RGA’s Jason Zhang underscores the importance of a cohesive risk management framework uniquely tailored to health insurance products and how such a framework is essential for enabling insurers and the industry to capitalize on the impending renaissance in China’s protection market.
Note: Health insurance in this article is defined broadly, encompassing not only medical insurance but also other health‑related coverages, such as critical illness and disability.
This article is translated and adapted from its original publication in The Actuary, the monthly journal of the China Association of Actuaries.
China’s health insurance market reached its new sales peak in 2019 after two decades of rapid, agency‑driven expansion. Since then, demand has weakened due to macroeconomic headwinds and consumer pessimism, while on the supply side, a sharp increase in cancer incidence and persistently lower interest rates have reduced the attractiveness of health offerings. Over the past three years, the lowering of statutory pricing interest rates forced insurers into repeated refiling of their products, disrupting development and launch cycles – an especially heavy burden for complex health protection products.
Recently, sentiment toward the health sector has shifted from prolonged pessimism to near despair; however, we believe this likely represents the bottom of the downturn. We anticipate the industry will soon embark on a phase of sustainable, quality‑oriented growth supported by multiple tailwinds: improving macroeconomic conditions and budding recovery in consumption; a series of regulatory initiatives promoting protection and health insurance; and a strategic industry‑wide pivot from savings products toward protection, answering to a persistently low‑interest‑rate environment.
Additionally, China’s rapidly aging population is creating strong growth potential in the senior protection market. Although the population aged 45-60 already forms the largest and most financially capable demographic, their insurance penetration remains low.
Benchmarked with mature markets like Japan and South Korea, the China protection market has significant room to expand among customers aged 45 and above. Over the next decade, this segment is expected to account for 60%-70% of new health insurance business, compared to around 20% now.
This market shift will not only drive the industry’s growth but also will heighten the demands on insurers’ risk management capabilities as the senior protection market faces three critical challenges:
Addressing these issues requires a comprehensive risk management framework, strong cross‑department collaboration, and innovative risk problem-solving, with the core objective of balancing sound risk control and attractive market solutions.
Health insurance is intrinsically complex; consequently, health insurance risks are highly diverse, granular, and inherently bottom up. They arise across numerous specialized risk control processes, including product development and pricing, underwriting, claim adjudication, data systems, and administrative processes. Risk characteristics can vary significantly, not only by market, product line, and distribution channel but also between generations of products within the same line. These differences require a robust, yet flexible, risk management framework that can match health insurance complexities.
When constructing a health insurance risk management framework, insurers must account for both top-down and bottom-up risk management needs. The top-level framework, as shown in Figure 2, encompasses the various functions and processes of health insurance risk management. Risk governance needs include assigning roles and responsibilities, defining processes and workflow, and establishing operational guardrails in order to create a structured system that ensures all risks and gaps are systematically covered.
Meanwhile, the bottom-level framework design (Figure 3) is aimed at providing a consistent and flexible tool to aid risk identification and assessment at a granular level, such as at the product line stage or even at each product level. Using first principles, risks are grouped into three categories and corresponding sub‑categories.
Incidence risk covers three areas:
Behavioral risk stems from adverse selection at three stages:
Other contextual risk considerations include product design, diversification, distribution channels, customer profile, claim volatility, and any unique ALM profile.
Each risk sub‑category is assessed using consistent, objective criteria, drawing on both quantitative inputs – such as population data, insured experience, and medical research – and qualitative sources, including market precedents and expert judgment. Risks are then classified into four severity levels: low, medium‑low, medium‑high, or high. Once the overall risk profile is mapped, the risks are aggregated using expert judgment and standardized quantitative models to generate insights that inform risk mitigation strategies and related decision‑making.
The practical application of health insurance risk assessment can be demonstrated through analyzing a typical critical illness (CI) insurance product in the Asia region. In this example, coverages include early-stage CI benefit, late-stage CI benefit, death benefit, multiple-pay CI benefit, and specific disease benefit – encompassing all main forms of CI product features. The risk identification and assessment framework can then be applied to conduct a comprehensive risk evaluation of the product.
Note: The color coding noted in Figure 3 is reflected in Figure 4.
Incidence risk: The misestimation risk of baseline incidence rates for early- and late-stage critical illnesses and specific diseases is generally classified as medium-low due to the availability of sufficient insured experience data. However, the misestimation risk for extrapolating into older age groups is typically categorized as medium-high or high due to both the lack of credible insured data and the fact that the mix and nature of critical illnesses change materially in the older ages. Trend risk is more concentrated in early-stage critical illnesses and some specific diseases, as they are the most vulnerable to sharp deterioration due to rapid medical advances.
Behavioral risk: Early‑stage CI and certain specific disease benefits face higher selection risk at issuance due to early detection advances and non‑disclosure. Selective lapse is generally moderate for CI products. Early‑stage CI claims are especially exposed to shifts in medical practice, while multiple‑pay CI products generally carry higher claim risks than single‑pay versions due to additional criteria such as condition grouping.
Finally, based on qualitative identification and assessment of various risk exposures, a standardized quantitative model – such as stress testing with shock scenarios (e.g., high risk: 30%-50%, medium-high risk: 20%-40%, medium-low risk: 10%-30%) – can be used for risk quantification and aggregation. After assessing risks qualitatively and quantitatively against internal risk tolerance levels, insurers can further refine product designs and features, impose underwriting and distribution restrictions, and optimize risk transfer strategies through reinsurance if necessary.
Health insurance risk management is fundamental to the continued advancement of China’s insurance industry. The two-tiered framework introduced in this article – especially the bottom-up risk identification and assessment methodology – offers insurers a practical, comprehensive, and flexible tool for managing the inherent complexities of a health insurance risk tiered framework.
山重水复疑无路，柳暗花明又一村 (When one road ends in blocking rivers and mountains, another path emerges through willow shade and glowing bloom) Echoing this eight-century-old poetic Chinese optimism, we believe a new path toward long-term, sustainable growth in the China health insurance sector is emerging. RGA aspires to serve as a catalyst and partner in guiding the industry through its complex risk landscape toward a blooming success.
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