China’s Henan floods a record industry loss, show need for reinsurance

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The recent severe flooding in China’s Henan province is expected to result in the largest catastrophe insured losses in history for the country, clearly demonstrating the need for more reinsurance protection, as well as faster roll-out of primary covers.

China flagAM Best said yesterday that it anticipates insurance and reinsurance industry losses from the floods reaching approximately US $1.4 billion, which is above Fitch Ratings $1.25 billion industry loss estimate.

At this level, AM Best believes that these floods that largely impacted Henan province and the city of Zhengzhou will surpass the record catastrophe insured loss of approximately US $1 billion incurred from Typhoon Fitow in 2013.

Even at a record level though, the protection gap is expected to be significant and the economic costs of the flooding could be eight to ten times higher, analysts have estimated.

While China’s insurance industry is increasingly well-capitalised and AM Best underscores this fact by saying that it “does not expect this flood to be a capital event for Chinese insurers as the losses are expected to be within insurers’ risk tolerance levels,” this does show an increasing need for reinsurance capital and also a chance to innovate in the Chinese insurance marketplace.

Motor insurance is expected to account for the vast majority of incurred claims, given the heavy flooding in Zhengzhou city, AM Best said.

Here, the rating agency anticipates a share of losses falling to reinsurance capital providers, but adds that “this event may highlight the need for catastrophe excess-of-loss protection for the motor line.”

This is especially true after the reforms in 2020 that mandate flood claims be covered under motor policies.

Another area of impact is agricultural insurance, and here the 2020 set-up of state-owned agricultural reinsurance firm China Agricultural Reinsurance Co. (Agro Re) is expected to provide some protection.

Insurers have to share 20% of their premiums to Agro Re on a quota-share basis, AM Best explained and can purchase additional proportional and non-proportional reinsurance as needed.

As a result, Chinese insurers have been actively reducing their own net exposure with the help of Agro Re, but that means this state-owned reinsurance firm is aggregating the risk.

Which perhaps presents an opportunity, as China could look to cede that risk to the international retrocession or capital markets perhaps, with the Hong Kong ILS framework providing a ready made conduit to access efficient reinsurance capacity, if it chose.

Accelerating uptake of primary insurance covers mean that exposure is rapidly rising for insurers in China.

As a result, the need for reinsurance capital is expected to accelerate, driving increasing engagement with global markets and in time the capital markets as well.

Already, the first catastrophe bond to come out of Hong Kong is expected to be the Greater Bay Re Ltd. deal sponsored by China Re.

With additional Hong Kong cat bonds anticipated over the rest of this year as well, some of which may also be for Chinese sponsors, there is an opportunity for the Chinese insurance market to make ILS and the capital markets a much greater proportion of its risk capital than we see in more mature marketplaces, given its rapidly growing premium base.

By tapping the capital markets early, China’s insurance and reinsurance market can access efficient capital for protection and to support growth, at a time when exposures are rising rapidly.

That could give the countries insurance industry an edge and enable its insurers to compete more broadly in time as well.

The Henan floods may prove to be a bit of a wake-up call for China’s government, its regulator and the insurance industry in the region, driving home both the need to accelerate roll-out of disaster insurance, as well as to underpin this with strong and efficient reinsurance capital.

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