In policy guidance issued last month, China’s State Council reemphasised the importance of the insurance sector to the country’s economy as a whole.
In Several Opinions on Accelerating the Development of a Modern Insurance Industry (“Opinion Document“), released on 13 August 2014, the State Council recognises insurance as an important pillar of China’s financial system and outlines strategies for developing the industry in order to strengthen its capacity to support China’s society and economy. In the Opinion Document, the State Council has reinforces and expands on a similar document it issued eight years ago.
The Opinion Document focusses on China’s internal systems, but includes a nod to the outside by expressly encouraging the further “opening up” of the industry through increased channels for Chinese companies to “Go Global” and through supporting international insurance companies in bringing advanced technology and experience into China.
It sets target rates for 2020 for insurance penetration (premium/GDP) of 5% and insurance density of RMB3,500 per person. Those rates are currently around 3% and RMB1200 per person respectively. Other than that, the Opinion Document does not set out any timeframe for implementation of the developments that it envisions.
Some of the key policies set out in the Opinion Document are these:
1. Development of Catastrophe Insurance
The Opinion Document states that a catastrophe insurance system will be established and research will be carried out into creating a multi-layer risk allocation system for major catastrophes through the establishment of disaster funds and reinsurance systems.
The State Council recognises the need to improve understanding – among companies and individuals in China – of how commercial insurance can be used to manage and mitigate catastrophe risk. It does not state how that understanding will be improved.
2. Use of health and medical insurance, annuities and liability insurance to deal with social needs
The Opinion Document provides that commercial insurance must become involved in the provision of social insurance in order to build and improve a multi-faceted social security system in China.
Commercial insurers will be encouraged to launch innovative annuity products and services. Plans must be made to cater for the particular needs of the elderly, single-child families and for couples who have lost their only child.
Commercial insurers are also encouraged to explore and create new, innovative health and medical insurance products and services and to engage with other parts of the healthcare industry – including through equity investment and strategic cooperation.
The State Council notes the function of insurance in civil disputes and that that this should be brought further into play. It provides that piloting the imposition of compulsory insurance for areas such as environmental pollution, food safety and medical liability should be explored and the speed of development of travel, product quality and professional indemnity insurance should be increased.
3. Use of insurance to support China’s rural areas and agricultural industries
The State Council attaches substantial importance to the development of insurance for agriculture. It encourages operators of agricultural businesses to buy insurance products and services, so as to broaden the coverage of agriculture insurance, improve the level of security it provides and allow operators to make greater use of risk management tools. New insurance products and services, such as climate index insurance, will be explored.
The State Council also intends to explore the breadth and depth of insurance to tackle the “three rural issues”: agriculture, farmers and rural areas. Insurance companies are encouraged to provide suitable, low-premium products and services to help to deal with the three rural issues. In particular, insurance should be further developed for small value loans, rural housing, agricultural machinery insurance, rural infrastructure, forestry and health insurance for people in rural areas.
China’s insurance industry is still small relative to the size of its population. It is also small relative to the size of China’s banking industry (some estimates suggest that China’s insurance industry is only 6% of the size of its banking industry). While few timelines are included in the Opinion Document and it is drafted in only general terms, it hints that new rules that implement the policies and strategies that it lays out will be issued over the next few years.
For foreign players in China’s insurance market and those looking to enter it, this restatement of the importance of the sector by the State Council and its proposals to expand and develop it will be welcome. It is, however, only a statement, and how it will be implemented in practice and the extent to which foreign players will be permitted to participate in the industry as it grows, remain to be seen.