China must dramatically increase its natural catastrophe cover.

Without greater insurance take-up China is at risk economically and socially from its natural catastrophe exposure. A recent Swiss Re report highlighted this issue and looked at the potential impact of earthquakes, typhoons and flooding. “Major events could trigger total property losses well beyond 100 billion yuan ($12bn),” warns Peter Zimmerli, one of the authors of the “China natural catastrophe focus” report and a member of Swiss Re's Natural Perils Team in Hong Kong.

Using 500 years' worth of data from the Atlas of Natural Disaster System in China, a joint Swiss Re and Beijing Normal University initiative, Zimmerli and co-author Junhua Zhou have estimated potential losses given various scenarios. “A devastating earthquake in Beijing could result in a total property loss of 990 billion yuan ($123bn); a widespread flood in Shanghai can cause as much as 300 billion yuan ($37bn) worth of property loss,” warns Zhou. “In terms of total economic losses, such a major disaster could exceed 1 trillion yuan ($124bn).” 1 trillion yuan is equivalent to around 6% of China's GDP in 2005.

And yet only a small proportion of these losses are currently insured, although there is some hope that this will increase naturally alongside economic growth. “With rising per capita income, the marginal propensity to consumer insurance will increase,” explains Zimmerli. “From overseas experience, we have observed that insurance take-up will accelerate once per capita income passes the $1,000 benchmark… China passed that benchmark recently.”

While there is an expectation that insurance take-up will increase naturally, the authors believe there is an urgent need to promote awareness of the benefits of insurance. One possible solution is getting the Chinese government on board, either by subsidising premiums, providing some kind of reinsurance backstop, or by making certain types of nat cat insurance covers compulsory. “In all three areas the Chinese government can play a more active role,” insists Zhou. “Endorsing cat pools is a first step.”