First catastrophe insurance pilot shows opportunities in China

by Artemis on July 14, 2014

The first catastrophe insurance pilot program has been launched in the Shenzhen, China, as the government looks to expand penetration of catastrophe insurance covers across the nation.

The catastrophe insurance pilot scheme has been in the offing for over a year now and Shenzhen is the first region to benefit. Interestingly the catastrophe insurance pilot is not a property cover, rather it is a personal injury type policy, aiming to cover the costs of medical treatment, disabilities and deaths that are caused by natural disasters.

The government-funded scheme is the start of the roll-out of catastrophe protection across the country, with the aim of first targeting regions which have greater exposure and insured values before expanding to lesser populated and insured regions of the country. The personal injury, death and disability catastrophe cover will be followed by products to protect property and businesses from natural catastrophes.

The pilot covers a wide range of perils, including: storms, heavy rain, cliff collapse, lightning, floods, tornadoes, squall lines, typhoons, tsunamis, mudslides, landslides, subsidence, hail, waterlogging, 4.5 aftershock and above earthquakes and earthquake secondary effects.

The maximum compensation for any policy holder during a single disaster is up to 100,000 yuan while the total available protection for a single disaster event is said to be 2 billion yuan. The catastrophe insurance also covers victims of nuclear accidents that may be caused by any natural disaster event.

Shenzhen is setting up a 30 million yuan catastrophe fund to supplement the insurance policies, which will provide protection to the government as well in the event of disasters striking the region.

The hope is that by launching a government-funded catastrophe insurance pilot enabling residents to get used to having protection, it will stimulate the private insurance market to step in and launch their own non-subsidised products.

“Commercial insurance institutions are expected to be encouraged by the move to develop more products related to catastrophe insurance,” commented Xiao Zhijia, vice director of Shenzhen’s financial service office.

The pilot will help to educate the Chinese insurance market and Chinese insurance consumers in the need for catastrophe protection. That should stimulate the growth of catastrophe insurance premiums in the country, which as a result will increase the need for reinsurance protection.

The international reinsurance market will end up playing a role in the provision of this cover and the capital markets stands in good stead to also play a role through the issuance of insurance-linked securities (ILS) such as catastrophe bonds. The Chinese government has expressed a desire to see the use of catastrophe bonds in the country, citing the effectiveness of capital markets for assuming large catastrophic risks.

China’s insurance premiums are expected to grow rapidly in years to come. Insurance premiums are expected to account for as much as 5% of the country’s GDP by 2020, the China Insurance Regulatory Commission (CIRC) said recently.

The CIRC said that it expects the Chinese will pay an average of 3,500 yuan (about $570) per capita in insurance premiums by 2020. That would make China the world’s second-largest insurance market behind the United States.

This rapid growth will equal insurance premium revenues of around 4.55 trillion yuan (around $733 billion) for the country’s insurers by 2020, compared with 1.72 trillion yuan at the end of last year, according to the CIRC.

Those numbers are mouth-watering for the global insurance and reinsurance market and you can see why there is a lot of effort spent on entering the market there. To date penetration is slow in China by foreign re/insurers but expect their efforts to become more active in the Chinese market to accelerate as insurance premiums grow in the country rapidly in years to come.

There is real opportunity for the ILS market to stake a claim to a share of the Chinese insurance market as it grows, risk models improve and the need for reinsurance increases. China looks set to embrace index-based catastrophe insurance and parametric triggers as well, as a way to avoid difficulties around indemnity covers in the country as it grows rapidly.

For many large risks and large insurers in China, parametric triggers may be the best way to gain significant amounts of catastrophe reinsurance cover in the next few years. That could present opportunity to ILS and catastrophe bonds, particularly as the Chinese regulators and government have in the past looked at the possibility of allowing ILS instruments to be issued domestically.

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