China State Council’s focus on disaster risk needs reinsurance & ILS support

by Artemis on May 17, 2017

Head of the Chinese State Council, Premier Li Keqiang, has called for improved and broader disaster insurance protection for the country’s agricultural industry, which could bring a significant volume of new Chinese risk to the insurance, reinsurance and insurance-linked securities (ILS) markets.

China flagAt a recent State Council executive meeting Premier Li urged for steps to be taken to ensure farmers across the country have greater access to affordable and effective disaster insurance solutions.

China is susceptible to a range of natural disaster events, and has had a number of catastrophe programmes in the past and currently, with the Chinese government often providing large funding to farmers’ post-event.

In fact, some provinces had government cash pools to help farmers recover post-disaster, but the message from Premier Li is for the expansion of programmes, the improvement of rates and compensations standards, and also improvements to the reinsurance system.

Artemis discussed last year how reinsurer Swiss Re had backed the first parametric disaster insurance programme for farmers in China, covering participants against the impacts of flood, excessive rain, drought and low temperatures in 28 counties across Heilongjiang province.

But the size of the Chinese agricultural sector and the number of livelihoods that depend on the industry to survive, combined with the region’s high vulnerability to natural disaster events, suggests that more can be done to ensure more farmers have access to affordable and effective disaster insurance coverage.

“Disaster insurance is especially vital to the development of scaled farming operations since they are most vulnerable to disasters,” commented Premier Li.

At the meeting, chaired by Premier Li, it was decided that the State Council would officially begin implementing the launch of pilot zones to improve the penetration of disaster insurance in the Chinese agricultural industry.

According to reports, 13 major grain-producing Chinese provinces will be provided with disaster insurance to cover material costs and land rental caused by a disaster, with the government also increasing the amount of subsidy for insurance payments in the pilot regions.

“We are aiming at innovating the disaster relief mechanism in agriculture and making full use of our financial funds, in an effort to increase farmers’ income and promote the development of modern agriculture,” continued Premier Li.

As mentioned earlier, the Chinese government helps and funds farmers in a big way after a disaster event, but were those risks transferred to the global risk transfer market it would alleviate some of the financial burden from the government, and also bring a lot more Chinese disaster and weather risk into international insurance and reinsurance markets, with ILS being a clear possibility.

The global protection gap (disparity between economic and insured losses post-event) continues to broaden and the global risk landscape continues to evolve, and for China a lack of insurance penetration has been an issue for some time.

In fact, Artemis reported that most of China’s $41 billion of catastrophic economic losses in 2015 was uninsured, and despite a growing economy and insurance market, insurance penetration has struggled to keep pace.

This highlights a clear opportunity for global insurers, reinsurers, and ILS players to develop innovate solutions and provide efficient capacity to support the expansion and maturity of the Chinese agricultural insurance industry. That is as along as they can get past practices which could see more risk retained within the country’s borders.

Re/insurers and ILS markets are incredibly skilled, willing and able to play a greater role in the Chinese weather and disaster risk markets, and features such as a parametric trigger, which ensures rapid-payout post-event, could be a huge benefit to farmers that heavily depend on the agriculture industry to survive.

Insurance solutions offered via a parametric programme help people by reducing the risk of poverty following such events, therefore protecting lives and livelihoods, as well as benefiting the governments by removing the financial burden from their budgets.

ILS funds currently participate in some Chinese reinsurance programs, or assume Chinese exposures via quota shares and global retrocession deals. If the models can be created to enable the Chinese government to offload some of its catastrophe risks, it seems certain that the ILS market and its investors would support this goal and ultimately provide China’s agriculture sector with more security and stability.

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