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Over the past decade, China’s insurance industry has experienced significant growth. However, the penetration rate of insurance, particularly in rural areas vulnerable to natural calamities, remains relatively low.
In 2023, the non-life insurance penetration rate in China stood at around 1.8% of GDP, a stark contrast to the global average of 4.2%. This disparity underscores a vast potential for market growth, especially in regions that are currently underserved.
While the concept of ‘protection gap’ can sometimes exaggerate the true extent of underinsurance – for instance, when insuring certain assets is not economically viable, or asset owners opt for self-insurance – it’s important to consider the context.
“In China, there’s an expectation that the government will step in to provide relief after losses, either through direct financial support or by aiding in reconstruction,” said Franz-Josef Hahn, chief executive officer of Peak Re.
“This belief has likely played a role in limiting insurance demand, as many individuals anticipate government assistance rather than seeking private insurance solutions,” he noted.
It can be argued that the substantial protection gap in China is primarily due to demand-side challenges, such as affordability and accessibility.
“An effective approach would involve a comprehensive, multi-layered strategy engaging multiple stakeholders,” said Hahn.
“This would combine traditional property insurance, local government-backed schemes, and national natural catastrophe pools, with a strong connection to the international reinsurance markets.
“Such integration would not only bring additional capacity but also invaluable expertise and support. By addressing the multifaceted aspects of the protection gap, this holistic framework could cultivate a more resilient and inclusive insurance ecosystem,” according to Hahn.
Understanding the intricacies of local market conditions is vital to developing targeted and effective solutions.
“For example, the burgeoning Asian middle class is generally knowledgeable about insurance products and has the financial means to afford premiums. However, a notable protection gap remains, which may be attributed to the perception that these products do not sufficiently cater to their specific needs or that the enrollment process is too complex,” he explained.
“Recognising and understanding alternative risk management strategies is essential for bridging the protection gap and fostering a culture of insurance adoption.”
Franz-Josef Hahn, Peak Re
In terms of bridging the health protection gap, it’s imperative for private insurance offerings to complement government-sponsored programs, Hahn said.
“This could involve providing coverage for medical conditions or expenses not included in public health insurance plans, thus offering a more comprehensive safety net for individuals.
“Harmonising private insurance products with public schemes will ensure a more integrated approach to health protection, filling gaps and offering consumers greater peace of mind,” he added.
Overall, it is crucial for the insurance sector to collaborate more closely with other stakeholders, such as the government and medical service providers, to deliver optimal solutions to those who are unprotected or under-protected.
Recognising and understanding alternative risk management strategies is also essential for bridging the protection gap and fostering a culture of insurance adoption.
“While the introduction of insurance-linked securities (ILS) and alternative capacities represents an innovative step, it is unlikely to significantly influence the core issues,” he said.
The expansion of the China Urban and Rural Residential Catastrophe Insurance Pool (CURRCIP) is poised to increase insurance penetration and foster the development of innovative products.
Nonetheless, the scheme’s voluntary nature might not completely address the longstanding affordability barriers that impede wider insurance adoption.
The emergence of other government-supported, localised voluntary household insurance schemes is also significant. These schemes offer coverage for fire, windstorm, and flood damages with low first-loss limits, catering to the unique needs of local communities. With their competitive premiums, these policies could complement CURRCIP and other initiatives.
“Such targeted insurance strategies, which are tailored to local conditions and financial constraints, could lead to a more insured and resilient populace,” he said.
Insurance companies must be prepared to embrace change and invest in building their own technical understanding to manage their portfolios effectively, says Guy Carpenter’s Mark Weatherhead.
Catastrophe models are at the heart of the (re)insurance industry’s ability to effectively manage risk and reduce loss events, significant climate shifts, however, pose challenges to model calibration and validation.
Model vendors should balance the need for consistency to ensure there are no dramatic shifts in modelling results, with the requirement to incorporate climate change and improved scientific data for reliable risk assessment,” said Mark Weatherhead, managing director, head of analytics & advisory, South-East Asia and Korea for reinsurance broker Guy Carpenter.
“Regular model updates are necessary due to evolving scientific views, exposure changes and regulatory factors,” he added.
In response to changing net retentions in the market, there is a growing emphasis on risk management, specifically regarding natural perils in Asia.
Insurance companies must be prepared to embrace change and invest in building their own technical understanding to manage their portfolios effectively, according to Weatherhead. It is crucial for companies to have an independent view of risk and its influence on portfolio decisions.
“We see a positive trend as insurers enhance their data and underwriting practices to effectively manage risk, giving them a competitive advantage and reducing losses during events,” he said, adding that this trend also leads to more favourable reinsurance conditions.
Guy Carpenter, for example, provides peer benchmarking tools in present and future climates and climate-related financial loss estimates and assists clients in optimising catastrophe responses, assessing impacts and providing them a view of risk to transform data into actionable insights.
‘Unmodelled’ perils
El Niño and La Niña are major influences on weather patterns and natural catastrophe events. From 2020 through early 2024, the APAC region experienced La Niña conditions, which set up the series of flood events in Australia, China, Japan, and Korea. These conditions also influence regions around the world, with insured losses in Asia remaining relatively stable compared to global losses.
“In the last few years, there have been a number of losses in Asia caused by ‘unmodelled perils’, most recently the flood events in Australia and New Zealand. However, the key drivers of loss in the region are still tropical cyclones and earthquakes,” Weatherhead noted.
While it is true that some of these secondary perils are currently not modelled in the larger commercial catastrophe models, this does not mean we cannot form a view of the risk, he said.
“We see a positive trend as insurers enhance their data and underwriting practices to effectively manage risk, giving them a competitive advantage and reducing losses during events.”
Mark Weatherhead, Guy Carpenter
Some of these perils are modelled by smaller specialist providers and brokers. Even when not directly modelled, there is ample scientific data available to assess the risk, whether it be satellite imagery of active wildfires, live data on volcanic activity or scientific publications on peril risk.
“As such, the concept of perils being ‘unmodelled’ is a misnomer,” according to Weatherhead.
The insurance industry should incorporate this data into their risk management process by investing in technology, computing capabilities and data analysis for informed decision-making.
Risk mitigation
Insurers have an important but often underappreciated role to play in building societal climate resilience.
“It has been well established that countries with a higher degree of insurance penetration recover much more quickly when catastrophes occur,” said Weatherhead.
Beyond claim payments, the insurance industry can advocate for improved mitigation measures and collaborate with governments and academic institutions for research funding, shape market dynamics through risk-based pricing and deliver innovative solutions to make insurance affordable for lower socioeconomic classes.
“These efforts not only help provide financial relief in the aftermath of an event, but also educate citizens about the benefits of insurance,” he said.
Beyond underwriting and investment initiatives, insurers can serve as advocates for climate action, leveraging their expertise to influence public discourse on sustainability, says Zurich HK chief executive Eric Hui.
Insurers are playing a pivotal role in fostering the transition to a low-carbon economy through various initiatives, collaborations, and advocacy efforts. As key players in the financial ecosystem, Insurers contribute significantly to sustainability by directing capital towards green projects and mitigating climate-related risks.
Insurers are increasingly investing in green bonds and financing sustainable ventures, thus channeling funds into projects that support environmental goals. For example, major firms collaborate with financial institutions to ensure their investments align with sustainability criteria. By supporting green initiatives, insurers not only enhance their portfolios but also contribute to the overall shift towards a sustainable economy.
“Insurers act as risk managers, providing coverage for climate-related risks, including natural disasters. This support enables the development of new technologies aimed at reducing carbon footprints. Zurich are leading the way by offering specialised coverage for emerging risks such as solar panel installations and electric vehicle (EV) chargers,” according to Eric Hui, Chief Executive Officer of Zurich Insurance (Hong Kong) and chairman of Zurich Insurance (China).
Advocacy and thought leadership
Insurers also serve as advocates for climate action, leveraging their expertise to influence public discourse on sustainability. Through participation in ESG forums and industry panels, they share best practices and promote collective action towards a low-carbon future. Zurich, for instance, has been active in various discussions around climate change, emphasizing the insurance sector’s role in shaping sustainable practices.
Moreover, insurers can foster a culture of sustainability within their organizations. By implementing training programs focused on sustainability and climate risk management, they equip their workforce with the knowledge and skills needed to drive change.
“Initiatives such as the Hong Kong Climate Charter are crucial in establishing a framework for sustainability within the insurance sector,” said Hui.
“This charter outlines climate principles tailored to local needs, promoting transparency and accountability through improved climate disclosure practices. By encouraging collaboration and the exchange of ideas, such initiatives lay the groundwork for a unified approach to achieving a low-carbon economy,” he added.
“Insurers act as risk managers, providing coverage for climate-related risks, including natural disasters. This support enables the development of new technologies aimed at reducing carbon footprints.”
Eric Hui, Zurich
ESG in underwriting
Insurers are increasingly integrating sustainability and ESG factors into their underwriting and investment decisions.
“Underwriters reassess risk appetites by incorporating ESG scores into risk assessments and pricing models. This approach allows for better evaluations of potential clients while encouraging improvements in their ESG performance,” according to Hui.
In investments, insurers employ negative and norms-based screening to exclude non-compliant sectors, ensuring alignment with international standards. This comprehensive analysis of risks and opportunities enables insurers to engage in impact investing, targeting projects that deliver social and environmental benefits. Zurich, for example, has reduced the carbon footprint of its Hong Kong portfolio by 65% since 2019, demonstrating a commitment to sustainable investment practices.
Emerging trends
The APAC reinsurance industry is witnessing significant changes driven by increasing natural catastrophes and emerging risks such as cyber threats and pandemics.
“Insurers are responding to these challenges by developing specialised coverage options for green assets and renewable energy projects, addressing operational risks and regulatory changes,” he said.
Parametric insurance products in particular are gaining traction, offering quicker payouts based on predefined weather events, thus enabling faster recovery and encouraging investment in sustainable practices, according to Hui.
“Furthermore, sustainability-linked insurance products are emerging, incorporating criteria that promote eco-friendly behaviors among policyholders.”
Challenges
Despite these advancements, insurers face several challenges in aligning their practices with sustainability goals. A major hurdle is the lack of quality ESG data, particularly regarding scope 3 emissions from clients.
Additionally, the evolving landscape of climate risks necessitates constant reassessment of risk models to maintain insurability.
“Insurers must navigate shifting sustainability regulations and develop robust performance metrics for reporting which can be resource-intensive,” said Hui.
“Balancing market demands with sustainability objectives poses strategic challenges, as does the risk of being accused of greenwashing. Ultimately, insurers must navigate these complexities to achieve a sustainable and financially viable business model,” he added.
The FWD Group chief digital officer Ryan Kim shares how AI and technology can benefit insurers’ operations and distribution processes.
Data analytics and AI architecture are equally important for insurers’ operations and customer experience, Ryan Kim, group chief digital officer, FWD Group, told InsuranceAsia News (IAN).
“Digital technologies and generative AI are important to enhance the customer experience,” Kim told IAN.
“We started our AI journey in 2019 and began exploring generative AI opportunities in 2022, recognising its great potential for the insurance industry,” he said.
The carrier has recently introduced a generative AI (Gen AI) platform for distribution, agency management, customer support, marketing, and internal operations.
Another recent development by the company is a generative AI assistant and a virtual avatar training bot for the carrier’s agents in the Philippines which the company is planning to scale to other markets.
It is designed “to streamline operations, enhance efficiency and enable agents to provide real-time insight with accurate information to our customers”.
The insurer is also planning to introduce generative AI voice-enabled customer service in specific markets.
“Our extensive testing in this area has yielded positive feedback from multiple stakeholders, reinforcing our commitment to leveraging advanced technologies to enhance our services,” Kim said.
Claims and underwriting
The carrier has launched an AI-driven claims model that allows it to make instant decisions on low-risk claims, cutting down the assessment time from days to under a minute and it has implemented an automated underwriting system supported by advanced AI technologies to streamline and speed up the process.
“By minimising and refining the questions posed to customers, we gather more accurate information. Improved risk assessment capabilities also expedite our underwriting,” Kim said.
One of the most recent examples of how the company applies Gen AI is FWD Cube, an app that integrates the entire agent journey – from recruitment and training to prospecting, sales, and client management – into a unified seller experience.
“Utilising the latest generative AI technologies, FWD Cube provides an innovative training model where digital humans will pose questions of varying difficulty to agents. This allows our agents to gain experience across different scenarios, improving their customer service skills,” Kim explained.
“By minimising and refining the questions posed to customers, we gather more accurate information. Improved risk assessment capabilities also expedite our underwriting.”
Ryan Kim, FWD
Tech partnerships
Another way of improving operations, including underwriting and claims processing, is partnering with tech companies. In February, the carrier announced an extended partnership with Microsoft with a four-year agreement to provide access to the latest generative AI innovations.
FWD plans to apply Gen AI to enhance the customer experience and improve operations in areas including acquisition, marketing, channel, and agent performance, underwriting, claims processing, and customer service.
“This collaboration marries FWD’s pioneering spirit in Asia in some of the fastest growing insurance markets in the world, with the global scale and skill that Microsoft brings in engineering and AI. We’re excited to harness more next-generation innovations to develop new industry standards that we believe will shape the insurance journey of the future.” Kim said.
The carrier also emphasised the importance of extensively using the cloud.
Cloud first
In May, the insurer signed a five-year agreement for technology services with Amazon Web Services (AWS) as part of its cloud-first strategy. The agreement will allow AWS to continue to host core business applications, ranging from finance to customer and insurance agent interfaces. The extended collaboration with AWS will also provide FWD with greater agility, scalability, and resilience.
At the end of 2023, 97% of FWD Group’s applications were migrated to the cloud – up from 27% as of December 31, 2020 – with 93% of applications targeted for retirement decommissioned.
Chelsea Jiang, Axa’s chief technical and innovation officer, general insurance for Greater China, shares her views on parametric, how companies can guard against convective storms, and HK’s role in narrowing China’s protection gap.
Axa has in August debuted in HK a heatwave parametric cover for HK and Macau outdoor workers. The product design involved 150 experts globally. Could you share with us what is the most challenging part in the design of this product?
The technical expertise in climate modelling has been built within Axa over decades, starting with natural catastrophes and in more recent years expanding to 50+ climate change factors with the establishment of Axa Climate. As our global climate is changing every day and unpredictability of weather especially temperature and rainfall become more volatile, our technical and scientific teams need to strive to update our datasets and models constantly.
We are proud to leverage Axa’s technical expertise to provide such purposeful insurance protection like the Heatwave Parametric Insurance in Hong Kong. Whilst the challenge in modelling the projecting future weather patterns will likely remain very steep, we strongly believe in the investment and dedication into these areas will provide better protection for all of our customers.
The HKMA has in December 2023 released a research paper which indicated that global warming can meaningfully lower housing prices (due to more severe typhoons, inundating risks), ultimately posing a risk also to the banking sector due to devaluation of the collateral value of banks’ mortgage loan assets. How are insurers helping to mitigate such risks to properties?
Indeed, the volatility and severity of climate phenomenon due to global warming is creating uncertainty in valuation of physical assets and disruption to everyday operations. We have had feedback from several banking institutions and valuations companies which highlight the importance of taking into consideration climate exposures and risks when conducting their credit and valuation assessments.
In some areas of the world, we can see that certain types of natural disaster insurances are becoming unavailable, such as those for wildfire, flood etc. This is creating uncertainty in other parts of the financial services value-chain.
We believe that clear understanding of risk, then strategic planning for adaption and mitigation actions is the best approach to address these risks. We are here to provide the full suite of services from climate risk assessments, strategic and engineering adaption/mitigation actions recommendations and insurance transfer offerings, to help customers navigate this complex and ever-changing area.
“We believe that clear understanding of risk, then strategic planning for adaption and mitigation actions is the best approach to address secondary perils.”
Chelsea Jiang, AXA
For the first half of 2024 natural catastrophes already caused direct economic loss of CNY93.2 billion (US$12.8 billion) in China. What role can Hong Kong play in helping to reduce the protection gap in China?
Hong Kong’s role as risk management centre of expertise for Greater China is very clear and valuable in this area. With the wealth of knowledge accrued and available in the Hong Kong insurance industry, we are well positioned to provide risk analysis, alternative insurance solutions expertise to the Greater China region.
With the abundance of international insurance and reinsurance capacity available in Hong Kong under a well-regulated capital regime, we are able to help the Greater China region to better manage these catastrophe risks.
Global warming is leading to more severe convective storms which seem to be more severe and last for longer. How is Axa advising corporate clients on how to mitigate such risks posed to their businesses?
We are utilising our key assets in risk engineering, Axa Climate and insurance to provide customers with scientific insights as to their current and future climate exposures. We are able to conduct in-depth climate risk assessments and specifically highlight the risk grading of each peril/factor at an asset level.
In addition to providing clients with a deep understanding on their exposures, we also advise on risk mitigation and adaptation measures with quantifiable costs and results so that clients can prioritize and investment in these improvement areas. From an insurance perspective, we are working with clients on helping them to realise the impacts of these mitigation and adaption actions in their insurance programs through specifically designed insurance coverage and benefits.