China's Elderly are an Opportunity for Insurers

Posted on Apr 27, 2012 by Sergio Ulloa (G+)

Published April 27, 2012

China is heading towards an aging demographic disaster. By 2050, the powerful Asian nation is projected to be the oldest BRIC economy, with the number of senior citizens far outstripping the actual working age population. A new study out this week by the Boston Consulting Group (BCG) and Swiss Re argues that insurance companies could prove integral in addressing this aging issue, and that they should be actively planning on how they will capitalize on both the challenges and opportunities the graying Chinese population presents going forward.

BCG and Swiss Re’s paper, titled “From Silver to Gold: How insurers can capitalize on aging in China,” examines how the Chinese population has and will continue to age, and what challenges a more elderly citizenry poses for the state’s health and social security systems, as well as the wider international business community. The report notes that any solutions found to address the demographic imbalance will likely require a concerted effort on the behalf of both public and private sector players in China, and, given their line of work, insurers are in a unique position to tackle the country’s fluctuating protection and savings demands.

Aging societies are by no means unique to China, it is indeed a global phenomenon particularly common in Western industrialized nations, but Asia’s largest economy will face some particularly harsh headwinds compared to most. China’s self-described ‘demographic dividend,’ which has been credited for driving the country’s rapid socio-economic growth and development over the past two decades, is coming to a swift halt as many in the workforce responsible for their country’s ascendance near retirement age. The shrinking working-age population and increasingly aged population will result in a deterioration of the citizen old-age ratio. BCG notes that the true ramifications of this development may be felt as early as 2015, when the proportion of those aged between 15 to 59 years old, the working population, begins to decline quite precipitously. As this occurs, the segment of China’s population aged 60 and above is forecast to grow at an alarming rate, from around 165 million at present to as high as 440 million by 2050. At this point, the number of senior citizens would account for over a third of China’s overall population, placing them at a competitive disadvantage relative to the other sizeable emerging economies: Brazil, India and Russia. Outside of insurance industry concerns, this could mean that tomorrow’s workers may have to pay higher taxes to support higher government spending on the aged, while older people will have to work for even longer than they do now.

The Mainland government has been working to address these issues, launching both a RMB 850 billion (US$125 billion) healthcare reform plan and a social insurance law over the past two years. While important advances have been recorded, especially with regard to improved access to medical services and insurance coverage across China, medical and longer-term costs continue to rise as a share of total household expenditure. Alleviating these concerns thus remains a pressing issue for the Chinese government, as it needs its citizens to spend more of their considerable savings, rather than holding on for medical emergencies, to drive the world’s second largest economy further forward.

China’s social security system is expected to struggle with the country’s shifting age dynamics. According to the report, China’s pension system and mandatory social insurance fund have not properly taken into account the rise in living expenses, medical inflation and demand occurring across the country and thus it might not keep pace with further adverse developments, especially as other voluntary and private sector pension schemes remain relatively underdeveloped in the market. The domestic healthcare sector isn’t expected to fare much better, with research showing consistent shortages in scope of treatment, services and medicine supply. Added to this is the fact that China’s traditional family support network, the true backstop for elderly long-term care support in the country, has weakened due to the mass migration occurring from rural regions to urban areas. The country’s notorious one-child policy has also worked to foster a 4-2-1 (four grandparents, two parents, one child) family structure, which places an undue burden on the younger generations to provide for the old. “China’s ability to deal with these challenges will have a significant impact on its prosperity level for decades to come,” commented Richard Huang, a BCG partner based in Beijing.

The Chinese government has taken note of this development and is determined to drive down costs despite facing strong internal challenges from vested interests that see reform as a threat to their current pay as you go business model. In the government’s next three-year reform strategy, the Health Ministry plan to protect care employees and reduce graft by increasing government subsidies in public hospitals while relying on insurance companies to make up the difference. By the end of 2015, the Chinese government has set a moderate goal to increase their contribution to about 33 percent of all health spending and to reduce individuals’ out-of-pocket expenses to 30 percent or less of the cost of treatment. Another issue China’s government looked to address in their broad social security reforms last July was the access and cost of maternity care in the country. Hong Kong has proven to be a popular destination for expecting Mainland mothers as children born within their borders are exempt from one-child restrictions and entitled to local residency. According to the Hong Kong government, the city-state’s maternity facilities were put under serious pressure last year after 40,000 Mainland mothers gave birth in local hospitals, equal to roughly half of the city-state’s total births. With the birthing threshold for such activity already surpassed again this year, tensions are running high between the two governments to solve this and other social security shortfalls between the two territories.

While it is the job of the Mainland government to continue reforming its social safety net to better meet the needs of its citizenry, both public and private insurance companies should expect to play a larger role in fixing the problems caused by an aging population going forward. According to BCG, China-based insurers should focus on several key initiatives to capitalize on the country’s demographic developments over the next couple of years. The report notes that insurers should place themselves at the forefront of any regulatory reforms which could aid the growth of private sector pension, healthcare and insurance markets in China. Part of this plan will require insurers to do more to survey and educate Chinese consumers about the longer-term value of savings and investments in retirement preparation. Once the under-penetrated market is better understood, insurers can innovate to its demands with better managed long-term care products and channels. Where available, insurers were furthermore advised by BCG to collaborate with the state’s social security system to help the government better manage its pension and healthcare systems at lower levels of longevity risk and cost. In addition, Chinese insurers will need to adjust to the impact of its own aging workforce. Chris Kaye, a BCG partner based in Hong Kong, concluded that if insurers prepare for China’s aging population accordingly they could reap dividends. “Insurance companies that take correct and prompt actions can turn the silver segment into ‘gold’, which means new revenue streams and higher profits.”