China Re: Building Nat Cat Risk Insurance System ‘Quickly as Possible’

Despite China's rapid economic growth in the past 30 years, China's natural catastrophe risk management system lags behind its foreign counterparts, according to Wu Gaolian, chairman of China Re, the state-owned reinsurer.

China is beset with a gamut of natural disasters with high frequencies and significant losses -- making it one of the most affected countries in the world, noted the Beijing-based China Re</person>.

More than 70% of the urban districts and more than 50% of the country's population are situated in areas that are seriously hit by earthquakes, as well as meteorological, geological, and oceanic problems. Another two-thirds of the land is threatened by flooding.

The insurance indemnity scale for a single natural catastrophe event in China "generally does not exceed 5%," which is far away from the global average standard of around 30% and the developed countries' standard of more than 50%, Wu said.

"The indemnity for the Wenchuan earthquake, for instance, was merely 0.18%, with claims payout of 1.66 billion yuan (US$256 million); while the direct property loss amounted to 845.1 billion yuan," noted Wu.

Since the May 12, 2008 Wenchuan earthquake in central China's Sichuan province caused massive property losses, the Chinese government and the China Insurance Regulatory Commission have addressed the deficiency in the domestic earthquake insurance scheme.

China lacked the common international practice of running a long-term public-private partnership for the residential property catastrophe insurance scheme until 2005, according to China Re.

There are 17 provinces offering this scheme, covering damages caused by fire, typhoon, rainstorm, flooding and landslide. Several provinces also provide risk coverage for earthquake. However, such a scheme at the city and town level has yet to be developed, Wu said.

As a strong ultimate financial support for the earthquake insurance scheme, the Chinese government can set up a professional earthquake reinsurance company and develop a ceding system. The government can encourage the market to buy earthquake insurance, or to have this as an additional insurance arrangement.

Possible Solutions

Wu has suggested China draw on the experience of Japan's earthquake insurance system by introducing pilot programs targeting commercial catastrophe insurance and government policy-guided catastrophe insurance for residential properties.

The Japan Earthquake Reinsurance Co. Ltd., which was established by 20 domestic Japanese nonlife insurers in 1966 and is supported by the government, provides three different levels of catastrophe loss claim payment to houses/or contents related to earthquake, volcanic eruption and resultant tidal wave. The limit for houses is 50 million yen(US$622,439) and for contents is 10 million yen, according to the JER.

Under the Japanese model, in case of the lower-level loss, insurers and reinsurers will cover 100%; for the middle-level loss, insurers and reinsurers will jointly cover 50%, and the central government and regional governments will share the remaining 50% on a 1 to 1 ratio; for the upper-level loss, insurers and reinsurers will cover 5%, central government and regional governments will share the remaining 95% on a 2 to 1 ratio.

For the reinsurance arrangement, around 30 direct insurers, including 22 domestic Japanese and eight foreign companies; together with reinsurer Toa Re, JER and the Japanese government, participate in the scheme. The aggregate limit for the claims payment is 5 trillion yen.

The JER reported the most expensive compensation up till March 2005 was the 7.3 magnitude earthquake in the south of Hyogo prefecture in January 1995, with claims payout of approximately 78.35 billion yen. It is followed by the 6.7 magnitude Geiyo earthquake in March 2001, with claims payout of 16.93 billion yen; and the 6.8 magnitude of the mid Niigata prefecture earthquake in October 2004, with claims payout of 14.01 billion yen.

In early June, Japan's nonlife insurance industry has paid 847 billion yen for insurance claims related to the March 11 earthquake and tsunami, with 440,612 out of the total received 588,239 claims by the nonlife insurers have already settled, noted the General Insurance Association of Japan (BestWire, June 1, 2011).

China Reinsurance (Group) Corporation currently holds a Best's Financial Strength Ratings of A (Excellent).

(By Rebecca Ng, Hong Kong news editor: [email protected])