Risk management for affordable rental housing in China

In China, domestic population flow continues to concentrate into economically developed cities, creating rapid urbanisation and driving up housing demand. In 2020, internal migration within China totaled 376 million people, or 41.6% of the urban population. However, a rising shortfall of housing supply in Tier 1 cities is making housing increasingly unaffordable for most residents. The price of residential housing has been rising since the mid-2000s and the average home price in Tier 1 cities has increased further since the COVID-19 pandemic when government strengthened policies to deleverage the property sector for sustainable growth. A lack of affordable housing may discourage younger workers from making long-term plans to live in cities, reducing the supply of labour in more developed regions and so increasing pressure on China's economy. In response, the central government has launched policies to promote the development of affordable housing for new migrants to major cities, as part of wider real estate market reforms. Our new publication is in Chinese only.

In 2021, the China State Council issued a Guideline to Accelerate Development of Affordable Rental Housing, proposing the government-subsidised construction and operation of rental housing on typically brownfield sites. The housing would be fully operated by market players, with units often no larger than 70 square meters, at rents below the market rate, designed to house new urban residents, young people and other eligible groups in large cities. Since 2021, local governments and authorities have issued construction plans for rental housing development and at least 40% of new apartments built in Tier 1 cities are expected to be for affordable rental in 2021-25. We expect this housing segment to gain momentum in the coming years given governments' commitments, a favourable policy environment and strong demand.

Affordable rental housing has similar risk characteristics to private-owned and rented residential property, with some additional features. Typical property risks include property loss or damage due to natural catastrophes, fire events or other accidents. In addition, affordable rental housing generally is more densely populated than residential properties given the small-sized units, and has a higher tenant turnover rate due to its rental nature, which increase the pressure on facilities' depreciation and the risk of accidents as time goes on. According to the ownership of different areas, residents are normally the risk takers for their own property within their rental units; the property owner/operator is typically responsible for the risks for building structure and properties in common areas; and the government would provide necessary support to the victims should an extreme catastrophic event occur. Since the residents of the affordable rental housing are new arrivals in cities, typically young and with relatively lower wealth, they are more financially vulnerable to external shocks. Finally, since this type of property is endorsed by governments, any event leading to large property losses would potentially have a significant social impact. We therefore see an imminent need for a strong risk management mechanism to manage the growth in risk faced by multiple stakeholders.

Percentage of home insurance in P&C premiums for China and other markets, 2021

Residential risks can normally be covered by home property insurance and property all-risk insurance, which protect the value of residents' property within a unit, and property such as common areas outside individual units, against various risks. In home property insurance, some existing products cater specifically for rental property. For example, tenant insurance protects tenants' own property as well as the property content for which they are liable for loss or damage as identified in the rental contracts. Property-owner insurance provides protection for a property's common areas and building structure against external risks.

However, related insurance lines are generally under-developed in China compared to other markets. As one typical line for residential risks, the share of home insurance* premiums in the property and casualty (P&C) insurance market is only 0.8% in China as of 2021, compared to 17.9% for France, 8.8% for Japan and 5.7% for Russia.

We see affordable rental housing as an attractive, growing risk pool for property insurance solutions in China, given its combination of social protection features through the government's support and endorsement, and fully market-orientated financing for its construction and business operations.

As we anticipate demand for risk protection for affordable rental housing to rise, we suggest stakeholders, including governments, property owners and operators, enhance the risk protection mechanism by incorporating the role of insurance. We offer three policy suggestions:

• A set of legal guidance is needed, particularly to clarify the legal liability for properties of affordable rental housing. This would ideally incentivise liability owners to take a proactive approach to risk management.
• Open cooperation between the public and private sectors, including the insurance sector, could enhance overall social governance through better risk management capabilities. For example, exploring public-private partnerships (PPP) to create city-specific solutions.
• Financial regulatory bodies could help to encourage residents to enhance risk protection through use of existing financial funds. For example, tenants could be allowed to use a property repair fund or individual provident fund to purchase home insurance for risk protection.   

We also see three areas of focus for the insurance sector to help to promote the use of residential insurance:

• Continuous enhancement of core risk management capabilities for various residential property risks, through digitalisation and technology-driven tools.
• Create a more differentiated range of insurance products, taking into consideration consumers' preferences and incorporating those features into all stages of the insurance value chain, for example by offering high-frequency home services such as property repairs and maintenance. Work with local governments to support the development of new, inclusive property insurance products that use innovative city-specific models of operation.
• Reinsurance can play a role to enhance overall insurance capacity and can support insurers' risk management capability for residential risks. Reinsurers can form part of a property insurance ecosystem alongside stakeholders including primary insurers, technology companies and service providers, to deliver the best outcomes for participants in the affordable rented housing sector.

* In China, home insurance typically covers home contents and part of structures such as pipes, electricity, drains, heating, etc.