The FINANCIAL — As China’s wealth and consumerism grow, so too does its demand for insurance to protect assets – from homes and cars to works of art, jewellery and fine wine. China now has the second-highest number of millionaires in the world and an appetite for luxury goods to match, according to Lloyd’s, an insurance market.
Luxury car maker Bentley has revealed it is on track for record-breaking sales in 2014, with strong growth in China helping to drive its bullish forecast. Gains in China increased by 61% in the first six months, up from the same period the previous year.
In 2013, China had over two million millionaires, surpassed only by the US which had over seven million, according to Boston Consulting Group’s 2014 Global Wealth Report. China’s millionaire growth shot up 82% from 2012, according to Lloyd’s.
And it’s not just millionaires enjoying some of China’s newfound wealth. The country also has a rapidly expanding middle class. By 2022 urban household income is expected to have doubled from where it is today according to McKinsey.
As wealth has been created in China, a new generation of consumers has developed. By 2015, more than a third of the money spent around the world on high-end bags, shoes, watches, jewellery and ready-to-wear clothing is expected to come from Chinese consumers, predicts McKinsey.
Foreign brands are held in particularly high esteem. London’s luxury store Harrods has seen sales to Chinese shoppers grow by 50% a year since 2011. And the Chinese are the world’s biggest consumers of Bordeaux wine and cognac, according to Lloyd’s.
The reverse trade
Interest in Western art is also growing. In November last year, Wang Jianlin, China’s richest man, bought a painting by Picasso of his youngest children for $28.2m at a Christie’s auction in New York, paying more than double its estimated value.
Auctioneer Christie’s has spotted the opportunity. Its first auction in mainland China achieved total sales of $25m in September last year, followed by a second auction in April which achieved sales of $20m. Chinese buyers accounted for 63% of total sales, according to Lloyd’s.
“China is a very ancient civilisation and for many centuries it’s been a major centre for art and culture and therefore it’s only natural as personal, corporate and government wealth increases some of that wealth goes into art and jewellery,” said XL Group’s global chief underwriting officer of fine art & specie Graham Hawkins.
The “reverse trade” has been a big feature of recent art acquisitions. “In Western collections there’s a significant amount of Chinese pottery, porcelain, bronzes etc and as the wealth in the Asian markets grow, many of those are now being purchased and brought back to these markets.”
XL Group, just one of the underwriters in this space, has seen a doubling of fine art & specie premiums coming from China over the past five years. One of the challenges in providing coverage involves managing the inevitable concentrations of risk, according to Lloyd’s.
“We are an underwriter in the luxury brands business and many of these brands keep an increasing percentage of their stock in this environment,” said Hawkins. “Many of these brands have stores in the major malls and therefore you can have high concentrations across multiple clients under one roof.
“We run very sophisticated modelling. Not only do we look at our exposure to risk from natural catastrophes and manmade perils, but we also monitor our risk down to per building basis and look at fire accumulations to make sure we are within our risk appetite,” he added.
The five main perils that can affect a work of art are fire, water, theft, accidental damage and damage in transit. Inevitably, porcelain and ceramics are most vulnerable to damage. “While transport has improved it is still presents multiple perils,” said Hawkins. “One small crack can depreciate a ceramic item tremendously.”
Another challenge is the lack of fine art restorers, independent valuers and specialist loss adjusters in the Far East. “Insurers need to take a very proactive approach and you’ve got to bring more to the table than pure underwriting, including risk management and loss handling,” said Hawkins.
“Our biggest competitor is the uninsured. Many people are highly sceptical of insurance and actually, brand and reputation are critical in that respect – uptake should increase providing we can offer sensibly priced understandable products,” he added.
Land of contrasts
Despite its growing wealth, China remains a country of huge contrasts, with the income gap surpassing that of the US. A study by the University of Michigan worked out a measure for income inequality and compared it to previous estimates.
In 2010 the coefficient for family income in China was around 0.55 compared with 0.45 in the US (where a reading of zero suggests equal distribution of wealth and 1 represents complete concentration). In 1980 in China the reading was a much lower 0.30, according to Lloyd’s.
“Chinese recognise income inequality as a serious social problem; on the other hand, they seem to have high tolerance for income inequality,” said the study’s co-author Yu Xie, a sociology professor and a researcher with the university’s Institute for Social Research.
“They don’t like it, but they seem to accept it as a fact of life. Something they have to pay for fast economic growth.”
With its low insurance penetration and high exposure to natural catastrophes, China has a significant underinsurance gap and a highly vulnerable rural and urban poor population. Only 1.4% of the losses between 2004 and 2011 were insured, according to the Lloyd’s Global Underinsurance Report.
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