‘Balance Of Interests’ Key to Establishing Natural Catastrophe Pool in China
China has long lacked insurance protection against natural catastrophes, and reinsurers say relatively low awareness of insurance protection among the public and the challenge of reaching a "balance of interests" among stakeholders have prevented country from setting up a protection umbrella against such risks.
The insurance market in China has experienced rapid growth in recent years, with total premium income up by 13.8% year-on-year to more than 1.11 trillion yuan (US$163.6 billion) in 2009, according to the China Insurance Regulatory Commission. But insurance density and penetration are "still relatively low," especially as coverage against natural catastrophes is "not widespread" for individuals, companies and municipalities, according to Munich Re.
Steven Chang, Munich Re's China chief executive, said the challenge of establishing a natural catastrophe insurance pool in China involves "how to work out a scheme that the stakeholders of the pool, including the central and local governments, reinsurers, primary insurers and citizens, can reach consensus to benefit people and domestic economic growth."
"The balance of interests between buyers and sellers," including whether available natural catastrophe insurance and reinsurance products provided by sellers are reasonable and affordable to buyers, is a concern that would require the government to be the project leader to develop a risk pool, said Chang.
Insurance Awareness
China's natural catastrophe funding is "mainly coming from the government fiscal support and public donations," which has largely relied on the government. Insurance payouts for natural catastrophe losses usually account for a "tiny" part of the total loss amounts, according to reports citing the Business School of JiuJiang University in southern China's Jiangxi province.
There has been a higher frequency of natural catastrophes in China in recent years, including droughts in five Chinese provinces and the Yushu earthquake in 2010, as well as snowstorms in southern China and the Wenchuan earthquake in 2008. All of these disasters have caused significant losses and increasing burdens on the government, which affects the government's financial security as well as the economic development of China, noted the university.
The Wenchuan and Yushu earthquakes also revealed that most Chinese citizens have no life insurance coverage. The snowstorms and droughts revealed a lack of agricultural insurance.
One solution is to enhance insurance awareness among corporate and individual customers. Insurers and reinsurers could help customers understand the insurance features like risk management, individual life and family property protection, as well as to help with post-disaster redevelopment, according to the university.
China Re, the largest Chinese reinsurer, recently introduced a natural catastrophe model from international risk modeling company RMS, with an aim to use the model to evaluate its own natural catastrophe risks and to provide relevant risk control services and management strategies for customers.
Nat Cat Funding
On the technical issue of how to set up an effective natural catastrophe pool in China, Swiss Re's managing director of Asia, Robert Wiest, said it will depend on political and financial factors.
Another important issue is "at what administrative level, such as the central or the provincial government together with other relevant government bodies that should be involved in running this model," said Wiest. On the financial side, "the source of funding and the size of capital" are topics the government would take time to address, he said.
China's high exposure to natural catastrophes has made its risk landscape even more complex as economic prosperity grows, according to Munich Re, which noted that due to the sheer size and complexity of exposures involved, individual risk solutions of single companies will not achieve the breakthrough needed in China.
To reduce the burden on governments, "measures for risk prevention and risk transfer are needed," said Munich Re, which added severe natural catastrophes can have a "serious" impact on economic and social development.
With the need of relevant data for earthquake, typhoon and flood models from the Chinese private insurance sector, Chang said Munich Re would support the formation of a natural catastrophe pool with significant reinsurance capacity to cover natural perils and include public and private property.
"Increasing urban populations and asset values will also drive the demand for natural catastrophe covers, which might also make economic sense for the state and municipalities and the biggest owners of property to transfer their risk to the worldwide insurance sector," he added.
Enlarging product innovations that focus on specific geographical characteristics in China would help insurance companies tackle the market efficiently, according to JiuJiang University reports, which added insurers could design typhoon insurance products in southern China's Pearl River Delta and Hainan province; develop earthquake insurance in earthquake-active regions; develop flood insurance in central China; design snowstorm insurance in northern China and drought insurance in southwest regions; and provide comprehensive natural catastrophe insurance products.
Chang said that according to the past experience of the insurance regulator, he believes the central government and regulators will introduce a pilot program in several districts as "experiments" before consolidating a commonly agreed catastrophe risk pool.
To hear the interview with Steven Chang, go to http://www.ambest.com/media/media.asp?RC=176492
(By Rebecca Ng, Hong Kong news editor: [email protected])
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