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The Geneva Association - Life and health insurance consumption in China: Demographic and environmental risks

Source: Asia Insurance Review | Mar 2019

China, the largest emerging economy and the fourth biggest life insurance market in the world, has seen rapid growth over the past 10 years. The Geneva Association published an article by professor Jiang Cheng from Lingnan University in Hong Kong and professor Lu Yu from Shanghai University, exploring the socioeconomic and demographic reasons behind the massive demand for life insurance.
Our study investigates life and health (L&H) insurance consumption by exploiting the significant regional differences in socioeconomic, demographic and environmental factors in China. We have also broken L&H insurance consumption into three types: Protection, investment, and health products. 
We find that changes in demographic conditions associated with the one-child policy, the urbanisation process, an ageing population and imbalanced dependency ratio are significantly related to the consumption of L&H insurance, and environmental degradation risk is significantly related to the consumption of health insurance. The empirical results also suggest that insurers’ characteristics and pricing strategies are additional important determinants of L&H insurance consumption.
We focus on this single economy for four reasons. First, China is the largest emerging economy, experiencing rapid growth since enacting market liberalisation policies in the late 1970s. On average, the annual real GDP growth rate was around 10% over the past decade according to World Bank statistics. 
Impressive growth
China also led the world in terms of insurance premium growth from 2000 to 2010 with a compound annual growth rate of close to 20%. China is now the world’s fourth biggest life insurance market, accounting for 6% of the world’s premium volume and more than one third of the emerging markets’ premiums.
The average growth rates are 2.9%, 18.7% and 16.9% for protection-, investment- and health-type insurance respectively. Note that these three types of L&H insurance show different patterns of growth: protection-type insurance shows comparatively stable growth, unaffected by the economic cycle, whereas the growth of investment-type and health-type products fluctuates dramatically over this period. 
Double-digit increases in health-type premiums indicate that commercial insurance has been a significant way to hedge against health risk over time. Despite the fact that China has become one of the most important insurance markets in the world, there are few papers that study the life insurance market in China exclusively.
Understanding the variables
Analysing the mean, median and related statistics for the macroeconomic variables, results indicate that the most popular L&H insurance is investment-type products, followed by protection-type products. Results not tabulated show that all three types of L&H insurance grew significantly during our sample period from 2005 to 2013. The annual compound growth rates for protection-, investment- and health-type insurance are 2.65%, 17.25% and 16.25%, respectively. 
Double-digit increases in health-type premiums indicate that commercial insurance has been a major way to hedge against health risk even though the government expenditure on social welfare has increased over time. The mean of government expenditure on healthcare per capita is CNY371 ($54.77) (value before taking logarithm). There is also significant variance in demographic, environmental risk and socio-economic variables. The highest urbanisation rate is 85%, while the lowest is only 30%. The proportion of the population with a college degree or above ranges from 16% at the high end of the scale to 3% at the low end.
Our results also contain the statistics for the firm-characteristic variables. Approximately 23% of the sample consists of insurers with some foreign ownership. Roughly 18% of the observations are publicly-traded insurers. Expense ratios vary significantly from 563% to 10% among firm-province year observations. 
These statistics are not surprising in the emerging Chinese market as during our sample period many new insurers are expanding their business and spending a significant amount on marketing, striving to attract customers away from existing insurers.
Demographics affect demand
The results indicate that changes in demographic conditions significantly affect L&H insurance demand. As birth rates decrease, falling below the replacement rates due to the one-child policy, the ageing population in China is increasing both absolutely and proportionally. This significantly increases the demand for commercial L&H insurance to address this problem and the associated social challenges. At the same time, the accelerating urbanisation process is positively related to L&H insurance consumption.
Environmental risk is found to be significantly related to L&H insurance consumption, especially for health-type products. Furthermore, the results suggest that insurers have a competitive advantage in health-type L&H insurance if they are larger, more long-standing, possess better investment ability or if they are publicly traded. We also find some evidence that price is negatively related to L&H insurance consumption. 
Overall, the results indicate that the insurers’ characteristics and price are additional important determinants of L&H insurance consumption, in addition to the demographic and socio-economic factors used in previous literature.
More detailed analysis
Our results on the relationship between education and life expectancy at birth and L&H insurance also challenge the literature that uses total insurance consumption instead of decomposing insurance into three distinct types of products. As different types of L&H insurance products are designed to hedge against different risks, treating all insurance products in the same way blurs the economic incentives of demand for varying consumers, potentially leading to biased results. 
Note that our results are based on empirical results for China and may not be readily applied to other countries. Thus, our evidence of the role of education on life insurance calls for further research on this issue using data from alternative countries.
Ageing risk a great opportunity for industry
These results are important because economic security for the elderly has become a social and political risk in China. As extended families and other traditional methods of supporting the elderly are weakening, China is facing challenges. There is uncertainty regarding future life expectancy, the cost of satisfying the needs of an increasingly elderly population, whether the economy will keep growing to provide support for the social security system, and, to some extent, how the birth rate will react to the relaxed one-child policy initiated in 2013. 
The high enrolment in tertiary education over the last few decades has increased the human capital that needs to be protected as well as the awareness of risk management. Overall, although the ageing Chinese population and a worsening pollution problem provide challenges to society, they also present great opportunities for the life insurance industry.
The current trend towards investment deregulation and product innovation in China is increasing the overall revenues of life insurance companies as well as the supply of capital. This provides insurance companies with the ability to answer potential demand. The research results suggest that insurance companies should improve their company reputation and financial strength. 
As consumers become more educated and possess more sophisticated financial knowledge, insurance companies should also innovate more suitable products to target customers and improve their marketing strategy, for example through the online sale of insurance products. A 
Professor Jiang Cheng is from the department of finance and insurance at Lingnan University, Tuen Mun, Hong Kong. Professor Lu Yu is from the school of finance, Shanghai University of Finance and Economics, Shanghai, China. 
The Geneva Association
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