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Insurance to play role in pension, healthcare reforms
By Sam Evans |
March 7, 2012, Wednesday
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Print Edition
Print Edition
Two critical components of the government's ongoing reform of the economy relate to the pension and healthcare sectors. Insurance will play a critical role in the development of both.
The Chinese government faces significant challenges but has established the necessary building blocks to drive reforms. For the pension sector, the government has adopted a "three pillar" approach in accordance with the World Bank framework: Pillar 1 - social security provided by the state; Pillar 2 - a supplemental pension system provided by employers; Pillar 3 - personal savings provided privately, often in the form of life insurance policies.
The ageing population and overall costs of funding pose challenges. Pension assets in China are estimated to represent between 6 percent and 7 percent of gross domestic product, compared with over 100 percent in certain developed economies such as the United States, the UK and Switzerland.
There are also a number of structural challenges, including, for the first pillar, poor governance, low investment returns and investment restrictions. Pillar 2 has limited distribution and therefore focuses almost exclusively on state-owned enterprises. Limited tax incentives and investment restrictions also exist.
As for Pillar 3, a common form of personal saving is through life insurance policies. However, there is a bias towards single-premium products that are not necessarily suited to long-term pension purposes.
Long-term protection
Further reform is therefore required to stimulate the market, including the tax reform to encourage greater participation, expanding access to the employer pension system for smaller businesses, lifting investment restrictions and supporting investors in their investment choices.
From the perspective of the insurance industry, KPMG expects the insurance regulator to support the development of long-term protection products. One of the key concerns for the regulator has been whether current insurance products are suited to the needs of the consumer. We expect to see the industry being encouraged to develop longer-term solutions for consumers.
The insurance industry is also responding with product reforms. Insurers are looking at ways to meet the longer-term needs of consumers, for example, by trialing variable annuity products. This is a policy whereby the investor makes a lump-sum payment or series of payments, and the insurer makes periodic payments beginning immediately or at some future date, based on a range of investment options.
The healthcare system is another fundamental building block in establishing a safety net for the population. The current Five-Year Plan includes some significant reforms related to providing basic healthcare for both urban and rural populations and to improving the healthcare infrastructure and network. The ultimate aim is to provide equal access to public healthcare for all citizens by 2020. The government is also promoting a comprehensive medical insurance system, with improved accessibility and reduced cost.
Again, the insurance industry will play a key part in the overall solution, with private providers serving the needs of the growing middle class and continued development of company-led plans.
In a recent survey of 1,220 people, we discovered that the key reasons people buy insurance include continued access to healthcare services, access to better healthcare services and lack of a pension. The most popular insurance products, the survey found, are accident insurance and critical illness. Interestingly, the fifth and sixth most popular products were medical outpatient, and hospital and surgical expenses.
Critical juncture
There appears to be scope to improve the level of coverage, with nearly half of survey respondents dissatisfied with their hospital and surgical expense coverage, which may reflect relatively high out-of-pocket expenses.
China stands at a critical juncture in a transition of its economy away from an export- and investment-led model to a consumer-driven society. This is partially dependent on providing a safety net for the population so people feel comfortable enough to spend. Essential to that safety net is a functioning pension system providing adequate income in retirement and an accessible, reliable and cost-effective healthcare system.
The Chinese government faces significant challenges but has established the necessary building blocks to drive reforms. For the pension sector, the government has adopted a "three pillar" approach in accordance with the World Bank framework: Pillar 1 - social security provided by the state; Pillar 2 - a supplemental pension system provided by employers; Pillar 3 - personal savings provided privately, often in the form of life insurance policies.
The ageing population and overall costs of funding pose challenges. Pension assets in China are estimated to represent between 6 percent and 7 percent of gross domestic product, compared with over 100 percent in certain developed economies such as the United States, the UK and Switzerland.
There are also a number of structural challenges, including, for the first pillar, poor governance, low investment returns and investment restrictions. Pillar 2 has limited distribution and therefore focuses almost exclusively on state-owned enterprises. Limited tax incentives and investment restrictions also exist.
As for Pillar 3, a common form of personal saving is through life insurance policies. However, there is a bias towards single-premium products that are not necessarily suited to long-term pension purposes.
Long-term protection
Further reform is therefore required to stimulate the market, including the tax reform to encourage greater participation, expanding access to the employer pension system for smaller businesses, lifting investment restrictions and supporting investors in their investment choices.
From the perspective of the insurance industry, KPMG expects the insurance regulator to support the development of long-term protection products. One of the key concerns for the regulator has been whether current insurance products are suited to the needs of the consumer. We expect to see the industry being encouraged to develop longer-term solutions for consumers.
The insurance industry is also responding with product reforms. Insurers are looking at ways to meet the longer-term needs of consumers, for example, by trialing variable annuity products. This is a policy whereby the investor makes a lump-sum payment or series of payments, and the insurer makes periodic payments beginning immediately or at some future date, based on a range of investment options.
The healthcare system is another fundamental building block in establishing a safety net for the population. The current Five-Year Plan includes some significant reforms related to providing basic healthcare for both urban and rural populations and to improving the healthcare infrastructure and network. The ultimate aim is to provide equal access to public healthcare for all citizens by 2020. The government is also promoting a comprehensive medical insurance system, with improved accessibility and reduced cost.
Again, the insurance industry will play a key part in the overall solution, with private providers serving the needs of the growing middle class and continued development of company-led plans.
In a recent survey of 1,220 people, we discovered that the key reasons people buy insurance include continued access to healthcare services, access to better healthcare services and lack of a pension. The most popular insurance products, the survey found, are accident insurance and critical illness. Interestingly, the fifth and sixth most popular products were medical outpatient, and hospital and surgical expenses.
Critical juncture
There appears to be scope to improve the level of coverage, with nearly half of survey respondents dissatisfied with their hospital and surgical expense coverage, which may reflect relatively high out-of-pocket expenses.
China stands at a critical juncture in a transition of its economy away from an export- and investment-led model to a consumer-driven society. This is partially dependent on providing a safety net for the population so people feel comfortable enough to spend. Essential to that safety net is a functioning pension system providing adequate income in retirement and an accessible, reliable and cost-effective healthcare system.
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