Stakeholder engagement key to narrowing protection gap: Peak Re’s Hahn
September 26 2024 by Georgina Lee
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.
“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
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.
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.
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