Government back-up, the establishment of insurance pools and good use of financial resources: experts say this is the formula for China's catastrophe insurance system, an underdeveloped but highly necessary sector.

 

The havoc wrought by Typhoon Bilis, which hit China on Friday, brought the country's death toll to 170 yesterday, according to the Xinhua News Agency. Losses in Zhejiang and Fujian provinces were estimated at 1.1 billion yuan (US$140 million), while figures for other typhoon-stricken areas were not yet available.

 

A country prone to natural disaster, China frequently suffers from the ravages of earthquakes, floods and typhoons.

 

Economic losses from natural disasters totaled 910.8 billion yuan (US$113.8 billion) over the past five years, the Ministry of Civil Affairs said at a seminar in February. That translates to average daily losses of at least 499 million yuan (US$73.3 million).

 

This situation is further complicated by China's impressive economic growth and the explosion in property values in some of the most highly exposed areas, especially along the urbanized coast, according to a Swiss Re report.

 

The report shows that without greater insurance take-up, China's sustained economic and social development would be threatened due to high natural catastrophe exposure and the increasing values at risk.

 

The world's largest reinsurer estimated that if one of the three principal natural perils typhoon, flood or, the biggest threat, earthquake triggered a major catastrophe in China today, it could generate economic losses exceeding 1 trillion yuan (US$125 billion), or about 6 percent of China's GDP of 2005.

 

Rebuilding after disasters is mostly financed by the State and donations at the moment. But insurance has proven an effective approach to deal with the aftermath of calamities; demand for catastrophe insurance is enormous in China.

 

The insurance sector paid around US$42 billion of indemnities as a result of the September 11 terror attacks in the United States, far surpassing federal government allocations of US$20 billion.

 

In China, the big floods in 1998 caused 248.4 billion yuan (US$29.93 billion) of direct economic losses, while insurance indemnities reached only 3 billion yuan (US$357 million).

 

For the moment, Chinese insurers have no specific policies to cover natural catastrophes, but typhoons and floods are included in the property and casualty policies for families and enterprises.

 

Earthquakes, however, are the exception. Earthquake cover often appears as additional insurance when enterprises insist on having it.

 

"We will not voluntarily offer earthquake insurance to our customers given the high potential risks," said Zhang Chunhua, general manager of the property insurance department of PICC Property and Casualty Company (Beijing Branch).

 

Swiss Re's report shows that earthquakes pose the greatest risk to China; for example more than 240,000 people died as a result of the Tangshan Earthquake in 1976. Earthquake hazard maps now include more than half of China's large cities, including Beijing, in the high intensity earthquake zone.

 

"Even though our customers ask for it (earthquake cover), we will have a very strict examination and control," Zhang told China Daily, adding the insurer has a quote every year for earthquake insurance.

 

As commercial insurance companies cannot afford to run catastrophe insurance due to risks and the extent of losses such policies cover, official policy support is crucial for its development, said Hao Yansu, an insurance professor with the Central University of Finance and Economics.

 

In a circular titled "Ten Suggestions on the Reform and Development of the Insurance Industry," the government identified its commitment to establish a catastrophe insurance system with the back-up of State finance.

 

"We are now working on detailed rules for this system," said an official with the China Insurance Regulatory Commission, the industry watchdog.

 

According to Hao, financial back-up from the State could take many forms, such as preferential tax policies and subsidies. "But the key is the implementation," he said.

 

Another solution for increasing insurance take-up is the creation of nationwide pooling schemes, said Luzi Hitz, head of treaty underwriting at Swiss Reinsurance (Greater China Region).

 

An insurance pool brings together insurance or reinsurance companies in an association that underwrites a specific type of risk, often with an extremely high exposure. The premiums, losses and expenses are shared in agreed ratios by all members of the pool.

 

Successfully used around the world, these schemes combine long-term insurance solutions with efficiency, thereby permitting savings on premiums.

 

"As natural perils have a low-probability but high-impact character, they are a prime candidate for an insurance pool solution," said Hitz. "The public or private partnerships could be highly effective in China."

 

China is also striving to hedge risks through derivative financial products.

 

Insiders disclosed that the China Development Bank (CDB), one of the country's policy banks, is working on a catastrophe bond, the first of its kind in China.

 

As a catastrophe bond could spread risk through the capital market to millions of bond investors, it has been the major means to deal with catastrophes in developed countries.

 

Compared with other common bonds, catastrophe bonds are linked to the degree of loss caused by a disaster.

 

If nothing happens, investors can regain the principal and interest invested; however, they will incur a loss in the event of a disaster.

 

The CDB, seeking support from the industry regulator, is on the hunt for a partner.

 

The bank plans to team up with a quality reinsurance company and then set up a subsidiary for this purpose.

 

(China Daily July 18, 2006)