Despite the global economic downturn, the growth of China’s insurance market continues. Total premiums grew a massive 31.3% between 2007 and 2008, according to Swiss Re (40.9% and 14.8% for life and non-life insurance respectively).
As insurance take-up increases, the assets at risk from natural hazards also grow in value. With cities such as Shanghai and Beijing exposed to typhoons and earthquakes, many insurance experts think China will become a major “peak zone” in just a matter of years.
“I think China is going to become a major peak and probably the peak in the world, just simply because China is so big,” says James Few, managing director of Aspen Re. “There are cities of 20 million people in China that Western insurance professionals have often never heard of – it is an enormous place.
“China is vulnerable to just about every type of peril you can think of,” he continues. “With so much value, so many people and a growing economy, you would naturally assume that insurance penetration rates are going to rise in the five to ten year timeframe.”
Nat cats in China
While inland flooding is currently the least costly peril from an insurance perspective, as it mainly affects poorer rural communities, it is also the most widespread hazard, affecting one in four people every year.
Earthquakes and typhoons have the potential to create the largest insurance losses. For Milan Simic, managing director of AIR Worldwide Ltd, the two most costly scenarios are either a typhoon making landfall in Shanghai or an earthquake affecting Beijing.
“Typhoons in China and the whole of Asia are quite different from their relatives, the hurricanes in the US. They tend to cause significant losses from precipitation. So in our China model we have two hazard models – one wind and one precipitation.”
In 2007, Super Typhoon Wipha led to mass evacuation as it moved worryingly close to Shanghai.
This year, Typhoon Morakot became Taiwan’s worst storm in 50 years, leading to 500 deaths and economic losses around TWD100bn ($2.9bn) before moving on to China’s Zhejiang province with more torrential rain. Alishan station in Chiayi County, in the southern part of Taiwan, recorded nearly 2,800mm of precipitation.
While last year’s Sichuan Earthquake was a human disaster (killing over 70,000 people), insurance losses were relatively small (at $1bn according to AIR) due to the low insurance penetration in the region.
“If insurance penetration were to increase in Asia and specifically in China, you could easily see the country becoming a peak zone for many insurance and reinsurance companies,” says Simic.
“There is a high potential for earthquake activity around Beijing, which from an insurance point of view is the highest zone for concentration so it’s really those Beijing events that we have to keep an eye on,” he adds.
Modelling the risk
While China has a long earthquake record, there remain plenty of challenges in properly understanding the country’s hazards. “China is the longest uninterrupted civilisation on earth and they pride themselves in having the longest historical earthquake catalogue. So from that point of view the information is good but on the other hand the information is not publicly available.”
Language barriers are part of the problem. “Most of the main publications were written in Mandarin and we therefore have to rely on our Chinese speakers and partner with local organisations to help us build the models and understand the hazard,” says Simic.
Another issue is the resolution of the data. Earlier this year, CRESTA [Catastrophe Risk Evaluation and Standardizing Target Accumulations] created new and more specific zones for China, increasing the number of zones from 60 to over 2,400. But this is still a long way from being able to assess risk at a street or zip code level.
Primary insurers are becoming more sophisticated in their approach to catastrophes, but the market lacks a unified approach, explains Robert Wiest, Swiss Re’s managing director for China.
“Given the relatively short history of insurance in China, market players here have different and sometimes highly different definitions for cat events. For instance, flood, snow storm and typhoon are often defined differently by different insurers, who then have different views on claims.”
Wiest thinks recent cat events will help to drive awareness of insurance, as well as improve the industry’s approach to covering catastrophes.
“The recent cat events have significantly increased the public awareness for insurance, which is important in driving insurance take up. The events also made the (re)insurance sector to take a further look at how to manage nat cat risks, which will help the industry to take up more risks.
“Having said that,” he continues, “one has to be realistic that it will take some time for China to see insurance playing a more important role in taking nat cat risks, as decision-making is not purely from the insurance sector.” 