Product liability insurance in China: what it covers and why is it important?

Product liability insurance is a type of insurance that covers damages dealt to third parties by a defective product. While such type of insurance is not mandatory for manufacturers and retailers based in China, it is highly recommended by the authorities and sometimes required by some international retailers such as Amazon. As Chinese laws concerning consumers rights and manufacturers liability have developed in recent years, the need for product liability insurance in China has been increasingly felt by manufacturers and retailers alike. Potentially dangerous defects are often found in products after they have been commercialized. In China, the motor industry is the industry conducing the most product recalls with 6.8 million vehicles recalled in 2020. Despite these preventive recalls, the number of legal disputes related to product liability has been on the rise in China in recent years thanks to the mounting legal awareness of Chinese customers. 

The motor industry has the most product recalls in China.
Source: China’s State Administration for Market Regulation. The motor industry has the most product recalls in China.

What is covered by product liability insurance in China?

Product liability insurance covers all fees that are related to damages dealt to third parties caused by a defective product. This includes all kind of compensations for injuries, deaths and for property damages but also covers arbitration and litigations costs. In serious cases, especially if public health is at stake, punitive sanctions can be applied by the authorities and can be covered to some extent by the insurance. Each contract is made ad hoc, and both premiums and coverage range will greatly vary depending on the nature of the product insured and the safety credence of its’ manufacturer. Product liability insurance does not cover costs related to product recalls, which are subject to another type of insurance policy that is often offered as a complementary product. Product liability insurance covers both the manufacturer and the retailer of the product insured as they are both responsible for defective products sold to the public.

Product liability insurance does not cover fees generated by product recalls.
Source: AIG, Ping An. Product liability insurance does not cover fees generated by product recalls.

The liability insurance market is developing in China

Insurance penetration in China has historically been relatively low across all field of insurance policies. It is only in recent years, accompanying China’s economic development, that the Chinese business insurance market has really taken off with businesses’ ever-growing insurance needs and insurers providing more complex products. As the extent of coverage and underwriting methods have significantly improved, so did Chinese insurance companies’ profits. In 2019, liability insurance premium benefits reached an all time high of 75.3 billion RMB with a year-on-year growth rate of 5.8%.

The market is dominated by China’s three largest non-life insurers, PICC, CPIC and Ping An, which benefit from a competitive advantage thanks to their well established brand name, vast network of underwriters, wide range of insurance products, and significant funding capacity. This oligopoly can be seen across all fields of non-life insurance in China, excluding insurance tied to specific sectors such as the agriculture insurance industry. Product liability insurance in China represented 11.3% of the liability insurance market in 2018, sitting behind general liability and employee liability as the largest liability insurance line of business in China.

The Chinese liability insurance market is dominated by the country’s three largest insurers
Image: Foresight Economist. The Chinese liability insurance market is dominated by the country’s three largest insurers.

New regulations have made both manufacturers and retailers more accountable

China has had a long history of public safety concerns caused by defective commercialized product. One of the most infamous of them was the Sanlu milk powder scandal, which involved baby formula containing harmful chemicals. The incident, on top of creating deep-rooted mistrust from Chinese consumers towards domestic manufacturers, has prompted a series of reforms in the food industry in China to hold manufacturers and retailers accountable for distributing potentially harmful products. Other incidents combined with a push from Chinese consumers for more legal representation have contributed to a tightening of regulations in China concerning product safety.

Among the most regulated industries in China, we can find food, toys, medical devices, pharmaceuticals, and motor vehicles. In an effort to gain consumers’ trust, some domestic companies have advertised their partnerships with insurance companies regarding product liability insurance to show the public that their products are safe. It is the case of Huayi Lighting that advertises a 4-year partnership with major Chinese insurer PICC.

What to learn from the product liability insurance market in China?

  • Product liability insurance covers retailers and manufacturers in the event of one of their products would cause harm to a third party because of a defect. Product liability insurance does not cover costs associated to product recalls, which are covered by a different kind of insurance.
  • As insurance penetration is improving in China, businesses have increasingly subscribed to liability insurance policies, making the Chinese liability insurance market grow extensively. The market is dominated by a handful of large insurance companies maintaining an oligopoly with their competitive advantages provided by their well establish brand, large funds and senior expertise.
  • With heightened regulations about quality standards and corporate accountability for defective products, there is mounting incentives for businesses to subscribe to product liability insurance in China. This is reinforced by consumers’ mistrust for domestic products in some industries, pushing Chinese companies to partner up with insurers as a guarantee of quality.

Contact Asian-Risks to learn more about product liability insurance in China.

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