A new report by Swiss Re Institute has highlighted the opportunity for re/insurers to access a new risk pool by increasing the uptake of residential coverages in China.
Analysts noted that residential insurance premiums totaled only CNY 9.1 billion (USD 3 billion) in 2019, which was less than 20% of all property premiums, 0.7% of total P&C premiums, and 0.01% of China’s GDP.
By comparison, US residential insurance penetration was 15% of the total P&C portfolio and 0.48% of GDP in 2019.
“Most of China’s urban household assets are concentrated in home ownership, but property is significantly under-insured,” Swiss Re stated.
“We see a huge opportunity for insurers to tap this market by partnering with banks on mortgage-linked residential insurance and by leveraging China’s residential special maintenance funds through a public-private partnership model.”
Swiss Re attributed the lack of insurance take-up to a lack of fit-for-purpose products and low risk awareness by resident, as well as China’s unique residential insurance market.
In other countries, mortgage lenders typically require residential insurance as part of the mortgage approval process for risk control purposes, which indirectly promotes residential insurance and reduces the catastrophic protection gap.
But in China residential insurance is not a lender requirement, even though 43.4% of urban households have a mortgage.
Demand-side awareness is also low due to the widespread perception that the government will step in as insurer of last resort, but Swiss Re contends that government compensation for disasters is typically inadequate.
The reinsurer also takes issue with the special maintenance fund (SMF) that apartment and condo contribute to as a means to keep buildings in repair.
“We see two routes for insurers to help enhance financial resilience for China’s urban residents by significantly increasing residential insurance protection,” Swiss Re explained.
“First, insurance companies could partner with banks to introduce mortgage residential insurance against property losses caused by nat cat and accident events, like fire, with the support and endorsement of regulators.”
“Second, insurers could leverage China’s CNY 1 trillion SMF to increase protection for residents. This would be a new risk pool to explore.”
A recent Swiss Re survey found urban residents very open to the idea of transforming part of the SMF into residential insurance to protect buildings
Analysts suggested that insurers could form public-private partnerships by leveraging governments’ right to set up the relevant rule to use the SMF.
“Insurers can work with owners’ committees and property management companies on product development, reducing decising-making costs while providing maintainance, claims processing and risk management services,” Swiss Re concluded.