Building, finished three years later, represented similar aspirations in New York. Today, the building is known as the Shanghai Pacific Hotel and continues to be cherished by locals as a jewel of Shanghai Art Deco.

More importantly, the investment was a brilliant coup, analogous to purchasing Pudong real estate in the 1990s. At the time the land was acquired, “there were not yet any tall buildings west of Jingansi; the China United building was the first one. After this, buildings started popping up all over, including the YMCA building and the International Hotel.”Footnote ¹²³ The Jingansi area soon began to thrive. The company leased the third to sixth floors, and the rental income alone amounted to a cash yield of 10 percent on the original investment. Hughes later boasted that “… it was one of the most important real estate transactions … and in business circles the Society … earned no little prestige for its foresight in buying a property and erecting a building which then was considered too far away from the business district but which is fast becoming more near its centre.”Footnote ¹²⁴

Over the years, CUAS continued to add to its property holdings, dutifully following Hughes’s strategy of making investments in major Chinese cities. It purchased property in Hankou in 1923, and in 1937 built a six-story regional headquarters in Guangzhou.Footnote ¹²⁵ As figure 2 shows, by 1928 real estate holdings composed over 80 percent of its investment portfolio.Footnote ¹²⁶

Note: Hughes, “Memo to the Board of China United,” December 5, 1929, Archives of China United, Q336-1-73, SMA.

Figure 2 CUAS Portfolio investments by asset class, as of 1928.

CUAS proved equally deft at investing in securities markets. In 1932, Hughes championed the “desirability of investing in domestic loans.” Hughes predicted that the GMD would continue to gain influence over the banking system, and thus drive down bond yields.Footnote ¹²⁷ Moreover, GMD government debt was underpriced relative to other fixed income securities. According to Hughes, “… in the foreign controlled areas of Shanghai [real estate’s] future value is dependent to no little extent on political considerations. It is open to doubt as to whether the risk on mortgage investments is any less, for this reason, than Government Securities which at present cost yield a much higher net return.” Hughes proved prescient, with yields falling significantly on domestically traded GMD debt after 1932.Footnote ¹²⁸

Apart from Hughes’s individual aptitude for investing, CUAS’s investment success derived from two structural factors. First was Republican-era China’s unusually high return on assets. Writing in the China Weekly Review, Hughes explained, “… the possibility of [Chinese life insurance] … exists in virtue of the enormous rates of interest obtainable in China … taking the past period of 20 years, the funds of a life insurance company carefully invested in, say Shanghai, in Debentures, Bonds, Preferred Shares, Real Estate, and other secured loans could have earned an average of 8% per annum or certainly over 3% more than of a ‘Home’ company on similar securities.”Footnote ¹²⁹ Indeed, China United earned returns far greater than anything British or American insurers could dream of.Footnote ¹³⁰ Hughes wrote in a 1922 memo to the board, “The average return on American Life Company investments is under 5.5%, in Canada under 6% and in England about 4.5%. In Shanghai we can get on mortgages and Government Bonds at least an average of 9%.”Footnote ¹³¹ The numbers bear this out. CUAS’s 1922 dividend and interest income totaled STls 81,000. On investments and loans of a combined STls 192,255.80, this translates into a cash return on investment of 12.5 percent. Given that New York mortgage rates bounced between 5.7 percent and 6.1 percent in the early 1920s, and UK mortgage rates ranged between 4.75 percent and 6.75 percent from 1912 to 1938, China United’s double-digit returns were truly enviable.Footnote ¹³²

The second structural factor was its ability to allocate its assets more aggressively than Western life insurers. By 1932, over 80 percent of CUAS’s investment portfolio was in property. Meanwhile, nearly half of its marketable securities were in common or preferred shares. Such aggressive asset allocation would have been impossible in Western markets. In the United States, for example, state legislatures limited the amount of noninterest paying assets that life insurers could hold.Footnote ¹³³ In the UK and Australia, the influence of Bailey’s Canons forced life insurers to concentrate holdings in fixed-income assets with definite maturities. Hence, land never constituted more than 10 percent of UK life insurance company holdings, whereas common or preferred equity did not go above 20 percent until after World War II.Footnote ¹³⁴ Holdings of prewar Australian life insurers were virtually all in government debt or mortgages.Footnote ¹³⁵