Scope for shared learning in Non-life Insurance: India & China

I had the pleasure of presenting a paper titled “Adapting long-tail pricing models: Scope for shared learning – India & China” recently at the 2014 China International Conference on Insurance and Risk Management (CICIRM), in Shenzhen, Guangdong province, adjoining the Hong Kong SAR. A city that late patriarch Chairman Deng Xiao Ping wanted to mirror Hong Kong. Mirrored it has in terms of high rises, elegant highways, golf courses and what have you.

The conference venue Ping An School of Financial Service itself located on the edge of a golf course, is in close proximity to Mission Hills the world’s largest golf club with a dozen courses. The School is one of the 50 small and large campuses across China, owned by Ping An Insurance Company. The insurer is currently building what is supposedly world’s second tallest structure, the Ping An Tower.

Metaphorically Shenzhen’s aerial graph is representative of Chinese insurance business. From late eighties or even early nineties when the Chinese life market was virtually non-existent and non-life had just begun to warm up, it is today a USD 100 billion market with Auto class exceeding 70%. Some analysts believe it will double by 2020. Nowhere in the history of civilised world has the non-life segment grown at such pace. This makes China almost ten times larger than India. Their non-life portfolio mind you does not include the Health segment.

Unique challenges:

Despite significant differences, China and India have many underlying similarities. The character and circumstances particularly in the long-tail class create opportunities for collaboration. There are also interesting possibilities in the voluminous process driven short-tailed classes.

Long-tail liability class poses unique challenges in any jurisdiction where new products are adapted for the first time. Generally most non-life insurance contracts are for one year. But not all are alike. One where an injury or other harm takes time to become known and a claim may be separated from the circumstances that caused it by as many years fall in the long-tail class. Claims can be presented to the insurance company a long time after the occurrence of the trigger event.

The key issue to such a class relates to an appropriate pricing. With no past experience on frequency and severity of claims, in this class, the pricing models have to be adapted from overseas environment from where these products are transplanted. As tort raises its head in adapted markets, pricing adequacy will be tested in such places. In the meantime, what do markets do to ensure there are no rude shocks-in-making. Particularly when pricing pressures in the short-tail classes tend to have a rub-on effect on the longer-tailed. In wake of the de-tariffication we are witnessing some serious pricing reductions in the short tail classes year on year, which are not sustainable and harmful for all stakeholders in the long run.

The big question, therefore, is whether the long-tail class pricing is aligned to the market conditions? The obvious answer is no. So what may happen if this is not the case. Well, there could be several scenarios:

• Pricing assumptions may relate to overseas markets (say product liability or errors & omission) and the book for such markets grows.
• Book for domestic markets may grow and so could the risk factors and thereby the multipliers applicable in home markets of these rating assumptions may outlive their utility. About three decades ago, for example, Hong Kong was in the midst of one such debate. The erstwhile British colony virtually rebelled to the proposition of applying the UK multipliers when considering settlement of bodily injury claims. The logic was simple. Hong Kong’s per capita income, inflation and longevity of its people was way above those in the UK. This eventually led to the case for capping the unlimited bodily injury cover as the claims started spiralling.

The introduction of tort law in China since 2010 and the implications of the Indian Companies Act 2013 transform the two playfields across all liability classes be it Motor Third Party; Medical Malpractice, Directors and Officers and the whole range of Professional Indemnity space.

In the long run it is the domestic transformations that need to be watched more closely. An analogy may be drawn with manufacturing cycles of the Far East markets which started as export hubs but steadily became markets for their own wares. China will be no exception as the internal consumption rises. Likewise, the back office capital of the world – India, is beginning to plug into the needs of its domestic market. Such changes will create far larger risk environments at home. The triggers will generally sit inside and not outside these economies and societies. Some of them may very well be in place and shall manifest in a matter of time. In the meantime have the covers been adequately priced to pay for the future claims, is the key concern.

It is indeed very impressive to see the number of non-life actuaries qualifying and also the number of young Chinese pursuing doctoral programmes in insurance. We have surely a lot to learn and imbibe if we need to bring in some brain power in the evolving complexities and scale of this new class of risk in our economy and society. A collaborative effort can only strengthen the outcome for both countries.

Till about the late eighties and early nineties the Indian insurance market was largely a corporate commercial book. The retail class began to take off on the back of increased demand well after the arrival of health insurance (primarily in the form of ‘Mediclaim’) and only when the auto boom picked up. The relative size of the latter also received a boost after the meltdown of the tariff classes. China on the contrary took off thanks to its own auto zoom. It produces in one month what we do in twelve. It may very well happen that in this huge build-up of the retail segments, the complexities of long tail related to the corporate and commercial classes may not receive adequate attention by either of us. Particularly when both the markets are predominantly obsessed with profits post investment returns rather than an underwriting profit.

Conclusion:

Perhaps the biggest dissimilarity between our two markets arises from the transaction language. The Chinese virtually use no English. This could provide some interesting opportunities. Our obsession with English is almost like turning a blind eye to non-English possibilities. Imagine what size could open up if we were to unlock the potential backup to the Chinese BFSI opportunity. Firstly, in Chinese (primarily Mandarin) and maybe in the long-run by supporting their aspiration to switch to English. There is a plenty of room to collaborate not so much in the form of Chinese insurers investing in our insurance business but primarily in knowledge sharing; managing big data and analytics. High time we look at the big neighbour face to face rather than the current back to back stance and proactively deal with a liability situation that could collectively become larger than the existing in the US. It is after all about a win-win for two of the world’s three largest economies.