With China’s rapid economic development, the country has seen a large number of corporations settling in and thus bringing a considerable amount of new assets. Whether it be domestic companies growing or foreign companies coming to China seeking new means of production or simply to sell to the ever-growing Chinese consumer market, all kind of businesses have flourished in China over the last few decades, creating a vast amount of new corporate property in the process. The construction of new assets, heavily incentivized by the Chinese government, has been a driver of the Chinese construction industry, but also the burgeoning insurance industry, that has soared over the 2000’s. In this article, we will talk about the necessity and risks related to insurance valuation for companies’ assets in the Chinese market.

What exactly is insurance valuation?

Asset valuation, also known as asset appraisal, is a process of determining the true value of an asset. It is often used in finances to evaluate the value of a business by giving an estimate of all its tangible and intangible assets. For business insurance purposes, asset valuation allows to get an appraisal of the true replacement value of a piece of property and thus insure it accordingly so that the insurance company can indemnify the proper amount in case of a loss.

There are two common risks tied to faulty insurance valuation in China:

• The asset is insured on its’ net book value: A common practice is to insure an asset at the price it cost to the company. Although the premiums will be relatively low, the sum indemnified is bound to be significantly insufficient to cover losses caused by a natural disaster for example. The reason why is because assets’ net book value is lower than their actual replacement cost because of various factors like inflation, resources costs fluctuation and building costs.
• The asset is insured on its’ financial appraisal value: Financial estimates tend to take into account market potential and speculation, which are valuable indices for market valuation but are unnecessary for insurance purposes as they are not included in the replacement cost of the asset. Thus, using financial appraisal of an asset for insurance leads companies to pay unnecessarily high premiums as the asset would be overvalued compared to its’ actual replacement cost.

Why is it important to do insurance valuation in China on a regular basis?

We recommend companies to do a yearly appraisal for their assets when it is time to renew their insurance policies. The reason behind this is because assets’ value is not set in stone and can fluctuate depending on various key factors. Market inflation and fluctuation can cause equipment being replaced by costlier alternatives and make the value of assets naturally higher over time. In China particularly, government subsidies can significantly lower the value of asset when they are built to lure in new businesses, but these subsidies rarely expend to replacement costs, meaning that buildings will be way cheaper to build than to replace or even repair. Insurance companies can also ask themselves for a new appraisal, especially since the China Banking and Insurance Regulation Committee (CBIRC) has passed a law in January 2021 asking for tighter control on property insurance by insurance companies. Finally, land value and resource prices in China tend to go up as the country develops and new infrastructure is built, and government indices are not always up to date on the price of things, which can lead to painful surprises if an asset needs to be replaced unexpectedly.

How to get insurance valuation in China?

Some large groups have the resources to do the appraisal themselves, although most of the time the policyholder or the insurer will use the services of a third -party company that is specialized in asset appraisal. Because China’s financial and insurance industries are still comparatively young compared with other developed countries, there are not many domestic companies specialized in insurance appraisal, but most large international accounting firms like John Foord and Deloitte are operating in China. Businesses also can ask help from their insurance broker, who can help them get in touch with domestic appraisers and connect them with the business’ insurance company.

You can consult our full report on insurance valuation in China made in collaboration with Daxue Consulting below.

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