This is how insurance can help prepare China for future crises

The last few years have shaken global resilience. Shocks, such as the COVID-19 pandemic, wars, runaway inflation and the skirting of recession by many advanced economies, have made the world seem uncertain.

Our latest sigma report assesses the shock absorption capacity in economies and insurance markets globally, including China and emerging markets in Asia. It highlights some stark realities that require a response from the public and private sectors.

The report takes a two-pronged approach. It examines the contribution of insurance in helping households and businesses to better withstand financial shock scenarios and it looks at the protection gap, the difference between optimal insurance coverage and actual losses.

The global protection gap reached a record high of $1.8 trillion in 2022. Despite macroeconomic resilience improving in the past year, thanks to central banks fighting inflation, it’s still below where it was in 2007, at the start of the Global Financial Crisis.

The key message of the report is that the world is underinsured and underprepared for future crises. The consequences of this could be catastrophic – particularly in emerging countries. For example, uninsured crop failures or natural catastrophes lead to poverty, injury or sickness that can overwhelm healthcare systems.

China is no exception. It is grappling with the consequences of COVID-19, climate change and a rapidly ageing population. At the same time, its challenges are a direct result of decades of progress: as living standards rise, households and businesses have more to lose and protecting those gains – health, material wealth, infrastructure and food security – becomes paramount.

Our research examines insurance resilience across the four perils that can threaten the existential stability of a nation: crop failure, natural catastrophe, health and mortality.

Agricultural insurance is key to helping stabilise farm incomes by covering losses when crops fail. Yet, about 60% of global insurable crop exposure is unprotected against natural hazards. China is the world’s biggest global agricultural crop producer. A quarter of its population work in the agriculture sector. This makes it a domestic and global food security issue. China’s policymakers have sought to improve stability and food security for many years. A policy of promoting and heavily subsidising crop insurance by up to 80% of premiums, for example,has vastly improved the sector’s resilience in recent years.

The increase in severe weather events, such as storms, floods and earthquakes, has boosted the demand and availability of insurance for natural catastrophic events globally. However, penetration levels in China are still low. The protection gap in emerging Asia, which includes China, has doubled in the past ten years, not just because of more frequent weather events, but also due to rising exposure from rapid urbanisation.

Generally, health resilience across Asian emerging economies has improved as rising standards of living have boosted health and life expectancy, alongside an increase in more innovative products, such as online private health insurance. That said, the health protection gap in China – the difference between optimal coverage and what is actually insured – is the biggest in the world, accounting for 63% of the emerging markets gap last year, up from 41% in 2012. The economic fallout from the COVID-19 pandemic lowered household incomes and prompted people to put more into savings.

Public healthcare in China is very broad-based, covering about 95% of the population, but protection levels are basic. Our report also highlights the risks of the low level of life insurance penetration in China (2.1%), even relative to other Asian markets, such as Malaysia (3.8%). When a primary breadwinner in a family dies, those left behind often face financial hardship, starting with funeral costs and the risk of losing a home if a mortgage can’t be paid. In China, for example, there is no requirement to take out a life insurance policy when getting a mortgage to buy a home. This exposes loved ones to potential risks.

This snapshot highlights the interconnecting risks China is facing, but it also presents opportunities for holistic solutions that can have a positive spillover effect.

Higher insurance penetration rates, for example, can reduce the impact of a shock on public finances and facilitate more investment. At the same time, investing to reduce expected losses by adapting infrastructure, buildings and crops to limit natural catastrophe losses before they occur will protect economies’ growth and fiscal resources.

We estimate that emerging markets need about $100 billion in investment per year for resilient infrastructure, buildings and crops until 2030. This can be funded through innovative new financial instruments such as climate resilience bonds and can generate economic dividends that outweigh the cost by multiples from 2:1 to up to 10:1 for lower-income countries.

Risk reduction can’t prevent all losses and damages though. That is where governments can support the transfer of risk to insurers, both at household and corporate levels.

Even though China is one of the most vibrant insurance markets in the world, its level of insurance penetration is still low at 4%, compared with 10% in Japan and 6% in Thailand and Malaysia.

Investing in resilience plays a vital role in safeguarding countries against the uncertainties of today's world. We’ve been involved with China since the 1930s. During this time we have observed many changes and much progress. To future-proof our societies we must all work together because the strength is in partnership.