Lushan county in China’s southwest was hit by a powerful earthquake earlier this year. Nearly 200 people died and damage was severe, but insurance claims are expected to amount to just Rmb143m ($23.5m), a mere 0.2 per cent of the estimated rebuilding costs.

It is a telling contrast with Hurricane Sandy, which lashed the US Atlantic coast a year ago – almost one-third of properties were insured and claims ran to $18bn.
Natural disasters cost insurers in China about one-hundredth of what they cost insurers in the US. Far from being a positive for the Chinese industry, it is a measure of the huge gaps in insurance coverage in the world’s second-largest economy.

But thanks to a regulatory push, better investment returns, an evolving consumer culture and more foreign participation, there are signs that the long-sluggish Chinese insurance industry is finally starting to perk up: it is becoming more profitable and reaching more people.

“The penetration rate of insurance in China is still very low, so there is a lot of room for growth and the average citizen is now getting more and more education about the benefits,” says Oliver Rui, a finance professor at the China Europe International Business School in Shanghai.

Third-quarter financial results for Chinese insurance companies painted a picture of growing strength. Industry profits were up 134.9 per cent year-on-year in the first nine months of 2013, according to the insurance regulator. Compared with the stolid profit increase of roughly 10 per cent in thebanking sector, it has been a red-letter year so far for Chinese insurers.

The rise in profits partly stems from a series of policy changes over the past few years to expand the investment horizons of Chinese insurers. Previously restricted to volatile equities and low-yielding bonds, the regulator has encouraged them to allocate up to one-third of their assets to infrastructure, private equity and overseas investments – giving them fatter, more stable returns.
Nevertheless, the ultimate goal of regulators is not to boost the profits of insurers but rather to get them to play a bigger part in building up the Chinese social safety net.

“It’s not supposed to be an industry driven by high returns. It’s supposed to be an important part of the social fabric,” says Yang Xia, head of China equities with UBS.

To nudge them in that direction, regulators have placed limits on co-operation between banks and insurers. Banks can sell products issued by no more than three insurers, narrowing what was once insurers’ main distribution channel. The idea is that this will force insurers to go directly to consumers with their protection products rather than just pump out investment products through banks.

At the same time, the regulator has given foreign companies somewhat more leeway to enter China as a way of unleashing more competition. AXA, Europe’s second-biggest insurer by market value, has been the leader thanks to its joint venture with Industrial and Commercial Bank of China, the country’s biggest bank.

Unlike the banking sector, where foreign groups have languished with less than 2 per cent of the market, foreign insurers are taking a bigger bite of the Chinese industry. Foreign insurers earned 3.7 per cent of Chinese premium income in the first three quarters of 2013, half a percentage point more than a year earlier, the regulator said.

Chinese insurers manage Rmb8tn in assets, meaning the sector is less than 6 per cent of the size of the country’s banking industry.

Persuading China’s growing middle class to buy insurance is the most important challenge facing the industry. Insurers have benefited greatly from the government’s decision to make car insurance compulsory. But many citizens are still like Gong Yi, 34, a civil servant whose coverage stops at his Volkswagen. “Buying insurance is like throwing money into water. Unless it’s a must-have, like if I’m in poor health, I won’t buy it,” he says.

Insurers have to become more sophisticated, relying less on cold calls to attract business and investing more in developing knowledgeable agents to sell their products, says Sam Radwan, managing partner and co-founder of Enhance International, a consultancy focused on the Chinese insurance market.

“If you’re going to be the back-up of the social safety net, how can you do that when the customer doesn’t trust you?” he says.

Slowly, they are beginning to earn that trust, especially in the biggest cities. Premiums are about 5-6 per cent of gross domestic product in Beijing and Shanghai, compared with less than 2 per cent in inland cities, according to Enhance.

Sun Litan, 32, saw her father die of a heart attack when she was young. The Beijing resident says that painful experience taught her the value of insurance and she has spent more than Rmb50,000 on seven different products for her family.

“Insurance is the foundation of everything. I have other investments. But if anything bad happens, I know we will be safe,” she says.