China Banking and Insurance Regulatory Commission (CBIRC) recently Releases the Green Finance Guidelines for Banking and Insurance Sectors (hereinafter referred to as the Guidelines), which requires banking and insurance institutions to develop green finance, to better assist in pollution prevention and control, and to promote carbon goals. It also highlighted the crucial roles of financial institutions, especially the insurance firms, in offering more secured financing approaches for the green economy transition.

This report will discuss how insurance can contribute to a sustainable economy in two parts. Part 1 will explain the basis of green insurance and its development in China. Part 2 will focus on the green insurance industry worldwide and its implications for the Chinese market.

The Basis of Green Insurance

The core business of the insurance sector is to understand, manage and carry risks. It empowers businesses and individuals to take risks and financially protects their tangible and intangible assets from the perils that they may not shoulder. As a risk manager, it contributes to every part of the economy by bearing risks and its substantial investments.

The concept of green insurance originated in developed markets in Europe and North America. Apart from integrating ESG matters into underwriting, insurance providers also want to offer new solutions to enable the transition to a carbon-neutral economy via green insurance products. The scope and function of green insurance can cover renewable energy projects, catastrophe modeling, climate adaptation measures, and innovative tech solutions.

Broadly speaking, there are three main categories of green insurance: environmental pollution liability insurance (EPLI), catastrophe insurance, and other innovative green insurance. EPLI covers the insured company’s penalties and/or environmental compensation if the insured pollutes the environment of and around their operation sites. Catastrophe insurance protects businesses and residences against those low-probability but high-cost events, including natural disasters and human-made disasters. In addition to EPLI and catastrophe insurance, innovative green insurance products cover different sectors, such as green transportation, green building, and carbon-related issues.

China’s Green Insurance Policies

In 2007, the Ministry of Ecology and Environment (MEE) and the China Bank and Insurance Regulatory Commission (CBIRC) jointly published guidance on EPLI, piloting China’s EPLI in some high-risk industries and marked the ambition to establish a national green insurance system. In 2016, the People’s Bank of China issued the Guidelines for Establishing the Green Financial System along with six other government agencies, setting the tone for China’s green insurance development. In 2018, the draft of Compulsory Environmental Liability Insurance (CEPLI) Rules was principally approved by the MEE, requiring entities to buy CEPLI if they belong to a set of industries defined by the government as presenting major environmental risks such as hazardous waste and chemical raw materials. In 2021, the State Council issued the Guiding Opinions on Accelerating the Establishment and Improvement of the Green and Low-carbon Circular Development Economic Systems, which urged insurance companies to improve their pricing mechanisms to better reflect and account for sustainability risks.

China’s Green Insurance Market Share

The Chinese green insurance market keeps evolving at a fast speed. According to the Insurance Association of China (IAC), cumulative green insurance premium amounted to RMB45tr from 2018 to 2020. In 2020, the total annual premium reached a peak of RMB18.3tr, which was 50% higher than the total premium in 2018. On the other hand, 2020’s total indemnity amounted to RMB21.4bn, increasing by 11.6% YoY. 

As a key investor in the financial world, China’s insurance funds are expanding their green investment, supporting the green economy transition in industries such as the utility sector and transportation sector. By 2020, the total green investment of insurance firms amounted to RMB561.5bn, 40% higher than that in 2018. 

China’s Green Insurance Products: Scale and Development

1. EPLI

MEE reported that 286 environmental incidents erupted in China in 2018, which increased to 412 in 2021. The growing pollution challenges urge a market-based mechanism to complement the government resources. Therefore, more EPLI products were developed and come into the market. Some high pollutive firms are also required to purchase EPLIs. In 2020, the premium of China’s EPLI was RMB5.4tr in total, which was 50% higher than that in 2018.

2. Catastrophe Insurance

Another key component of green insurance in China is catastrophe insurance, which was of RMb362.50bn in total premium in 2020. In 2016, the Chinese government brought it into the green insurance development, introducing a series of policies such as those detailed in the nation’s 13th Five-Year Plan and organizing initiatives such as the China Urban and Rural Residential Building Earthquakes Catastrophe Insurance Pool (CECIP). In keeping with such development, China’s reinsurance giant, China RE, established a catastrophe insurance research center and held annual summits on catastrophe risk and insurance.

3. Other Innovative Insurance

In terms of green transportation, insurance firms mainly develop products for renewable-powered or electric vehicles, as well as related infrastructure such as charging stations.

In terms of green building, the total amount insured by green building insurance is RMB101.7bn in 2020. It was introduced by the People’s Insurance Company of China (PICC) [2328:HK] in 2019, covering the upgrading and renovation of Beijing’s Nidong Village. The insured can use the insurance contract as proof of green operation, making it easier to obtain green financial support and certificates. As an example, in 2020, China Institute of Building Standard Design & Research Co., Ltd got all the buildings in its upgrading project of Chaoyang District qualified for 2-star-level and above green building certification through its green building insurance. Therefore, it incentives the insured to achieve the expected green operation criteria as required in the policy and promote green building development.

In terms of carbon-related insurance, it protects investors in the emission trading market from political uncertainty, price fluctuation, and other default risks. It is more well-developed in the European market, while China has just started several programs in the past two years. For example, in 2020, the Shanghai Environment and Energy Exchange (SEEE), along with top insurance firms in China like China Pacific Insurance (CPIC) [2601:HK], initiated a program named Carbon Allowance + Pledge + Insurance (碳配额+质押+保险), which has raised over RMB43m of funds for 18 companies to trade in carbon emission market by now. It takes companies’ risks in carbon trading and further enhances the liquidity of the carbon assets.

China’s green insurance market possesses great potential with the resource and effort that government and insurance firms have devoted to. However, compared to more developed markets, green insurance is still at an early stage in the country. Part 2 will explore other global markets to see any implications for green insurance in China.

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