China is vulnerable to every kind of natural disaster, especially in the new boom cities and on the coast. With recent disasters raising the profile of insurance, the rapidly maturing market is set to develop shared strategies

As China’s wealth grows, so do its insured catastrophe exposures. And as recent events have demonstrated, this vast country is vulnerable to perils – including earthquake, typhoon, inland floods and winter storms.

China’s impressive economic growth has continued in spite of the financial crisis. The Chinese government’s $586bn stimulus package (introduced in 2008-2009) helped to lift the country out of the downturn by investing in key areas such as infrastructure, housing and transportation. As global economic power shifts eastwards (China’s economy is expected to outstrip the USA in size in the next 10 to 15 years) and China’s major cities undergo massive development, it is clear that the country’s assets are increasing in value.

“Disaster losses are rising dramatically worldwide and Asia is bearing the brunt of it,” Asia catastrophe pool practice leader at Asia Capital Reinsurance group, Werner Bugl, says. “China is one of the countries most seriously affected by natural calamities. Most cities are megacities, in earthquake- or flood-prone locations. Megacities are megarisks. Shanghai, Beijing and Guangzhou are in the [world’s] top 10 cities of exposed populations and asset concentration.”

It is thought that the Yangtse flood losses in 1998, which cost the Chinese economy $30bn, would cost twice as much today. Likewise, the outcome of the Tangshan earthquake of 1976 (which had a magnitude of 7.5 and killed up to 500,000 people) would be an even more frightening scenario in economic terms in today’s China.

“It is estimated that if triggered by one of the principal perils – earthquake, typhoon, flood, drought, winter storm – a major catastrophe in China today would generate a total economic loss in excess of $100bn,” Bugl says. Without an increase in insurance penetration, he believes “the gap between economic and (re)insured loss will fall squarely on the government, with severe disruptive effects and adverse implications for stable and sustainable economic development”.

Many international insurers and reinsurers have a presence in China, with Lloyd’s recently granted a license to transact direct insurance business by the China Regulatory Insurance Commission (CIRC). In 2009, China reported non-life premiums of $53.87bn, up 19.8% from $44.99bn in 2008, according to Swiss Re’s sigma report ‘World Insurance in 2009’. By contrast, insurance penetration is less than 0.5% of GDP.

“The growth was actually much faster than many other emerging markets,” Swiss Re’s managing director for China, Robert Wiest, says. “Given the fast economic growth that leads directly to the high accumulation of asset value, the potential for cat losses is certainly on the rise. And this is especially true for the coastal areas.”

Crisis year

The year 2008 was a prominent one for catastrophes in China and one that has raised the profile of insurance and its ability to cover catastrophes. In February, the south of the country suffered the worst snowstorms in 50 years; 129 people died and 1.7 million had to be evacuated. This was blamed on the combination of a very cold winter and a weather pattern related to climatic event La Niña. Economic losses were put at between $15.4bn and $21bn, according to Aon Benfield, as southern centres such as Guangzhou ground to a halt just three weeks before the Lunar New Year holiday. Insured losses were much lower at around $280m to $1.2bn.

Then, in May 2008, the province of Sichuan was rocked by a M8.0 earthquake that caused massive loss of life and extensive damage to buildings and infrastructure, as well as triggering landslides and quake lakes. More than 70,000 people were killed (including around 10,000 schoolchildren when up to 100 schools collapsed as a result of suspected building code breaches). More than 138,000 businesses were affected and more than 15 million properties collapsed, causing over $125bn damage. While insured losses were again only a fraction of the total economic cost, this remains the highest insured loss for China to date.

“Insurance penetration in China remains at a very low level, especially for residential property and small to medium-scale domestic enterprises,” Wiest says.

“As a consequence, insurance compensation following natural catastrophes has been only minimal to date, leaving the bulk of the loss burden to individuals, companies and ultimately to the government. The insurance payout of $260m for the Sichuan earthquake accounted for only 0.2% of the direct economic loss of $125bn. World-average recoveries from insurance are around 15%, with the ratio in some developed countries being much higher.”

The low insurance impact from events is set to change, however, as a growing Chinese middle class and maturing insurance market drive insurance take-up. Some predict that in the next decade China will become the next “peak zone” for catastrophe exposure after the USA, Europe and Japan. With its huge geographic area (9,522,055km²), the country is at risk from all natural perils. “China’s complex climatic and varied geological conditions expose the country to virtually every type of known natural disaster,” Wiest says. “Among these, earthquake, typhoon and floods have the most devastating potential. However, landslides, snowstorms and torrential rainfall also cause significant damage.”

He notes an increasing demand for earthquake insurance since the Sichuan and Yushu earthquakes in 2008 and April 2010, respectively.

Flood and typhoon risks

According to Munich Re, four of the 10 earthquakes with the highest death toll since 1900 have occurred in China. In the Guangzhou metropolitan area, which includes Guangzhou, Shenzhen and Hong Kong, there is a possibility for insured losses far exceeding $1bn. China is also prone to flooding, particularly in the area around the country’s longest river, the Yangtze, because of the very flat terrain. China’s 10 largest flood events since 1980 accounted for overall losses of over $135bn, but insured losses only accounted for around 1%-2%.

Recent events include heavy rain across several sections of the country, leading to flash flooding and landslides. Floods in Gansu, Sichuan, Shaanxi and Yunnan provinces left at least 829 people dead and caused damage to nearly 800,000 homes and over four million hectares of agricultural land. Massive landslides in Gansu caused 1,467 deaths. The economic loss due to floods and landslides this summer is around $40bn, according to Swiss Re, with insured losses for property casualty insurers coming in at around $400m-$600m.

Hazards that could contribute to motor losses are of key interest to insurers. The recent floods caused some losses in urban areas, as overtaxed sewer systems led to flooding and damage to cars in underground car parks. The potential for hailstorms could also prove costly, as the 1999 Sydney hailstorm demonstrated when more than 70,000 vehicles were damaged.

Of all the perils, insured losses are currently highest for typhoons. Hong Kong and Shanghai both have large exposures. While Hong Kong has seen some claims from ‘black rain’ and landslides, typhoon losses have been moderate in the past two decades.

In 2007, Super Typhoon Wipha led to mass evacuation as it moved close to Shanghai. On average, seven typhoons make landfall in China each year. 1998 brought the highest death toll from typhoons in China, with over 4,000 deaths as a result of widespread flooding.

Of the major loss scenarios for a 200-year return period, an earthquake in Beijing could cause economic losses of $120bn and insured losses of $1bn, while flooding in Shanghai could cost $31bn in economic losses and up to $2bn in claims. This is according to a 2007 Lloyd’s report – China: Avenues for Growth – which also puts the cost of a major typhoon in Guangdong at $38bn, with insured losses of $3.5bn.

Several recent events have been “near misses for the industry”, senior analyst at Aon Benfield Analytics, Dustin Fabbian, says. “They are very significant events and humanitarian catastrophes – especially in the case of the Sichuan event in 2008 – but in terms of insured losses they haven’t been catastrophic.”

A repeat of the Tangshan earthquake is, he says, “one of the loss scenarios we discuss with clients. There is a large accumulation of exposure around the north-eastern economic centre of China that is Beijing, Hebei and Tangshan. Another scenario is a large, very strong, typhoon making a direct landfall in the Pearl River Delta, with significant associated storm surge. Pearl River Delta earthquake risk is another concern.”

Scientists think that while the incidence of typhoons is not likely to rise as a result of climate change, the typhoons could become more intense. Climate change is also likely to product rising sea levels that could exacerbate coastal flooding.

Hong Kong is typically associated with typhoons rather than earthquakes, but Dr Michael Spranger, an earthquake expert for geo risks research at Munich Re, has recently been studying the potential for quake activity. “If you look along the coast of southern China, it has sporadic M8 earthquakes – maybe 50km-100km offshore – and we have no clue how often they are offshore Hong Kong.”

Public-private potential

Public-private approaches to insuring catastrophe risk and microinsurance are two ways of tackling the mounting exposures in China. In late 2003, the China Earthquake Administration, with the support of the CIRC and other government bodies, pushed for an earthquake insurance pool, which did not go ahead due to a lack of funding. This option is being revisited following the 2008 Sichuan earthquake.

“Given its high exposure to natural catastrophes, China’s risk landscape will become even more complex as economic prosperity grows,” head of non-life underwriting at Munich Re in Beijing, Fan Weishu, says. “Increasing urban populations and asset values will drive the demand for natural catastrophe covers.

“It might make economic sense for the state and municipalities, as the biggest owners of property, to transfer their risk to the worldwide insurance sector,” he continues. “Due to the sheer size and complexity of the exposures, individual risk solutions of single companies will not achieve the breakthrough needed in China. Additionally, the private insurance sector needs relevant data for earthquake, typhoon and flood models.”

Reinsurers in Asia have already backed several initiatives. In July 2009, Swiss Re joined forces with the Beijing Municipal Government to reinsure catastrophe risks under the government-funded agricultural insurance scheme for epidemic, livestock diseases, flood, hail, wind and rainstorms.

It pools agricultural insurance business in Beijing (covering around 400,000 farming households) and provides reinsurance cover for losses that are between 160% and 300% of the annual premium, with losses higher than that falling onto the municipal government.

Renewed pool push

At the East Asian Insurance Congress conference in Hong Kong in November 2008, many experts felt the recent catastrophes, particularly the Sichuan earthquake, would drive greater take-up of insurance and prompt the government to seek public-private ways of covering catastrophes. “The timing has never been better to address these pressing issues,” Bugl said, speaking at the conference.

ACR has developed a pan-Asian catastrophe pool, which has built up a membership of 26 since it was launched in 2009. The pooled approach can help to maintain underwriting discipline in a competitive market, explains Bugl. “Pool solutions are viable for sustainable, long-term catastrophe (re)insurance,” he continues. “They have a track record of functioning well in Europe and the USA and where they have been formed in Asia they also work well.

“They have particularly proven their worth as a mechanism for residential risks. Pools structured as public-private partnerships between insurers, reinsurers, the government and capital markets are effective and powerful catastrophe risk managers.” GR