Brief comparison of insurance in Europe and China
In this article, some aspects of insurance law will be dealt with briefly, with historical references. In particular, the aspect on which we will focus is the usefulness of the law within the insurance field for the protection of individuals, companies and the market, as it was born and developed in the European context, comparing it with the Chinese insurance phenomenon also in light of the developments following the covid-19 pandemic.
Utility of insurance
Although for many, insurance is almost useless (and in some cases, they don’t go very far from reality if it is offered without actually analysing the customers’ needs and providing correct consultancy), insurance still plays a fundamental role in modern society and has had this function for centuries. At this point, how does insurance law fit into the market context? It would suffice to say that the law regulates the usefulness and functioning of the insurance phenomenon. The presence and development of the insurance phenomenon correspond to a general interest, and it has been essential for the development of the modern economy, constituting, in fact, one of the determining factors of economic progress.
In particular, the “possibility to protect ourselves”:
- It enabled existence of high-risk careers or positions assigned with special responsibilities. For example, insurances allowing surgeons to carry out riskier operations by protecting them from a possible failure;
- It allows the existence of many useful economic activities for the community but, at the same time, constitutes an incentive to take risks. For example, of agricultural activities, which in addition to the business risk also run a natural risk, or of a bank which, by granting a loan, exposes itself to a substantial risk.
- Furthermore, insurance can allow for greater security (also for others) concerning compensation for damages that may occur [1].
In the event of excessive risk aversion, insurance is also useful because it allows dangerous activities to be carried out without excesses of prudence which could be counterproductive beyond certain levels. On the other hand, an insured person could also do the opposite, leading to an excessive propensity for risk.
Let’s now consider the case of an economic activity in which there is no form of protection. Faced with the lack of insurance coverage or something that guarantees the peaceful conduct of business, the entrepreneur could engage in illegal conduct in the face of too high risks or could have to spend too much to adopt security measures appropriate to the corporate risk. In the worst case, an accident of a large amount would even lead to the bankruptcy of the company (for example, in the event of a fire which leads to a compensation duty that is too high compared to the company and/or personal assets of the entrepreneur). It, therefore, becomes necessary to recognise the usefulness of insurance.
Self-insurance vs insurance
Without insurance, a possible solution, which then represents how the insurance phenomenon was born, is that of self-insurance. Through self-insurance, liquidity is set aside [2] to protect ourselves in difficult situations. Like self-insurance is co-insurance, i.e. the division of the insurance risk among several heads. To understand it better, suppose we live in the same building and decide to avoid the traditional insurance, replacing it with a risk fund into which each of us pays 300 euros a year. In the event of damage, such as the breakage of a condominium water pipe, we would use the amount set aside to repair the damage. Or again, we decide to allocate 1000 euros each to another fund in case of theft. If the car one of us were stolen, the fund would be used to buy back the car. Sure, it might sound functional, but it’s not efficient. Without insurance, much more resources would have to be immobilised to face future risks, so insurance allows you to free up a significant amount of resources that can be invested in productive uses, freeing up the economy [3].
Other reasons for the usefulness of insurance concern competitive dynamics and the distribution of costs. Insurance improves the functioning of competitive dynamics, making fortuitous events no longer a selection factor. It also improves competition in the sense of facilitating competition, allowing even less economically gifted companies to participate [4]. Furthermore, if it works correctly, the insurance assigns the premiums in proportion to the riskiness of the insured, better distributing the costs of social danger.
Nonetheless, insurance facilitates negotiations. In any contract, which is not executed instantaneously, the agreement can also be seen as an allocation of future risks between the parties. The fact that there is insurance for the risks in the contractual relationship means that in the negotiation, try to identify the party most able to insure and not the one able to bear the risks. For example, no director of a large corporation would accept the position without a D&O policy [5].
Furthermore, from a social point of view rather than an economic one, insurance makes people responsible.
Insurance companies tend to be economic entities that have large amounts of capital available; this does not mean that the accounts are necessarily positive [6], but it makes insurance companies potential investors of the first rank, having to make investments compatible with the commitments deriving from the indemnities they have to pay. For this reason, the insurance sector is considered a very important component of the financial sector, through the circuit that allows the flow of monetary resources between those who have excess resources (resource unit) and those who need resources to carry out an activity (deficit unit).
Self-insurance vs Official insurance in China
Insurance plays an important role in the job market as an important part of social welfare. Companies providing five fundamental insurances, including pension, medical, unemployment, work injury, and maternity, would be preferred. According to the Labour Law and Insurance Law, among the five insurances, the first three types of insurance are paid for by both the company and the individual with different ratios. In contrast, the rest are paid by workers only. Some companies would provide another type of insurance named Commercial Insurance, which is not required by law.
Regarding the fact that not everyone will choose to work, pension insurance could also be paid individually. Combined with the household system, another official insurance named Social Pension Insurance allowed jobless residents to get paid when they aged up. It determines that the pension rate would be defined by where you were born.
Still taking Pension Insurance as an example, the official insurance, whether paid by an individual or not, is decided by area. Since companies have to share part of the payment, many would pay workers’ insurance according to the lowest income instead of the workers’ real wages to save money and meet the legal requirements. Jobless residents are only allowed to purchase insurance according to the lowest income. Pensions would be delivered after the insured people reached the retirement age and had paid 15-year pension insurance. Residences paid less than 15-year pension could not get the pension unless they made up for the gaps. However, pensions would be limited, so people could also choose pensions insurances instructed by banks. For example, China Bank released pension insurance in 2023 to guarantee a pension of 1000RMB after retirement, which could also be used for tax deductions.
History of insurance in Europe and China
Without going too far, having due points of similarity, we will now see how the insurance phenomenon was born in Europe and China. Although there are no certainties in this regard, it seems that in Europe, insurance policies were born in the era of trade by sea to protect traders (and also their noble clients) from the risk of pirate attacks or shipwrecks, often resulting in the ruin of the same due to too large a loss of invested money. In the fourteenth century, there were the first public interventions of insurance regulation. Still, they were essentially punctual interventions (only of some specific aspects), of a restrictive or limiting nature of the practice and essentially dictated by reasons of public order (remember, for example, the statutes in medieval times which forbade insuring foreign goods and ships to prevent monetary resources and gold from leaving the states). The first organic regulations of the insurance relationship arose a few centuries later. For example, with the ordinances of Barcelona of the fifteenth century [7] and the French ordinances of the seventeenth century, a tendentially organic insurance regulation was implemented. In Italy, however, we must wait for the first Code of Commerce of 1865 [8].
According to other theories, in the late 1600s, the first real forms of insurance spread, driven by industrial development, to cover the risks associated with fire and personal life insurance policies. In China, forms of insurance, or rather co-insurance, appear to be even earlier to cover any risks of unproductive harvests or bad years. Only in 1800, with the monopoly on Chinese trade of the British East India Company, did the insurance of ships and goods also spread to China, with the payment of high premiums. From the commercial routes between Europe, India and China, the first Chinese insurance company was born in 1805, the Canton Insurance Society, based in Hong Kong, made up of two independent trading houses, Dent&Co. And Jardine Matheson & Co., later split into other smaller insurance companies. Initially, the clientele did not include Chinese. Still, from the 1860s, Canton Insurance and other insurance companies of European calibre began to accept Chinese customers, guaranteeing an opening to insurance law also in Asia. Shanghai became another important pole at the end of the First Opium War (1839-1842). A fishing town, it soon became a very important commercial pole, starting to expand itself and attract foreign investments. In addition to the more than 180 Chinese and foreign banks, small insurance companies spread like wildfire.
In the first half of the 1900s, the types of policy still known today were born, albeit in a rudimentary form: life and non-life policies, which also began to cover damage to property and damage due to atmospheric phenomena [10]. Given the aversion of the Chinese to the mention of death (everything that refers to the concept of death, as well as the number 4, which in terms of pronunciation is close to that of death), life insurance policies had a slow and difficult diffusion.
With the establishment of the government of Mao and the People’s Republic of China, insurance companies aimed at becoming state-owned were subjected to heavy taxation. Within a year (from 1949 to 1950), their number decreased by 80%. In 1953, the remaining insurance companies were merged into the People’s Insurance Company of China (PICC). To wait for the resurgence of the insurance phenomenon in China, we have to wait until the 1980s, when the Minister of Finance closed the PICC, not recognising its role in the modern communist civilisation [11], and leading to the birth of new companies, especially in Hong Kong and in the neighbouring areas. A real acceleration occurred in the 1990s, with the spread of wildfire of new insurance companies, both European and Chinese, and a huge collection of insurance premiums. In 1995, the insurance law was adopted in China, recognising the different insurance policies and laying the foundations for insurance globalisation [12].
Insurance in China during the pandemic
Covid Insurance and Quarantine Insurance became popular during the pandemic, which could be purchased easily through AliPay. Providing evidence of a negative nucleic acid test report and a less than 100RMB insurance fee would guarantee you to be paid more than 2000RMB once you tested positive or be defined as close contacts and isolated. However, since the virus is highly contagious, normally, a city could be covered in less than half a month, it is not surprising to witness many insurance companies start to offer their service when there are sporadic affected spots but cancel their service immediately when the situation could be defined as during pandemic.
(A cura di Lorenzo Nobile e di Liu Jiawen)
References
[1] However, if this were an absolutely priority issue, then consequently there should be an obligation and not just a faculty to insure.
[2] Through funds.
[3] Obviously, companies have a provision for risks and charges which is used for non-insurable risks.
[4] It is necessary to pay only the premium and not set aside money for a possible disbursement.
[5] D&O policy protects the personal assets of directors and members of other management bodies in the event they are sued for damages.
[6] The availability of huge capital has the correlate of possible liabilities, i.e. compensation to be paid.
[7] The Barcelona ordinances on marine insurance allow us to follow the development of marine insurance up to the point in which it was recognized as a necessary tool for trade.
[8] The Commercial Code of 1865 was a revision of the Albertine Code of 1842, which in turn was based on the French Code de commerce of 1807.
[9] Situation defined by an inefficient distribution of goods and services in the free market.
[10] See the flooding of the Yanghe and Huaihe in the early 1930s, as well as the cyclonic phenomena that caused huge victims in the same years.
[11] Which split into other companies.
Rivista scientifica digitale mensile (e-magazine) pubblicata in Legnano dal 2013 – Direttore: Claudio Melillo – Direttore Responsabile: Serena Giglio – Coordinatore: Pierpaolo Grignani – Responsabile di Redazione: Marco Schiariti
a cura del Centro Studi di Economia e Diritto – Ce.S.E.D. Via Padova, 5 – 20025 Legnano (MI) – C.F. 92044830153 – ISSN 2282-3964 Testata registrata presso il Tribunale di Milano al n. 92 del 26 marzo 2013
Contattaci: redazione@economiaediritto.it
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