Urgent need for more natural catastrophe coverage in China

by Artemis on July 19, 2011

China is a country particularly exposed to damaging losses from a range of natural catastrophes and severe weather events and it regularly suffers billions of dollars of economic losses per year and major loss of life. Despite this fact insurance penetration is low across the country and natural catastrophe coverage is hard to come by.

Global insurers and reinsurers are increasing their presence in China and at a lower level microinsurance availability is growing slowly but it’s a slow process as it’s not always the easiest country to do business in. Re/insurers are keen to increase their roles and are now calling for increased catastrophe insurance availability in the country.

This Bestwire article discusses the issues. Severe weather and catastrophe events in China are causing devastating losses, huge loss of life and displacement of populations but re/insurance isn’t picking up the bill. Recent flooding in China caused $5.41 billion in economic losses said Aon Benfield in a recent report, this type and magnitude of event are becoming an annual occurrence. The article says the largest recorded loss event in China was flooding in 1998 which killed 4,159 people and resulted in economic losses of $30.7 billion but only insured losses of $1 billion.

The potential for economic losses is huge in China due to the extremely rapid development and expansion of urban and industrial areas. It’s said that 71% of the urban districts and more than 50% of the population are in earthquake prone areas or subject to meteorological, geological, and oceanic problems while two-thirds of the country is prone to flooding. The need for catastrophe insurance is clear.

The article goes on to quote Munich Re’s China chief executive, Steven Chang as saying “We see an urgent need for more natural catastrophe insurance in China, especially considering today’s comparatively low insurance density.” The article also says that indemnity cover only manages to protect as little as 5% of the losses from an event in China compared to a global average of 30% and developed country average of 50%.

We’ve written about China and the need, and potential, for reinsurance and risk transfer to help increase catastrophe cover and lower the financial impacts of disasters. Recently we wrote about the hopes that a new China typhoon risk model from RMS could help facilitate the use of catastrophe bonds in the country and RMS said they were actively investigating China as a potential market for cat bonds. At the moment it seems that the desire for a Chinese peril cat bond would be high, both among reinsurers and certainly among investors (it would be another popular diversification string to the markets bow), but the time is not quite right. Weather risk management is another sector with an eye on China as their tools are a natural fit for a growing nation so exposed to perils and usage of weather hedging tools are definitely on the agenda in the Chinese market.

It can surely only be a matter of time until both weather and catastrophe risks in China can be successfully hedged or transferred to the capital markets as easily as they are in countries like the U.S. We’d like to think a Chinese cat bond may be something the market will see within the next one to three years, but a lot will depend on the rate of growth of insurance penetration and the continued development of models and availability/use of weather data.

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