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Insurance Markets

China: Weaker economic growth – But the insurance market is booming

Even with economic growth in China slowing further, the outlook for the insurance sector remains excellent. Pent-up demand and the structural transformation to a service economy are likely to revitalise the finance sector in the longer term. The insurance industry in China is thus forecast to grow at twice the rate of the economy as a whole until 2020: on average, a low double-digit annual growth rate is anticipated when adjusted for inflation.

In global terms, growth in China’s gross domestic product (GDP) was still considerable in 2016 at 6.7% when adjusted for inflation. But the signs of a slow-down are unmistakable. Annual growth has fallen from an average 11.3% in 2006–2010 to 7.9% in 2011–2015. By 2020, we expect a further decline in annual real GDP growth rates to around 5.5%.

Alongside the factors of labour and capital, overall productivity plays a key role in conventional analysis of the causes of growth. For the period 2000–2010, it is apparent that growth was attributable in roughly equal parts to investment in fixed assets (e.g. infrastructure and machinery) and to productivity improvements. The increase in the number of working hours played only a minor role (see Fig. 1).

After 2010 however, the contribution of productivity fell significantly. Further growth by way of investment is not a permanent solution. On the contrary: if the investment is primarily financed by debt, the risk of a credit bubble bursting is exacerbated. There have been warnings against this for many years. Instead, given the stagnating working-age population, stronger productivity dynamics are what would be needed to revive growth. In this respect, China seems to face similar problems to many other industrial countries, where productivity growth has also fallen in recent years. But China has a good chance of catching up: productivity per employee is still only at about 20% of the level in the USA.

© Oxford Economics / Haver Analytics
Fig. 1: Sources of Chinese economic growth (Average annual growth in %)

Structural change underlies the slowing of growth in the economy. Thus, the services sector increased its share in economic activity from 41% to 48% between 2005 and 2016, while that of the industrial sector (manufacturing industry, mining and construction) sank from 47% to 43% (see Fig. 2).

© IHS
Fig. 2: Sector share of Chinese GDP in %

Within the services sector, finance grew particularly strongly with value creation moving up approx. 11% per year on average from 2012 to 2016. Further structural change towards a knowledge- or ideas-based economy is being pursued not only in the IT, communication, pharmaceutical and banking sectors, but is also being influenced to a great extent by the insurance industry. China offers considerable catch-up potential. The insurance penetration rate (defined as premium volume as a percentage of GDP) of 4,2% (forecast for 2016) is far below the global average (ca. 6,2%). The Thirteenth Five-Year Plan published by the Chinese government in 2016 anticipates that the services sector’s share of GDP will increase to 56% by 2020. The Plan anticipates a premium target of CNY 4.5 trillion for the insurance sector, and market penetration of 5%.

On the basis of our forecast models, we also expect a significant increase in insurance penetration (see Tab. 1). Whilst average economic growth until 2020 is set to come in at just under 6%, for the insurance sector we predict average growth of almost 12% when adjusted for inflation (see Tab. 2). Experience has shown that people in countries with relatively low but rapidly increasing wealth by global comparison have a disproportionately increasing demand for insurance provision, e.g. for property covers or health costs. In addition, developing insurance markets like China are predestined to benefit from digitalisation. New distribution channels and business models are evolving, along with innovations in product development and claims handling. Newcomers in emerging markets can exploit these opportunities at an earlier stage than established insurers in mature markets.

© Source: Munich Re Economic Research
Tab. 1: Insurance penetration 2016 (estimate) and forecast for 2020 in China
© Source: Munich Re Economic Research
Tab. 2: GDP and insurance sector growth in China

The success of the government’s new Five-Year Plan is particularly dependent upon life insurance, where premium volume is approx. 1.5 times greater than in property-casualty and health insurance combined. In the light of the need to make provisions for old age, and the popularity of life insurance products for savings purposes, there is good reason to expect that the coming years will see extremely dynamic growth. 

A further key requirement for the Plan’s timely fulfilment is the absence of a collapse in Chinese economic growth, e.g. triggered by a financial crisis owing to the extremely high levels of debt. Even if this risk scenario eventuates, we do not foresee the positive insurance-market development outlined here falling by the wayside; it would merely be delayed by several years.

Global Trending P&C 2016

© Munich Re Economic Research
P&C insurance penetration (P&C premiums as a share of GDP in percent) and income per head (measured as gross national income per head in US$ adjusted for purchasing power) for selected countries in 2016 (estimate) and for China from 1996 up to 2020 (estimates and forecasts from 2016 on) The Global Trendline P&C is based on the relationship between P&C insurance penetration and income per head for more than 100 countries in the past 15 years. The forecast for China takes Chinas's 2016 P&C insurance penetration as a starting point and projects a development with the slope of the Global Trendline according to the expected increase in income per head (i.e. no move towards trendline expected).
Munich Re Experts
Benedikt Rauch
Economist at Munich Re
Michael Menhart
Chief Economist at Munich Re
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