Despite more numerous and increasingly costly incidences of typhoons and flooding, typically only close to 2% of economic losses caused by natural catastrophe events are insured in China.  According to statistics, economic losses caused by natural catastrophe events were 327bn CNY in 2019 in China. While this ratio is representative of the Asian region as a whole, it is low when compared to other advanced economies which are in average around 40%. There is a clear opportunity for government and industry to benefit by rethinking extreme weather cover. This article explores why the insurance gap is as big as it is and how insurers might help reduce it to the nation’s benefit.

Extreme weather events with major losses continue to become more frequent in China and across Asia. And 2020 was another record year: with major floods in the central and southern parts of China. It was pretty serious, at least a one-in-100-year event in provinces like Sichuan, Hubei and Chongqing, with the Yangtze valley flooding no less than three times in a single summer, the insured losses included multiple product lines e.g. property, motor, agriculture and personal accident. The insured losses were estimated to be more than 9bn CNY. In addition, the threat of typhoons on the East Coast is increasing significantly. It’s not simply that extreme weather events are expected to becoming more numerous or severe, the effects of floods and typhoons are magnified by continuing urbanisation and economic growth. These phenomena concentrate large numbers of people and assets around an ever-increasing number of growing urban centres and, as a result, the likelihood of a tropical storm moving over a densely populated urban area has risen steeply.

A primary reason for low insurance levels in China is a lack of risk management awareness. Communities, financial institutions and government are often not familiar with the benefits of the insurance options available to them, or the fact that insurance solutions can be customised to the specifics of a given certain situation, so-called scenario based insurance.

Furthermore, China is unique in that most people rely on the government in emergencies. The government inevitably steps in to save the day and industry and corporations understand this, which might partially explain why they are under-insured,. But government intervention still does not solve the whole problem of the immediate financial relief needed in the wake of a catastrophe, since governmental emergency help tends to cover a wide range of people or corporations, therefore can’t be with significant amount for each single beneficiary. Often majority of losses still can’t be properly compensated. Having sensible insurance strategies in place could thus help industry, corporates and government counter unanticipated loss-volatility by smoothing the cash-flow required to keep things going.

Traditionally, governments in China and elsewhere also find it challenging to motivate action around rare but very real risks of the one-in-a-century variety. The focus tends to be on shorter-term goals and this poses obvious problems when rare, but ultimately predictable, events do strike. This scenario is a good illustration of why insurers can’t simply cut and paste solutions from, say, western markets into China. They have to factor local attitudes and outlooks into the design of local solutions. 

Analysis of weather disaster in China

China can and does manage risks associated with natural disasters it expects very well, even if these are big events, such as massive flooding of historically flood-prone areas. The time and water level of seasonal floods could be pretty much predicted and resilience strategies that include insurance could be designed accordingly. However, far less provision is made for unexpected events. For example, in 2017, Typhoon Hato tore through Hong Kong, Macau and Guangdong province.  As the strongest typhoon to hit Macau in more than half a century, Macau experienced widespread power outages, downed telecommunications, blocked streets, and flooding. More than 4,000 trees were reportedly downed, blocking roadways and interfering with rescue operations, that nobody imaged it was possible to harm in any serious way. The typhoon caused more than 3.5bn MOP (2.8bn CNY) insured losses in Macau. Worse, the data suggests that the frequency and severity of typhoons is becoming more and more unpredictable in Southern China and East Coast.

The ability to predict extreme events means they can be properly built into insurance pricing models, while the possibly of the totally unexpected happing is often simply ignored. It’s obviously better to expect the unexpected. Munich Re’s ability to do this is improving thanks to predictive technologies like our “Location Risk Intelligence” solution, a sophisticated risk profiling tool with a comprehensive data sources and excellent modelling technology. Primary insurance companies can use Location Risk Intelligence to analyse not only natural catastrophe and climate risks but also the accumulation risk of their own portfolios. This enables them to quantify their capital and reinsurance requirements for risk management purposes and to ensure that the comply with solvency regimes imposed by regulators.

The asset risk for banks also increases as a result of extreme weather, because the homes and buildings they finance are effectively the security for the loans they provide. There is limited awareness that this risk can actually be transformed into insurance risk. Greater awareness would certainly benefit banks and represents a real opportunity for the insurers who service them.

There are also potential opportunities for investors in the pipeline: Discussions with industry partners are in place on possible piloting natural catastrophe bonds in China to help expand capacity. It’s an area Munich Re has a huge amount of experience in internationally and we’re now leveraging that expertise here.

The insurance gap signposts the need for the insurance industry to get involved and show decision makers in China how it can add real value to the country. For example, parametric covers built around triggers that ensure automatic payouts so cash is immediately available the moment it is needed would be an important part of any extreme weather solution. A logical approach would be to provide some combination of parametric and conventional indemnity covers funded, say, by private public partnerships, particularly for the lower band of the insured risks like private housing, where people basically don't buy insurance. The government could enable this by pooling the risk of normal people and, in addition, through the purchase of commercial insurance to compensate for the associated tail risk. However, pooling risk for large corporates would not be practical because the overall risk would just be too huge. It would be more prudent for medium and large corporates in private hands and decide to buy commercial insurance to cover their own natural catastrophe risk.

The opportunity that China’s insurance gap represents is certainly not lost on insurers. The three major domestic players, which account for almost two-thirds of China’s Non-Life insurance market, alongside other Chinese and global insurance companies are all looking to grow their presence is what is undoubtedly a highly attractive future market. The extent to which they can do this will be decided by their ability to engage decision-makers with compelling insurance solutions which intelligently address the accelerating growth of the country’s extreme weather challenges. In addition, all proposed solutions will have to be based on sound risk analysis backed by sufficient capital capacity and, not least, comply with regulatory requirements aimed at ensuring sustainable natural catastrophe insurance.

Profound knowledge of scientific correlations, statistical trends and relevant high-resolution data are essential elements when assessing extreme weather risks. Our experts are part of an international scientific network providing the risk analyses that form the basis for our risk models. This allows us to have the best-possible offer of weather-related and weather-disaster covers and to develop new concepts for previously uncovered risks for a whole range of different client groups.

We can also assist Chinese insurers in lobbying regional and national government by providing information about how insurance can improve the position of all stakeholders as well as the conditions where insurance solutions are most useful and practically applicable. Furthermore, we can demonstrate how greater insurance density helps greater numbers of  people and businesses recover more quicky after natural catastrophes. And we can also provide key information such as hazard maps and claims statistics, and advise on how to spread risk so it is easier to absorb.

In the final analysis, we enable insurers to help people, companies and society to recover from the financial impact of a catastrophe more quickly. We invite you to benefit from our data and decades of experience in assessing extreme weather risks and the factors that impact them. To discuss extreme-weather related reinsurance and capital solutions relevant to your specific requirements, please get in touch.