China's decision to partially relax mergers and acquisition rules in the insurance industry could see global insurance firms expand their footprint in the $288 billion market.

Beijing would allow insurers, including Chinese-based units of foreign insurance firms, to buy stakes in more than one peer that competes in the same market segment, according to a statement on the China Insurance Regulatory Commission's (CIRC) website and dated last Friday.

The old rules prohibit insurers from buying stakes in more than one peer that competes in the same products.

The move marks another step in the gradual liberalisation of the country's vast insurance industry in recent years, which had seen restrictions that made it difficult for foreign insurers to achieve scale and exploit advantages in underwriting techniques.

"The new rules allow foreign insurers to acquire domestic Chinese insurers with a nationwide licence, a highly attractive way of achieving target distribution scale," said Maurice Williams, Managing Director for the Asia-Pacific, Middle East, Turkey and Africa at broker Willis Re.

"There is no doubt this transforms the investment potential for foreign insurers in China," Williams said.

The change would also allow stronger domestic and foreign insurers to invest in weaker peers.

"Some insurance players are not in such great shape, and this allows them to be taken under a warm and cuddly arm and nursed back to health by another insurer," said Keith Pogson, managing partner in financial services, Asia-Pacific, at Ernst & Young.

Foreign fillip

The changes are expected to help boost the small presence of foreign insurers, which have long struggled to expand in China. Indeed, heavy-handed regulations have seen overseas insurance firms' market share decline to 4.3 percent in 2012 from 8.9 percent in 2005, CIRC data showed.

Europe's Axa and Allianz, and Canada's Manulife Financial Corp are among the global insurers operating in the world's second-biggest economy via domestic joint ventures.

Axa has said it is already in good shape in China after investing in joint ventures with ICBC and auto insurer Tian Ping.

"I don't expect us to do much else other than grow the operations we now control, and grow fast," Axa Chief Executive Henri de Castries told analysts in February.

Foreign firms are currently prohibited from owning more than 49 percent of a domestic insurer.

China's $288 billion insurance industry is dominated by domestic companies, such as China Life Insurance Co, Ping An Insurance Group Co of China Ltd.

The sheer size of these top Chinese insurers has made it hard for new entrants, both domestic and foreign, which found the strict rules on mergers and acquisitions made expanding their geographic reach difficult.

"This is a positive move for the opening up of China," said Linda Sun-Mattison, senior analyst at Bernstein Research. "Previously, insurers couldn't buy into another insurer without sacrificing what they already have in the country."

Bernstein research said in a recent report that the rapid growth in China's insurance industry and investment into risky local infrastructure and housing projects have weakened the position of smaller insurers in particular.

In October 2012, CIRC broadened the range of markets into which insurers can invest, increasing their ability to generate financial returns. But smaller firms lacking scale have struggled to thrive, losing market share and haemorrhaging cash flow. The new rules could allow them to be taken over in an orderly manner, granting foreign and local players equal opportunity to consolidate their grip in a particular market.

"The new rules are aimed at promoting an optimal structure for the insurance industry and enhancing competitiveness ... ," a CIRC spokesman said in a separate statement on the website.