Swiss Re: Digital transformation in China- on the crest of a wave

Article Synopsis :

Digitalisation, and e-commerce in particular, has become the main engine of China’s economy.

E-commerce is the main engine of China’s economy

The move to digital has introduced new risk pools, such as cyber. Risks that were previously difficult or uneconomic to cover are now being satisfied through innovative solutions that run on enhanced data and analytics.

Big growth

Swiss Re anticipates “exponential sector growth” to continue over the next decade. The gross value of the digital economy increased by a fifth (21%) from the previous year to CNY 31.3 trillion. This is now 35% of China’s gross domestic product (GDP), compared with 59% in the US. This share of GDP is forecast to increase to more than 50% by 2030 (see Figure 1-1).

Risks as well as rewards

Alongside greater opportunities come new and emerging risks, such as cyber exposure and the development of innovative solutions for previously uninsurable risks such as intangible asset earnings and cash flows losses.

These will become the primary sources of growth for the Chinese insurance sector as digital transformation continues. And with it will come a great opportunity. It has already created 191 million new jobs in 2018, an increase of 11.5% in 2017. By 2030, there is likely to be nearly 400 million new jobs added to the economy.

Big money

China’s eCommerce sector (online retail sales and electronic transactions) is now the largest in the world, accounting for more than 40% of global eCommerce transaction value in 2018 (see Figure 1-2).

This is as a result of the growth in internet usage. China now has 829 million internet users, with 11% compound growth over the decade to 2018.

Retail shopping of tangible goods amounted to more than CNY 7 trillion in 2018, up more than 25.4% on 2017, increasing consumption by 45.2%.

Closer scrutiny

With eCommerce so important to consumption and economic growth, it is timely that China-based its first comprehensive E-Commerce Law in 2019, designed to safeguard consumer interests and protect intellectual property rights. It also commits China to the promotion and development of eCommerce on an international scale. Supported by a number of government projects.

The total value of goods imported and exported through cross border e-commerce platforms in 2018 CNY 135 billion (USD 20.3 billion). This growth close to 50%, and if continued, will translate to almost CNY 300 billion worth of goods (USD 42.6 billion) in 2020.

The impact of the expansion of eCommerce will be felt across all industrial sectors. The adoption of 5G networks will increase the impact with the value from 5G commercial applications (IoT, sensors, wearables, etc) forecast to increase by CNY 10.6 trillion between 2020 and 2025. Another CNY 24.8 trillion is anticipated in indirect benefits.

New opportunities

Cyber risk is just one new avenue of opportunity. Another area of growth is risk protection solutions for intangible assets such as intellectual property, networks data and information.

Advanced analytics will help insurers develop more personalised solutions for previously uninsurable risks such as earnings losses and cash flow volatility. Underwriting and risk pricing will become more accurate as a result.

Insurers still face challenges including the potential arrival of big tech companies such as Alibaba. But perhaps the greatest challenge will be adherence to consumer protection and the regulators’ ever-increasingly stringent data privacy laws.

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