While investors shun Chinese bank stocks over fears of exposure to rising bad debt and a slowing economy, insurance has emerged as a bright spot in the financial sector, with an emerging middle class expected to buy more cover.
China's eight Hong Kong-listed insurers were valued at a median 10.7 times estimated 12-month forward earnings in early December, compared with 5 times for banks and 8.5 times for securities brokers, according to Thomson Reuters data.
Growth expectations are being fuelled by China’s low rate of insurance penetration, giving providers room to catch up. Premiums were only 3 per cent of Chinese gross domestic product in 2014, compared with 7 per cent in the US and 11 per cent in Japan, according to Swiss Re.
 “The insurance industry is brimming with fertile soil. The room for growth is gigantic,” said analysts at Huatai Securities.
Chinese bank earnings are stagnant and asset growth is slowing amid a debt hangover from the lending binge that followed the global financial crisis. In contrast, insurance premiums grew by 20 per cent in the year to October, on pace to reach Rmb2.24tn ($349bn) for the full year.
The government is also pushing supportive policies to expand the role of private insurance in filling out the country’s patchy social safety net.
 “Whether it’s infrastructure, medical care, pensions, and even education reform — these all need the insurance industry’s participation,” said Meng Zhaoyi, executive director at China Taiping Insurance.
Now the challenge for insurers is managing assets that have swelled to $1.85tn. Long restricted to government bonds, insurers have recently been permitted freer rein, allowing them to seek higher yields — and take on greater risk.
High-profile property acquisitions such as Anbang Insurance’s purchase of New York’s Waldorf Astoria Hotel signal the beginning of a wave of outbound investment. Cushman and Wakefield expects Chinese insurers to buy $73bn in foreign real estate by 2019 on top of $13bn invested already.
Insurers have also diversified their domestic portfolios to include higher-yielding investment in the shadow-banking sector.
“Increased alternative investments make Chinese life insurers’ credit profiles more vulnerable to an economic downturn as these types of investments are generally less liquid than straight bonds, and are focused on the infrastructure and real estate sectors,” rating agency Fitch said.
Just as China’s state-owned banks are forced to lend to unprofitable projects to support government policy priorities, insurers have also been pressed into a kind of national service. At the height of China’s summer stock market rout, the insurance regulator introduced long-awaited rule changes allowing insurers to increase their equity allocations. It was a clear signal that authorities expected the groups to join the “national team” of state-owned financial institutions in propping up the market.

Listed insurers including China Life and Ping An fell shy of earnings forecasts in the third quarter in part due to investment losses from the stock market rout. The market has since recovered, which will boost fourth-quarter results.

Beyond investment risk, the main challenge facing insurers is a lack of consumer awareness. Most so-called life insurance products are more akin to certificates of deposit, where the customer pays a single, lump-sum premium and is guaranteed a payout in several years’ time.
Policymakers and insurers want to promote the sale of protection-type insurance products, where payouts are contingent on death, illness, accidents or disaster. The challenge is overcoming Chinese consumers’ reluctance to shell out for a product where a payout is not guaranteed. “Peace of mind” remains an undervalued commodity for Chinese consumers.

“The general public still considers insurance an investment product. So it’s not just the life insurance companies that have to change; the culture has to change,” said Walkman Lee, partner at KPMG China in Beijing, who leads the firm’s insurance consulting practice.
To achieve this shift, the industry needs to overcome a reputation for questionable sales tactics. China Life, the country’s second-largest insurer by revenue, has a sales staff of 949,000 people. By comparison, US insurer State Farm, which has similar revenue, has only 18,000. That has created unprecedented challenges for training and monitoring.
“The Chinese consumer severely distrusts anyone trying to sell them insurance,” said Sam Radwan, partner at Enhance, a consultancy focused on China’s insurance industry.
While life insurance accounts for two-thirds of premiums, auto insurance is the fastest-growing. Recent deregulation of auto insurance prices has created opportunities for insurers to introduce risk-based pricing based on analytics. Mr Lee says a few auto insurers are already experimenting with so-called usage-based insurance, where the customer installs a device in his car that tells insurers how much he drives, and how safely.
“What the insurance industry is growing into is different from what we see today. You know more or less what the Chinese banking industry will be in the next five years. The insurance industry is still shaping itself,” said Mr Radwan.