New regulations are poised to impose big changes on China’s insurance sector — long a sleepy backwater in the country’s financial system — as the government pushes the sector to play a larger role in the country’s patchy social welfare system.

Chinese insurers’ Rmb11tn ($1.8tn) in assets have fuelled the acquisition of trophy properties in London and New York, but innovation has lagged behind.

Most life insurance products are more akin to certificates of deposit, offering a guaranteed payout in return for a single upfront premium payment. So-called protection products — in which beneficiaries pay regular premiums but receive benefits only in the event of accident, illness or death — comprise a fraction of the market.

That is changing, however, as awareness of the need for protection increases among a rising middle class with the income to afford it. Last year regulators imposed a new requirement that at least 20 per cent of insurance products sold through banks — a major distribution channel for life insurance — must be traditional protection products.

"In Asia, you see a massive protection gap in all the different businesses — mortality, morbidity, and assets such as your car and house. The gap is two to four times higher than what you see in Europe," said Jean-Louis Laurent Josi, Asia chief executive of French insurer AXA, which has joint ventures for both life and property and casualty insurance.

“People don’t realise how big a protection gap they have. You need salespeople ready to explain to potential customers why they should have this kind of protection.”

Leon Qi, bank and insurance analyst at Daiwa Capital Markets in Hong Kong, estimates that the Chinese government’s targets for insurance penetration imply annual premium growth of 17 per cent in 2015-20, up from 13 per cent in 2009-2014.

A main driver of increased premiums is a new system for tax-exempt corporate pensions implemented last year and modelled on the US 401k system. Further rules are expected this year to create a similar system for tax-exempt individual pensions, much like individual retirement accounts (IRAs) in the US.

The government wants an enlarged private pension system to supplement the public system, which is facing a looming shortfall as China's population ages and tens of millions of new retirees are set to draw benefits.

New capital requirements are also set to reshape the insurance industry. This year the industry regulator began phasing in the China Risk-Oriented Solvency System (C-ROSS), which requires insurers to set capital buffers based on more advanced risk metrics.

“You’ve gone from a rudimentary way to calculate solvency and capital requirements — something that you can do in the back of a napkin — to a much more sophisticated, segmented, risk calculation along many dimensions,” said Sam Radwan, co-founder of Enhance International, a consultancy focused on China’s insurance industry.

The rules favour insurers with a diverse product mix and broad geographic coverage, punishing smaller players whose risk is concentrated in a single product or region. Analysts say the new requirements are likely to separate the weak from the strong, eventually leading to industry consolidation.

A senior China Insurance Regulatory Commission official said in March that two-thirds of Chinese insurers will see their overall capital ratio weaken under the new standards. Mr. Radwan says foreign players may be forced to either inject more capital or exit the market.