Expanding insurance protection for China's urban residents
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China's residential housing is under-insured
Home ownership accounted for almost 70% of the CNY 3.2 million average value of urban household assets in China in 2019, according to a recent consumer survey by the central bank. Property is consequently an important contributor to financial security for Chinese urban residents, and protecting residential property from value impairment, for example from natural catastrophes, is paramount to enhancing financial resilience. However, residential insurance 1 penetration and growth rates in China are low. Premium income stood at CNY 9.1 billion in 2019, less than 20% of all property insurance, 0.7% of all P&C premium income, and only 0.01% of China's GDP, far below the average for other major global economies.
Residential insurance is not a mortgage requirement
In many other countries, banks typically require compulsory residential insurance as a condition of mortgage lending for risk management purposes. This indirectly promotes residential insurance and reduces the catastrophic protection gap. China could also increase insurance penetration and strengthen homeowners' financial resilience, while reducing risk for banks, by incorporating residential insurance into the mortgage process in the same way. Regulatory support would be indispensable to regulate both banks' and insurers' behaviour and increase consumer confidence in residential insurance.
Leveraging the special maintenance fund could reduce the protection gap
Condominiums and apartments make up the majority of China's housing, but most buildings have no condo/strata insurance, creating potential devaluation if facilities are not well-managed. Homeowners contribute to a residential special maintenance fund (SMF) that has a similar function to strata insurance, but it is complex to apply for and consequently under-used. The total SMF for 660 cities reached CNY 1 trillion in 2019 but utilisation rates range from 0.2%-1.6% due to its complexity. Insurers can play a critical role in increasing protection for property owners by working with the public sector and property companies to leverage the SMF. A Swiss Re Institute consumer survey 2 found urban residents very open to the idea of transforming part of the SMF into residential insurance to manage and protect buildings. Respondents believed this would materially improve their properties and significantly increase the SMF utilisation rate.
Two paths to promote insurance solutions in China
We combine international best practice with the insights from our consumer surveys and case studies to propose two insurance solutions to cover Chinese residential property owners' and tenants' risk exposure. These are to leverage risk management practices adopted by banks on residential mortgages or introduce an insurance mechanism into the SMF. We believe these would reduce banks' natural catastrophe exposure associated with mortgage lending; shorten the SMF application process and improve the fund's efficiency and utilisation rate; and leverage insurers' risk management and asset management expertise to manage properties more effectively.
Structure of the report
Our report starts with an overview of China's household types, loss events and insurance provision. The second chapter discusses case studies of residential insurance and the role of banks in its promotion in developed markets. The following chapters analyse two potential routes to increase residential insurance penetration in China and offer recommendations on expanding insurance protection for owners and tenants of China's growing urban housing market.
This study is available in Chinese only.
1. Residential insurance includes contents insurance (mainly referred to as traditional home insurance) and building/strata insurance, which covers shared areas and common facilities in residential communities. This second product is a new insurance in China, where housing is typically a condo/apartment that has to date lacked insurance protection.
2. Conducted in May 2020 by SRI and China's Property Team, with response from 577 owners of apartments living in tier 1 and tier 2 cities in China.