Do cultural attitudes affect the demand for individual property insurance? The case of China

If you had more money or other financial resources to fall back on, would you be more inclined to take certain risks? Quite possibly, but the effect may not be the same across cultures, contexts, and markets. In fact, Prof. Michael Powers found that, compared to their American counterparts, wealthier Chinese students tend to be less comfortable with risk. This may reflect significant changes taking place in China’s society today. Understanding this phenomenon has implications for rapidly evolving economies, especially regarding government policies and business decision making, which is why Powers and his team are studying China’s property insurance market.
A great deal of personal wealth in China is held in physical property, including real estate and motor vehicles, rather than stocks and bonds. “This could lead to more risk aversion,” according to Prof. Powers, “because the investment is something that can be damaged by a fire, earthquake, or other physical event.” That, he says, is why the country’s citizens would benefit from buying more property insurance than they currently do. His research on Chinese motor vehicle insurance has helped tease out the factors at work in this market and distinguished, for the first time in the literature, among different types of behavioral (or “moral”) hazards.
The most striking difference from comparable markets, like Taiwan’s, is the absence of the moral hazard that exists before a car accident. A source of carelessness, this type of risk arises from people driving less cautiously because they know they have insurance to protect them. One possible reason this risk was not seen in China is that the population has been moving away from traditional, rural lifestyles. In the city, people tend to earn more money, but may feel the loss of a cushion of financial support formerly offered by the community around them. Sensing their vulnerability, new arrivals in urban settings may not derive the same level of psychological comfort from buying insurance as that of policyholders in more mature markets, Prof. Powers explains.
His team has developed new techniques to analyze economic data from insurance companies, including coverages sold, premiums collected, and losses paid. As more data become available, the researchers expect to find significant differences between China and other markets. Multiple factors indicate that the Chinese property insurance market should be ripe for growth. The fact that it hasn’t expanded very rapidly suggests that the government may want to accelerate the process with subsidies, as it already has done for the agricultural sector. Understanding the mechanisms of the property insurance market – the interactions between individuals, businesses, and the state – is a necessary first step. Next, it should be possible to develop policies that help reduce risk at all levels of society.

Protecting Personal Property: A Question of Culture?

First AXA Research project supported in Mainland China: Do cultural attitudes affect the demand for individual property insurance? The case of China

Michael Powers is the very first AXA Research fellow in Mainland China. He is Professor of Risk Management and Insurance at Tsinghua School of Economics and Management (SEM) and has just been 362K€ to carry out a 3-years-research project to investigate on the impact of cultural attitudes on risk sharing and risk retention in the Chinese property insurance market.
A signing ceremony with Henri de Castries and Dean Qian held on October 22th, 2013 Tsinghua SEM paves the path of forthcoming academic partnerships in the country.
Many observers of China’s insurance market attribute the country’s slow reception of various forms of property insurance to cultural attitudes that will change as the society evolves and “modernizes”. It is expected that as economic relationships become more sophisticated, individuals and firms will abandon both a fatalism that encourages risk retention and a reliance on family and community resources that encourages risk pooling. But are such cultural characteristics so easily discarded? Is it possible they will maintain a long-term impact on the property insurance market by encouraging greater use of alternative risk finance?
The project will consist of a comprehensive review of the relevant scholarly literature, gathering data from several sources (industry and government data, survey results, and experimental game-theoretic observations), the construction of econometric models to test hypotheses regarding the Chinese property insurance market and formulating projections of demand in both China’s conventional and alternative property insurance markets.
Thus, it will consider 2 principal hypotheses regarding the Chinese property insurance market: (a) Fatalistic cultural attitudes are likely to discourage the purchase of insurance in the short run, and encourage the use of risk-retention methods (e.g., high deductibles/copayments, self-insurance reserves, single-parent captives, etc.) in the long run. (b) Community-oriented cultural attitudes are likely to discourage the purchase of insurance in the short run, and encourage the use of risk-pooling methods (e.g., family- and community-based financing, group captives, small mutual insurance companies, etc.) in the long run.

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