What’s the future of microinsurance in China?

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By Lisa Morgan, Richard B. Lord | 27 October 2011

Rapid economic development over the past three decades has benefited the lives of many Chinese, but millions still live in poverty. Those who have not prospered include, especially, poor farmers and migrant laborers from impoverished rural regions who go to urban centers in search of work—the largest human migration in history, by some accounts. The government sees microinsurance as a vital element in providing a social safety net to its citizens still living in poverty.

Milliman’s participation in the development of microinsurance in China is taking place on a broad scale. It involves an analysis of the whole microinsurance market—supply, demand, and regulation—and helping the Chinese determine in what ways the market functions most effectively in order to promote the availability and use of microinsurance by those most in need.

The Chinese government implemented its first microinsurance pilot projects in 2008, and the program has since expanded to cover more than 14 million people. This is a small number relative to the country’s total population (it is roughly 2% of the rural population), and China’s leaders now want to increase its penetration further still. The ultimate objective is to give everybody across the country access to essential protections against the risk of financial ruin and the economic costs of death and illness.

The government is offering incentives for the development of microinsurance programs by both large, state-owned firms, such as People’s Insurance Company of China (PICC) and China Life, and small private companies. The Chinese Insurance Regulatory Commission (CIRC), the main governmental organization for insurance regulation, has established a set of criteria defining microinsurance as insurance policies with premiums no higher than 50 yuan (approximately US$8) and benefits no greater than 50,000 yuan (approximately US$8,000).

Where the state is the major shareholder of an insurer, it has been easier to offer microinsurance because they operate with larger risk pools than the purely privately owned insurers. The larger, predominantly state-owned insurers have been more active in cooperating and integrating government policy on microinsurance into their operations, partly because they need to align their activities with the goals of the government. They see the social function of providing financial protection to Chinese citizens as part of their mission.

Private insurers, on the other hand, are more accountable to their shareholders and have a greater emphasis on achieving the economies of scale required for profitability. They want to be good corporate citizens by providing help to the rural poor, and in addition, they recognize that the increasing social mobility of the Chinese population means that many of today’s microinsurance customers will become tomorrow’s purchasers of regular insurance. Private insurers are eager to establish themselves in what could become a massive market with potentially big profits.

Current market research is assessing demand around China, especially in rural areas and among migrant workers. The very concept of insurance is relatively new to the masses of farmers and migrant laborers, but they are all in need of the social protections available through microinsurance. Experiments to date offer life insurance and basic sickness and accident policies tied to microcredit loans. Another area of interest for the future is agricultural insurance, e.g., for crops and livestock. Meanwhile, CIRC is working to set up a framework that provides protection to both insurers and insured.

China’s well-organized political system ensures that governmental decisions at the top level carry down to the district and village leaders who implement the decisions. CIRC hopes to avoid making insurance registration compulsory, feeling that it will be more attractive if people have a choice about signing up. This is where local leaders, such as village heads, can play a crucial role by educating constituents about the value of microinsurance.

Distribution poses major challenges, especially in remote rural areas. One model being tested is insuring an entire village as a group.

Another issue is culture change. Few rural Chinese have bank accounts, and none have previous experience paying insurance premiums. One concept that might aid the transition is the use of mobile-phone technology to sell insurance products and allow consumers to pay premiums by trading air time. Such usage of mobile-phone technology is only an idea in China now, but the Chinese might draw upon lessons from its application in Africa, especially Kenya.

Today, microinsurance represents only a tiny proportion of insurance activity in China, but it has an excellent chance of becoming a major factor in the lives of many millions of the country’s citizens, especially if the government promotes it actively.

Milliman’s primary role in the current phase is to assist with the ongoing market research. Besides the authors of the present report, Guanjun Jiang and Sharon Huang (Shanghai) and Fang Fang (Chicago) are participating in the study. Together with other consulting partners, we are providing expertise in data gathering and analysis, risk assessment, and pricing.

China’s industry leaders recognize that, although China is in many ways unique, there is much they can learn from international perspectives on insurance in general and the experience with microinsurance in other countries.