China's insurance companies unveil tax-deductible health insurance in trial programme

A dozen insurance companies have unveiled tax-deductible, health insurance schemes on the mainland in a trial programme that China hopes can spur commercial medical coverage.

They come with tax incentives and are aimed to complement social insurance schemes.

Still, initial market feedback hasn’t matched the splash made when the idea was unveiled by policymakers. That’s despite the rush by insurers to launch new products. The hurdles they face include a small deduction quota, reluctant employers, limited pilot schemes and a complex buying procedure for clients, market watchers said.

This year, taxpayers in 31 major cities, including Shanghai, Beijing, Tianjin, Chongqing and one large city in each of the provinces and one autonomous region can deduct up to 2,400 yuan (HK$2,856) annually, or 200 yuan each month, on their taxable income if they pay the money for designated “tax-preferential health insurance products” allowed by the China Insurance Regulatory Commission (CIRC).

So far 12 insurers including PICC Health Insurance, Sunshine Life Insurance, Taikang Pension, China Life Insurance, Ping An Life Insurance and China Pacific Life Insurance have obtained the go-ahead from the top insurance regulator to run the trial business.

The policies will offer additional coverage beyond that provided by the current medical fund, with yearly coverage of at least 200,000 yuan.

“The new products didn’t ring many bells with the market,” said Siren Xia, general manager of Shanghai Mercer Insurance Brokers. “Few clients are really sniffing around to ask for development of the new type.”

According to a 21st Century Business Herald report earlier in May, Sunshine Life, Taikang Pension and PICC Health, — the first three insurers to run the trial — respectively collected premiums of less than 2 million yuan of the products since they won the regulatory nod in February.

Xia noted that many employers don’t feel the push to buy extra products and shake the existing system as changes could lead to extra internal work.

For employers yet to include commercial health insurance in employee packages, the new product means extra human resources cost that they may not want to bear especially during an economic slowdown in China, she said.

For employees, a yearly 2,400 yuan deduction doesn’t seem enough to trigger a buying spree.

For taxpayers earning a taxable monthly income of less than 5,000 yuan, they can pay 72 yuan less tax annually, or 6 yuan monthly, if they buy the products. For taxpayers earning 8,000 yuan, the relief is 240 yuan a year, or 20 yuan a month.

“The incentive is only better-than-nothing,” said Hua Qi, a white-collar worker in Shanghai who is considering taking out a policy. “I can buy an extra cup of Starbucks coffee on the savings.”

KPMG’s tax partner Tracy Zhang noted that lower or medium income tax-sensitive groups may be more attracted to the scheme.

Another problem is the limited buying access for individuals.

So far, the products are mainly sold through group buying, requiring a minimum of three buyers. China Life does accept retail clients, but only through designated counters at its branches. Generally, retail clients prefer online or agents for products sales.

“It’s easier and more efficient for insurers to build business scale via group insurance at the initial stage of the trial,” Chen Dongmei, an insurance associate professor at Fudan University in Shanghai, said. “In the long run, insurers may extend the business into more cities with more products that are more accessible to retail clients as their development is supported by China’s decision makers.”

KPMG’s Zhang said the tax-deductible insurance policy shows policymakers’ support for the insurance industry to play a bigger role in resolving high medical expenses.

“The individual income tax-preferential health insurance products are uniquely positioned in China as a supplement to the existing social insurance schemes,” said Zhang. “The product, which is also available to people who are currently not well, highlights its specialty as this group is usually not offered commercial health insurance products.”

In November 2014, the State Council, or China’s cabinet, issued a guideline on supporting the health insurance sector, projecting a “notable increase” of contribution of commercial health insurance compensation to total healthcare expenditure by 2020.

The 2,400 yuan tax deduction was announced in May 2015 during a State Council meeting presided over by premier Li Keqiang. In August 2015, the top insurance regulator stipulated that the product is a policy-driven, low-profit universal life insurance product and the minimum annual insurance coverage is 200,000 yuan. The 31 trial cities were announced in December.

Analysts said more incentives and an expansion of the trial cities are expected in the future to allow the business to take off. At this initial stage, obstacles remain.

Though the top insurance regulator has made it very clear that the tax-preferential health insurance business is low-profit, insurers still have ample reason to join, analysts said.

Health insurance, a relatively small business, has seen sizzling growth on the mainland, outpacing that of the industry overall during the past decade.

In 2015, health insurance premiums topped 241 billion yuan on the mainland, up 52 per cent year-on-year. Total premiums grew 20 per cent to 2.43 trillion yuan in the period, according to CIRC data. The CIRC data also showed that health insurance accounted for 10 per cent of total premiums in China, up from 6.7 per cent a decade ago. Overseas the average is around 30 per cent of total premiums, indicating huge growth potential for the domestic sector.

“For insurers, it looks like doing a [politically] correct thing,” Xia said. “Insurers want to show their stance to follow the call from policymakers, promote their brand, and build scale.”

Fudan’s Chen noted that insurers can also seek opportunities to sell other tailor-made products to preferential policyholders once they bring them into their pool of clients.

China International Capital Corp (CICC) said in a research note earlier that the new product offers a short-term contribution to premium growth because the pool of people directly benefiting from the new policy is not big.

The CICC estimated earlier that tax-preferential health insurance premium could top 80 billion yuan by 2014, about 50 per cent of the total health insurance premium in 2014.

“The new product’s contribution to profit is limited for insurers and it may also bring challenges in risk management,” CICC said.

Haitong Securities also said in a research note that it takes time to see a profitable business in the segment and the scale of economy will play a key role for insurers to make money in the sector.

(SOUTH CHINA MORNING POST)