Property insurance in China
We would like to make a presentation of property insurance for corporate available in China.
First of all, let us present briefly the property and casualty Chinese insurance market.
According to Sigma (04/2022), the total premium volume of the Chinese insurance market for 2021 is about CNY 4,490bn. It’s the 2nd largest market in the world. According to the statistic of the Chinese Banking and Insurance Regulatory Commission, in 2021 the total premium and property insurance represents only 4 % of the total premium volume of the property and casualty insurance market (representing 26 % of the total premium volume). If we compare this to the European market, it’s a relatively small share, as in Europe property insurance accounts for about 27% of the total premium volume collected in 2020, regarding property and casualty insurance (https://www.insuranceeurope.eu/statistics).
In terms of players, the biggest ones are the three biggest local insurers in China with a combined share of about 75 % of the property and casualty insurance market: People Insurance of China (PICC, 38.5 %), China Pacific Insurance (CPIC, 13%) and Pingan (23 %). The biggest foreign insurer is Huatai (Chubb) with a market share of about 6.3 %.
Although property insurance represents a tiny share of property and casualty business, it remains a must for all companies operating in China to protect their physical assets.
The main form of coverage is property all risks. Named perils policy is not so common here. The policy wording is pretty much standard. Our comments are based on the policy of the 3 mains players (PICC, CPIC and Pingan).
The policy is structured with a main wording and extension clauses to carve back some exclusions or improving the conditions of indemnification in case of claim.
The definition of the scope of coverage is: “the Insurer shall indemnify the Insured for direct physical loss of or damage to the property insured caused by any Natural Hazard or Accident …”.
Apart standard exclusions that can be found everywhere in the world, there are few exclusions that must be carved back.
First of all, theft, burglary and electrical damage, machinery breakdown can be covered under property policy. Risks associated to supply disruption of electricity or gas can be covered, too. Companies producing, trading foods or any kind of goods to be kept under low temperature should have this extension in their policy, as power outage often occurs in China, especially in summer when the consumption of electricity is at its peak due to the extensive use of air conditioning. Machinery breakdown can be covered under a separate policy. The scope of cover is the same as the one of the extension clause of property all risks policy. Some insurers offer a stand-alone machinery breakdown if the values of equipment, machine to be covered are significant so they can get a better control of the risk.
We’ve seen in many cases, when there is a machinery breakdown policy in place, the equipment, machineries covered under this policy are not included in the property all risks. Therefore, they are not covered for damages caused by fire, natural perils, etc…
Out of “Natural Hazard”, earthquake is the only exclusion listed under the main general wording. It can carve back with the relevant extension clause. Some of it may request that the premises covered are built according to regulation about the quality construction against seismic activities. Regarding property covered, the main excluded properties are valuable property goods such as gold, works of art, etc.., mobile communication devices, construction and erection works. All these kinds of property can be covered with the relevant extension clauses.
The sum insured might be determined by different ways such as reinstatement value, book value, market value or any other method agreed by insured and insurer.
The policy wording regarding the declaration of the sum insured, leads to some issues.
First of all, if we use “book value”, this definition is vague, as it refers to value reported in the financial account of the company. There is no precise definition if it refers to “original purchase price” or the value net of depreciation (after accounting amortization). It’s a source of underinsurance, as sometimes insureds may use the net value of depreciation.
If we use the “reinstatement value”, although there is a definition of it which is “the replacement, rebuilding, repair or restoration of the insured property”, this may also lead to underinsurance, as it’s usually based on the original purchase price. There is inflation in China due to many factors such as the fluctuation of the price of raw materials (which occurs everywhere in the world), increase in labor costs the country has experienced over a long period of time. Moreover, equipment built up 10 or 15 years ago, may cost more today. The transportation costs might also be a source of increase in costs, too. There is no mechanism in the property all risks policy to take into account inflation that occurs year by year.
The more accurate way to determine the replacement value is to do a valuation of the property that has to be carried out by companies specialized in valuation services. At this stage and due to the development of the Chinese market with respect to these kind of services, it’s better to appoint international valuers. Some of them even offer online valuation – which is pretty convenient in times of travel restrictions.
The valuation of the insured value is something to take into consideration, as in many cases, in case of a loss – especially total loss – there is often underinsurance and the rule of average applies.
In conclusion, we would like to say a few words about loss settlement. As soon as a loss occurs, apart from providing supporting materials about the ownership and value of the property damaged, the insured – depending on the nature of the accident – has to provide proof it occurred such as notification from weather bureau if it’s a natural event such as typhoon, hail, etc. In case of fire, the insured has the duty to report it to the local authority. This is not done every time especially if it’s a minor event or sometimes companies are not keen on reporting it to avoid further checking from the authorities. Fire is considered as a criminal act, triggering a police investigation. There is always a risk of being fined or in trouble if the police rises some safety issues. Moreover, they may close the site for a few months to find out the cause of the accident, so it may lead to disruption of activity.