China’s premium risk

The 4.8-magnitude quake that hit Heyuan city in southern Guangdong on Feb 22 left no casualties behind but toppled a few houses and was felt as far away as Hong Kong. It was one in a series of at least nine tremors recorded throughout southern China within a week. One of them resulted in eight injuries.

However, these are little more than conversation starters.

In the last half-decade China has experienced devastating floods, brutal droughts, typhoons and one massive earthquake.

While it is difficult to avoid natural disasters, the risks to economic growth and livelihoods can be minimized. In China, awareness of the value of such products as insurance is only beginning to seep in.

The recent earthquakes paled in comparison to the large-scale destruction on May 12, 2008, when a temblor with a magnitude of 8 rattled Sichuan province for almost two minutes. That jolt killed 68,000 people and left 4.8 million homeless.

It was the fifth most expensive natural disaster on record. The total damage has been estimated at 181 billion yuan ($29 billion). The two most expensive disasters were in Japan — the 2011 earthquake and tsunami that cost $235 billion, and the Kobe quake in 1995 that cost $100 billion.

In a country the magnitude of China, disasters are a common occurrence.

Snowstorms in Xinjiang and Liaoning in December killed at least one person and left ships and planes stranded. A landslide in Yunnan province in October buried 19. Floods in Heilongjiang, Guizhou and Sichuan in September resulted in the deaths of a couple of dozen people and untold damage. A strong earthquake in the same month hit three provinces — Sichuan, Yunnan and Guizhou — killing close to 100 people and destroying more than 20,000 homes.

Several dozen people died due to typhoons last year. Floods resulted in a high death toll of 673 people, and damage from floods and droughts combined came to 320.8 billion yuan. Another 16 million people were left without access to drinking water as a result of droughts.

The list goes on.

Three of the five most destructive natural disasters in Asia in 2012 happened in China, according to the Centre for Research on the Epidemiology of Disasters at the Catholic University of Louvain, Belgium, that keeps databases of natural disasters.

Natural disasters killed 1,338 people in China last year, according to a joint statement by the Chinese Ministry of Civil Affairs and the National Committee for Disaster Reconstruction. Another 192 people are still missing. Over 10 disasters hit 200 counties, with 16 earthquakes of magnitude 5 or higher.

Around the world, economic losses from natural and manmade disasters in 2012 are likely to top $140 billion, according to reinsurer Swiss Re. The figure is down from the previous year’s $350 billion, which was mostly attributed to the earthquake and tsunami in Japan.

Aon, an insurance broker with significant operations in China, however puts the global loss at $200 billion spread over 295 separate events.

And 2012 was a mild year.

Zhang Zhitong, office head of the State Flood Control and Drought Relief Headquarters, noted in a statement that droughts affected 9.3 million hectares in 2012, about 60 percent less than the average of previous years. The damage caused by floods was about 40 percent lower than average.

The China Insurance Regulatory Commission (CIRC) estimates insured damage topped 1 billion yuan ($157 million). The actual damage was likely 10 times as high, Xinhua reported.

“We must still contend with the fact that risk is growing faster than wealth is being created,” says Jerry Velasquez, head of the United Nations Office for Disaster Risk Reduction in Asia Pacific. “Exposure is on the rise and flooding represents a serious challenge to Asian cities as we have seen earlier (in 2012) in Beijing and Manila, where both cities were partly flooded in a couple of hours.”

On the positive side, the number of deaths associated with disasters is dropping steadily. But on the other hand, notes Velasquez, “economic losses are going up and we should be worried about it”.

The Asian Development Bank (ADB) estimates that as much as 56.6 percent of China’s GDP comes from areas at risk of multiple hazards — from floods to earthquakes and droughts. Almost half of the population, some 671 million, lives in these areas. Ironically, these areas amount to 13 percent of the total area of the country. China is the largest recipient of natural disaster loans and grants from ADB, having received more than $2.5 billion to date.

While disaster damage in places like the US or Europe is generally covered by insurance, few in China are protected. As a result, the impact on GDP is worse. Those affected have to rely on the government or themselves to rebuild their lives. Farmers have little, if any, insurance. According to Swiss Re, losses from droughts can be as high as 2 percent of GDP. By 2030, they could be as high as 6 percent. Insurance, however, could reduce that by half.

For businesses, the impact can be severe. Production may stop and business may be lost.

“Although insurance cannot bring back lost lives, many people and businesses can rely on financial relief from insurance cover, as is the case for the US,” says Kurt Karl, chief economist at Swiss Re. “However, in large parts of the globe that are prone to severe weather events, people and businesses could increase risk preparedness by eliminating underinsurance.”

This is particularly true of China. Earthquake insurance coverage is rare.

According to a senior executive at a multinational brokerage who had a meeting with the CIRC shortly after the 2008 Sichuan earthquake, few companies had insurance but the quake did not lead to a sudden surge in insurance purchases.

In broad strokes and even in the face of significant catastrophic events, China remains chronically underinsured, according to a 2011 report by PricewaterhouseCoopers. An example is business interruption insurance, a product common in developed economies but a rarity among domestic policies.

The problem is not that insurance is not available but a lack of awareness.

Giant domestic companies like PICC Property & Casualty and Ping An Insurance reach most of the country. Brokers are also increasingly a part of the equation. The largest domestic brokers are Chang’an Insurance Brokers, a State-owned company, and Jiangtai Insurance Brokers. The large multinational brokers are also busy in China. The largest, Aon and Marsh, typically focus on the Fortune 500 companies. The third largest broker in the world, Willis, made an early decision to focus on the domestic market.

Throughout 2012, the combined revenues of insurance brokers and adjusters were expected to hit $18 billion, up by 12.5 percent from a year earlier.

But even when insurance is at hand, few avail themselves of it as a hedge against earthquakes, floods or droughts. In the US, still the largest insurance market in the world, most companies are mandated to take out insurance.

Slowly, however, the attitude in China is changing as economic growth and increased awareness of the importance of protection drives growth in the insurance market. Devastating as they can be, natural catastrophes help raise awareness, say insurance providers.

According to the Economic Research and Consulting team at Swiss Re, non-life insurance premium income in China could grow by 13 percent this year, compared to 12 percent last year. Across industrialized countries, by comparison, the growth rate is likely to be a more modest 2.9 percent.

Last June, G20 leaders got together to discuss ways to deal with the increased cost of natural disasters. China participated in the discussion that resulted in a concerted call for action.