China urges focus on disaster insurance product development

The Chinese government via its regulator has urged its insurance and reinsurance industry to focus on developing new products for disaster risk transfer and to help in covering more of the natural catastrophe risk in the country, given the current evident protection gap that exists.

Recent flooding in Henan province in China has provided yet another example of thee massive gap between economic losses from natural disasters, catastrophes and severe weather events and the amount actually covered by insurance.

With the Henan flooding now set to become the biggest insured catastrophe loss in China’s history, it drives home the importance that the country continues to evolve its insurance and reinsurance market, especially in terms of disaster coverage.

Most important is increasing uptake of disaster insurance products, something the Chinese government is all too aware of and after the floods, a number of statements have been made calling on the industry to innovate and produce new disaster insurance product options for the population.

China’s Banking and Insurance Regulatory Commission (CBIRC) said in a statement to the Reuters media agency that it plans to encourage insurers and reinsurers to invest more in disaster insurance in the country, particularly in expanding the range of products on offer.

In addition, the government and regulator plan to increase public awareness of the need for disaster insurance, to try and stimulate greater uptake and also in future ensure that insurance financing plays a greater role in national disaster recovery.

The recent flooding has driven home both the scale of the protection gap, with the economic loss expected to be as much as eight or ten times the roughly US $1.4 billion estimated insurance market loss from the event.

It has also underlined the role of regulation and government, in encouraging greater uptake of insurance, as in the case of the Henan floods, a significant proportion of the insured loss will come from motor lines of business, while flood coverage was only bundled into motor policies more widely after 2020 rule changes.

Which shows that further regulatory changes to encourage uptake of important disaster insurance products may be required, especially for homeowners and renters, but it’s also acknowledged that product development will be key, to ensure they are affordable and still provide useful coverage.

More and a wider range of disaster insurance products are recognised as being needed by the CBIRC and the regulator has also called on the Chinese insurance and reinsurance industry to get involved in a national census of disaster risks.

The idea is to ensure re/insurers are fully engaged and recognise where opportunities to improve protection may come from.

In addition, the CBIRC said that it wants the industry to improve the insurance protection system for major natural disasters and further enhance the insurance industry’s ability to participate in disaster prevention, mitigation and relief.

These directives come from the top, as General Secretary Xi Jinping has himself called on government to improve the ability of society to weather natural disasters, while the State Council has also noted the need for financial innovation to respond to increasing disaster losses and drive greater rates of protection.

Capacity building is also part of this work, with a recognised need for more catastrophe reinsurance capacity to support roll-out of new and more widespread disaster insurance products.

The regulator wants to see exclusive financial services for flood prevention and disaster relief, including insurance products, while it also expects insurers to respond quickly to claims.

China needs disaster risk financing to be integrated across its people, businesses and government functions, with risks pooled and then efficiently hedged into reinsurance and capital markets.

As we’ve explained, the advent of an insurance-linked securities (ILS) issuance platform in Hong Kong can be a significant support in these goals, with catastrophe bonds now possible and access to the capital markets for insurance protection now opened up.

China has an opportunity to realise a new way of implementing disaster insurance that works from the bottom-up, in terms of payouts and protection, while pooling risks and bringing capacity top-down from the most efficient sources to support that.

The country could provide a model for integrated disaster risk financing and insurance solutions that really help those most exposed, while utilising advanced capital markets technology to leverage the efficiencies of institutional capital and securitisation. That could be compelling and most of all, truly useful to the population.

In addition to the focus on disaster insurance, the CBIRC has also said it will explore new legislation to support the disaster insurance and reinsurance market in China.

At the same time, the regulator is also hoping to encourage more foreign capital, saying that overseas investors will be treated the same as domestic in capital markets.

Putting the two together, this could be a good base for a Chinese insurance-linked securities (ILS) marketplace, a range of disaster insurance product opportunities and open access for foreign institutional investors.