China hit by $20bn economic loss from natural disasters in July

Underscoring the need for significantly higher insurance and reinsurance penetration in China, the country’s government has reported that natural disasters during the month of July 2017 alone have resulted in direct economic losses of around US $20 billion.

Of the 135 billion yuan (20 billion U.S. dollars) of direct economic losses reported by China’s Ministry of Civil Affairs and the National Commission for Disaster Reduction, a relatively minimal amount is expected to be picked up by insurance and reinsurance markets.

Despite the rapid pace of development and urbanisation witnessed in China over the last decade and the rapid growth of its own insurance industry, property insurance penetration remains relatively low and so natural disasters can create enormous economic impacts, but little in the way of hit to the global re/insurance markets.

July’s disasters killed at least 230 people, with 44 still reported as missing and an estimated 2.8 million people displaced by extreme weather, flooding, typhoons and drought.

Approximately 73,000 houses were destroyed and an incredible 600,000 houses damaged, reflecting the massive population in China that are exposed to natural disasters. Around 8.84 million hectares of agricultural crops were damaged by July’s weather events, with 920,000 hectares reported totally destroyed.

Interestingly and perhaps reflecting both the locations of July disaster events in China as well as the continued rapid development, while the expanse of damage seen in July was lower than equivalent periods in recent years, the toll to agriculture and the direct economic loss was higher, the Ministry of Civil Affairs reported.

Flooding was the major cause of economic loss during the month, with 112.39 billion yuan reported. High temperatures and drought is reported to have caused direct economic losses of 16.16 billion yuan, while hail resulted in 5.88 billion yuan.

To be clear, enormous economic losses from severe weather and natural catastrophe events in China is not unusual and it only serves to underscore why the country is an attractive target for global reinsurance players, as well as for the insurance-linked securties (ILS) market.

But with the Chinese government remaining on the hook for the vast majority of the country’s natural disaster losses still, there is a lot of work to do in order to get more of that catastrophe and weather risk transferred into global risk transfer markets.

China’s government and insurance regulators are well aware, working closely with global reinsurance firms on pilot projects while also helping their own growing insurance market players get up to speed.

Interestingly, even the highest echelons of Chinese government are aware of the opportunity to disintermediate the traditional reinsurance market, as the capital markets and catastrophe bonds have been recognised at State Council level as tools with which Chinese disaster risk could be efficiently transferred to diversified sources of risk capital.

We’re told that the willingness to keep bearing these disaster costs is wearing thin in Chinese government circles, as investigations into risk transfer options continue and the country looks to the best way to foster a healthy local insurance market, while making best use of efficient reinsurance capital support.

Catastrophe bonds and their ilk are specific opportunities for the Chinese government and its insurance industry as it develops. But so too are ILS fund operations, as there is significant capital within China that could also be put to work in bearing local and international catastrophe risks as well.

With economic losses of this scale, the appetite to support and take on this risk will be abundant, in both traditional and alternative reinsurance markets. It’s down to China to work out the best way to tap into that appetite, while ensuring its local economy benefits and can foster healthy domestic markets as well.