Insurance penetration in China, a key indicator of the industry's role in the overall economy, is expected to reach 5 percent by 2020, the State Council said on Wednesday.

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The percentage, calculated by dividing the overall premium by GDP, now hovers at around 3 percent, indicating huge growth potential for the sector. Meanwhile, insurance density, which is calculated by dividing the premium by population, is estimated to hit 3,500 yuan ($565) per person by 2020, up from the current 1,266 yuan figure.

Xiang Junbo, chairman of the China Insurance Regulatory Commission, said in July that the country's premium income could be among the top two worldwide by 2020.

Statistics from the CIRC showed that China's premium income stood at 1.72 trillion yuan in 2013, ranking fourth globally. Over the past decade, the industry has been growing even faster than GDP at a compound annual growth rate of 16.5 percent

"China's insurance industry is the only developing market among the global leaders that still promises huge growth opportunities," Linas Grigaliunas, director of the financial institutions analytical team at Dagong Europe, was quoted by Xinhua as saying.

According to Dagong Europe, a branch of China-based Dagong Global Credit Rating Co Ltd, the Chinese insurance market is set to expand by about 15 percent in 2014-2015, with health and non-life businesses expanding faster than the life insurance sector.

Along with addressing the premium growth target, the State Council also outlined a number of measures to boost the sector. For instance, qualified insurance institutions will be encouraged to invest in the elder care industry and take part in the integration of healthcare services.

Hao Yansu, director of the School of Insurance at Central University of Finance and Economics, said those measures will expand insurers' business scope and improve their investment returns.

Meanwhile, a catastrophic insurance system, including a catastrophe fund and catastrophe reinsurance, will be established, with commercial insurers poised to play a bigger role in disaster relief.

In managing natural disaster risks, some local governments have conducted trial runs of the system. The Shenzhen municipal government, for instance, created a disaster liability insurance policy to compensate residents who are injured in natural disasters, thus becoming the first local government in China to arrange this type of disaster-related insurance program. Swiss Re is the technical adviser and a leading reinsurer for the program.

The China Development and Research Foundation on Wednesday released a research report on parametric insurance solutions for the country's disaster relief system reform.

The research, sponsored by Swiss Re, revealed that parametric insurance is a feasible fiscal instrument for disaster relief and post-disaster reconstruction in China.

According to Swiss Re, the payout model of parametric insurance "aims to closely mirror the actual damage on the ground and enables a much more rapid payment as no loss adjusters are required after the event to assess the actual damage."