Critical illness insurance in China

China's commercial health insurance market has grown rapidly since the launch in 2009 of a new phase of reforms to the medical care system, including the establishment of a well-funded social medical insurance scheme. In 2020, total health insurance premiums came to nearly CNY 930 billion (USD 135 billion), representing a 28% compound annual growth rate. Critical illness (CI) insurance accounted for almost half (47%) of this, with premiums of CNY 435 billion (USD 63 billion) in 2020, making CI a core pillar of the health insurance market.

However since 2019, a mix of factors have combined to challenge the sustainability of CI products and insurers, including slowing economic and income growth, a reduction in the number of sales agents, slowing demand from existing customer groups and a spill-over effect from surging growth in online medical insurance products, including the government-backed inclusive product 'Huimin Bao', – further accelerated by COVID-19.

This research (in Chinese only) summarises the key drivers of the development of CI insurance in China in the past decade, highlights the core structural challenges facing this line of business, and proposes recommendations for industry stakeholders from a holistic risk management perspective to achieve a sustainable business model. The findings are based on a wide-ranging consumer survey on critical illness insurance in China, interview-based feedback from a number of distribution channels, and views exchanged with executives of local primary insurers, as well as public market information.

Our research finds that critical illness insurers in China are facing a set of long-term adverse trends that challenge the sustainability of the business model. For example, the incidence of critical illnesses is unpredictable, and the complexity of the products is making CI business operations and risk management increasingly difficult. More insurers are also experiencing worsening claims trends, partly as advances in medical technology detect CI at earlier stages. The long-term decline in interest rates is also negatively impacting their asset-liability management.

At the market level, too, structural issues hamper the sustainable development of the CI insurance market. These include insufficient health protection for society overall; uneven protection across different segments of consumers; strong similarity between CI products and synchronisation in product innovation with little diversification in features.The business portfolios of most life insurers are highly dependent on CI insurance, which has contributed considerable profit in the past, so the slowdown of in CI insurance growth will likely cause a decline in long-term underwriting profitability.

Looking forward, we expect China's health insurance market to become increasingly diversified, and CI insurance to remain the backbone of the health market. Growth in CI insurance will likely come from market segments that are not yet well-covered, and insurers' adoption of more differentiated product features and innovation that broaden their risk liabilities.

We offer the following recommendations for life insurers to put the CI insurance market on a sustainable footing:

• Broaden CI ownership through products tailored more to the needs of customer groups such as women, children, the elderly, young people starting their first jobs, or low-income groups.
• Promote "light" CI insurance products that offer lower average premiums and shorter terms, to attract a wider consumer base.
• Strengthen risk research on critical illnesses and enhance risk management capabilities, to promote a multi-layered market structure that offers insurance coverage for a wider range of illnesses.
• Put in place a long-term strategic development plan designed to create a competitive advantage by offering a clearly differentiated value proposition. Promote the development of CI business from being a passive insurance payer to taking an active role in risk and health management.
• Continuously refine the liability structure and improve matching of asset-liability duration, to strengthen the balance sheet against low interest rate risks.
• Maximise the benefit of new insurance technologies for business innovation, for example by expanding the use of online applications and channels.