Issue 15/2019

Economic Insights
Digital transformation in China (II): a near-100% cyber protection gap just one of many
insurance opportunities

Key takeaways In a nutshell

• Insurers in China are partnering with
firms from other sectors to offer
enhanced services to customers
through digital ecosystems.
• Insurers are using latest
technologies to change claims
management processes.
• Digitisation means more cyber risk:
there is a near-100% protection gap
against all potential cyber-related
exposures in China today.
• The role of online connectivity in
rural regeneration and smart cities
will generate premium growth
opportunities in personal line,
agricultural, commercial,
engineering, liability and property
insurance, and others.
About Economic Insights
Analysis of key economic
developments and their implications
for the global re/insurance industry.
Managing Editor
Jérôme Haegeli
Swiss Re Group Chief Economist
Digital transformation means new opportunities for insurers. For
instance, there is a near-100% protection gap for cyber-related
exposures in China today; we expect online distribution to contribute
a large share of what will be a growing rural insurance market under
the national "Rural Revitalisation" programme; and smart cities will
offer growth potential across many lines of business.
Digitisation has become a key growth engine for the Chinese economy,
accounting for 35% of national GDP in 2018. The share of the digital
economy of national GDP is forecast to increase to more than 50% by 2030. 1
The impact of the increasing interconnectedness of the economy and
business is wide ranging, including for insurers. Further, with ongoing
development of advanced analytics capabilities, insurers will be able to curate
and make sense of larger volumes of structured and unstructured data, to
improve risk pricing, provide more customised solutions to targeted
customers. Digital transformation is also opening up new risk pools and
premium growth opportunities, particularly in the fields of cyber risk,
intangible corporate assets, and insurance for rural areas and smart cities. 2
Increasingly, insurers in China are partnering with enterprises from other
industries to build their digital capability through leveraging well-established
digital ecosystems. Chinese insurers are more advanced than many overseas
peers in providing services to customers through ecosystems. 3 For instance,
PICC Group, China’s largest property insurer, has established its online motor
service unit Bang Bang Auto Service, with the goal of integrating online car
retail, financing and after-sale services. It has also established partnerships
with DNV GL and VeChain to apply blockchain technology to reform its legacy
claim management system, to enhance data management and processing.

Authors A side effect of increasing digital interconnectivity is growing threat from

Xin Dai cyber-related risks such as cybercrime, data breaches, internet connection
Economist issues and more, with fast-growing exposures that are almost 100% under-
insured. A market survey conducted by Swiss Re Institute estimates the
Julia Chen current size of the cyber insurance market in China to be USD 10.6 million in
Research Analyst premium terms. 4 That is just 0.5% the size of the market in the US (USD 2
billion). 5 The share of cyber of non-life premiums in China is likewise
negligible, at 0.06% in 2018 (see Figure 1-1). For more vivid quantification of
We welcome your feedback. For any
comments or questions, please
the risk exposure, a report from McAfee estimates that the total economic loss
contact: institute@swissre.com potential of cybercrime incidents alone in China in 2017 was USD 80-120

1
CAICT, see http://tradeinservices.mofcom.gov.cn/article/yanjiu/hangyezk/201906/85232.html
2
See sigma 4/2019 - Advanced analytics: unlocking new frontiers in P&C insurance.
3
Customer Behavior and Loyalty in Insurance: Global Edition 2017, Bain & Company, 14 September 2017.
4
Cyber insurance market in China, Swiss Re Institute, 2019, for details.
5
Cyber insurance are profitable today but wary of tomorrow's risks, A.M. Best, June 2019

05 September 2019

Swiss Re Institute – sigma research 1

Economic Insights
Digital transformation in China (II): a near-100% cyber protection gap just one of many
insurance opportunities

billion. 6 Including possible losses from other cyber-type incidents, the gap
relative to existing levels of cyber cover in the market would even larger.
Another area of insurance opportunity resulting from digital transformation is
the development of innovative solutions for previously uninsurable corporate
assets. As corporate balance sheets transform from being rich in physical
assets to deriving more value from intangibles such as intellectual property,
networks data and information, and as analytics capabilites advance, insurers
will be better able to develop more personalised solutions for risks such as
earnings losses and cash flow volatility. 7
Digitisation will also be a key force in the national "Rural Revitalisation"
programme. 8 This includes in driving agricultural-sector modernisation and
extending the reach of insurance across rural areas. Over the past decade,
disposable income growth in rural areas has outpaced that of urban areas, but
internet penetration in the countryside is still relatively low (see Figure 1-2).
This will change with the next phase of digitisation, and insurers will be able to
tap into rising rural purchasing power by distributing standard personal line
and microinsurance products online. We believe online distribution with, for
example, the expanded presence IoT sensors and the launch of 5G networks,
will make a large contribution to the growing rural insurance market.
Figure 1-1 (LHS) 600 0.03% 80% 20%
Projections for cyber insurance 60% 15%
400 0.02%
premium (RMB million) and its share 40% 10%
in total non-life market (%) 200 0.01% 20% 5%
0% 0%
- 0.00%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Figure 1-2 (RHS)
2018E
2019F
2020F
2021F
2022F
2023F
2024F
2025F

Internet penetration (internet users as

% of total population) and growth Internet penetration in rural area (LHS)
Cyber insurance premiums Internet penetration in urban area (LHS)
rates of disposable income (yoy, %) Growth of disposable income in rural area
by rural/urban areas Market share of cyber (RHS) Growth of disposable income in urban area
Source: (LHS) CAICT; (RHS) National Bureau of Statistics of China, Swiss Re Institute

Lastly, as part of China's commitment to "high-quality" development, smart

cities are a priority. By 2018, more than 500 local governments in China had
put forward proposals for the building of new smart cities, in which modern,
data-driven digital infrastructure for "smart" social governance will be a central
feature. The smart city concept presents new risk pool opportunities across
many lines of business, including commercial engineering, liability, credit and
surety as well as general property insurance.

6
Center for Strategic and International Studies, McAfee.
7
See sigma 5/2018, Global insurance and economic outlook 2020, Swiss Re Institute.
8
Guidelines on rural industry revitalization released, State Council, June 2019 Link

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