China’s $41bn of 2015 catastrophe economic losses largely uninsured

According to China’s government Ministry of Civil Affairs, natural catastrophes and severe weather events cost the country a huge $41 billion of economic losses in 2015, a number that is far above the total covered by insurance and reinsurance.

China, despite having been the fastest developing country in recent years, remains a country where under-insurance is an issue and the protection gap opportunity is extremely evident.

Natural disasters across 2015 killed 819 people in China and a massive 186 million people were said to have been affected, either directly or indirectly, by catastrophes and severe weather events during the year.

6.4 million people had to be evacuated from their houses due to catastrophes during the year, with 1.8 million needing emergency assistance. 248,000 houses collapsed, the Ministry said, while almost 22,000 hectares of land were damaged, including 1,000 hectares of crops.

The economic loss calculated by the Chinese Ministry of Civil Affairs came to 270.41 billion yuan, which converts to roughly USD $41 billion.

The scale of the economic losses suffered in China at $41 billion, which almost accounts for half of reinsurance firm Munich Re’s estimate of economic losses for the year of $90 billion, and is more than half of the $74 billion estimate of 2015 economic natural catastrophe losses from Swiss Re, demonstrates the opportunity to close this protection gap and increase insurance uptake in the country.

It’s also worth noting that the numbers for 2015 are down, considerably in the case of deaths, and around 2% for economic losses, due to lower seismic activity compared to 2014.

China is of course a rapidly growing economy and has a rapidly growing insurance market. However, to date, penetration is not picking up quickly enough to help the country to offset the burden of catastrophes and weather impacts.

This presents a tangible opportunity to the insurance, reinsurance and also insurance-linked securities (ILS) sector, to help to narrow the protection gap between economic losses suffered and insurance payouts.

Artemis spoke with Steve Bowen, Associate Director and Meteorologist at reinsurance broker Aon Benfield’s Impact Forecasting catastrophe modelling and analysis unit.

“China provides one of the fastest growing insurance markets in the world, and there is tremendous potential for insurers to help in the aftermath of significant natural disaster events. The country is no stranger to natural catastrophes given its exposure and regular risk to perils such as earthquakes, flooding, severe thunderstorm and tropical cyclones,” Bowen explained.

“In 2015, the country incurred an insured loss estimated between USD1.5 and 2.0 billion from natural disasters. Roughly half was attributed to flooding and convective storms. Given that the overall economic cost was substantially higher, this continues to show that overall penetration levels remain quite low,” he continued.

So taking the mid-point of the estimate from Impact Forecasting’s Steve Bowen, at USD1.75 billion of insured losses in China in 2015 from natural disasters, suggests that just 4% of losses suffered were covered by insurance and reinsurance, a tiny amount for a country which has such high exposure to natural disasters and severe weather events.

Clearly the Chinese government is bearing the brunt of this economic impact, with some passed on to taxpayers and the population. In order for the figure to be reduced the work to establish catastrophe risk insurance pools in Chinese regions should be accelerated, with the support of the global reinsurance and capital markets to bear the peak exposures.

With the first catastrophe bond featuring Chinese risk completed in 2015, the $50m Chinese earthquake exposed Panda Re Ltd. (Series 2015-1), the appetite of the capital markets, ILS investors and ILS fund managers has been whetted for assuming Chinese risks.

ILS fund managers are already participating in some Chinese reinsurance programs, or assuming Chinese exposures through quota shares and global retrocession deals, so ILS capital is no stranger to China. 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.

At the moment the Chinese government heavily subsidises agricultural insurance in the country and agriculture in general. Perhaps this could be a target for taking risk away from the government and shifting it into private markets.

Around USD$2.04 billion was allocated to subsidise agricultural insurance premiums in 2013, while subsidies for agricultural disaster relief and prevention are also high. A further USD$1.95 billion was allocated to fighting drought and its impact on agriculture since 2011.

These subsidies are vital to enable poor farmers to gain access to insurance coverage for their crops and livestock, but perhaps efforts could be taken to begin to shift some of that burden away from the government to private insurance and risk transfer markets, resulting in a reduction in subsidy required.

China could benefit from a risk pooling approach, perhaps similar to the African Risk Capacity (ARC), providing insurance at province level and using the traditional and alternative reinsurance markets for risk transfer and to back the schemes. As any initiatives such as this grew the government could reduce its exposure to natural disasters and weather events that affect agriculture.

And agriculture is just one area that China could benefit from more risk transfer, insurance and reinsurance capacity. The country could also benefit from the new trend of resilience bonds, catastrophe bond like structure that transfer risk while promoting the development of resilient infrastructure. There is an opportunity for China to tap the capital markets with these structures both to increase its resilience and to offset some of the risk and financial burden that its government faces.

China provides a perfect example of under-insurance or the protection gap, with trillions of dollars of economic risk and very little of it insured. The insurance, reinsurance, ILS and risk transfer industry has a real opportunity to use innovative techniques to help the country, the government and its people become better financially protected, more resilient and better able to bear the effects of weather and natural disasters.

Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.