China needs better insurance coverage, says insurance expert

China needs better insurance coverage, says insurance expert

Analysis-Extreme weather sounds alarm for underinsured China Aerial view shows rescue workers extricating residents on a flooded road following heavy rainfall in Zhengzhou Aerial view shows rescue workers evacuating residents on a dead end road in China Aerial view shows water warning agents in the river called by the flood.

BEIJING - The devastating summer floods in central Henan province in the populous province of Henan are a wake-up call for local authorities to seek better insurance coverage against natural disasters, potentially opening up a national market for insurers in the country.

Many local governments in China, especially those in typhoon-prone areas, have embraced such insurance, but regulators and experts say more needs to be done after losses in Henan were hit by the floodings last month to 133.7 billion yuan or 4.6% of its first-half gross domestic product.

Globally, insurance covers 30%- 40% of economic losses from disasters, with coverage up to 60% in North America. In China, where Swiss Re. warns of further extreme weather due to global warming, coverage is just 10% according to local experts.

The gap between economic and insurance losses is still huge and underpins the potential demand for catastrophe insurance protection, S&P Global Ratings said in a research note on Tuesday.

Nearly all of China's 654 major cities are prone to flooding and waterlogging, official data show, with their rapid growth creating urban sprawls that cover floodplains with concrete.

Latent Chinese demand for protection offers a potential future source of earnings for insurers, but hurdles remain, both global and local.

Globally, insurers have yet to fully factor in climate risk in their offerings and better protect their bottom lines as extreme events become more frequent and damaging, moderating the speed at which they roll out policies in both developed and emerging economies.

In China, catastrophe insurance is still in its infancy, partly due to a lack of a central government push. In China's 2021-2025 economic and social development plan, catastrophe insurance briefly mentioned without elaboration.

Disaster insurance coverage in China is also highly dependent on local authorities, which may not necessarily be warm to the idea since they would have to pay for such policies out of their own pockets, unlike in advanced economies like Japan and Australia where it is left to the owner of a property or asset to buy what insurance they can afford or is available.

15 provinces and cities have signed up for pilot disaster insurance programs, China's top banking and insurance regulator told Reuters, adding it will call for more product rollouts after recent disasters.

With the help of re-insurers in collaboration with Chinese insurers like People's Insurance Company of China and Ping An, pilots have been launched in coastal cities such as Guangdong and provinces like Ningbo where typhoons bring economic losses almost every year.

In its renewal of a three-year disaster insurance policy, the Ningbo government paid 41 million in premiums to five insurers including Ping An in 2021, public statements showed.

It is unclear if all the pilots have been renewed, given different national budgets and evolving metrics to accurately measure climate change risks which differ across China.

Heilongjiang province is rolled out a pilot to protect farmers from losses caused by disasters such as flood, rain and drought. The first phase ended in 2019, after three years.

Last month, two dams collapsed in the Heilongjiang regions of China, causing downstream damage and raising alarm bells for neighbouring Inner Mongolia counties that used to be insured by the pilot.

Pricing is challenging as business analysts have to make sure product pricing reflects the real risks when disasters happen, said Kelvin Kwok.

But from local authorities' perspective they are purchasing coverage in events that could rarely happen.

Swiss Re told Reuters it is working on a product that offers quicker assessment for flood-related disasters in China, remotely tapping data such as the depth of floodwaters and size of affected areas to gauge the severity of the situation.

To expand coverage, regulators and the central government need to play a bigger role, said Wang He, an insurance expert and former vice-president of PICC's property and casualty insurance unit involved in some of the pilots.

Greater support is necessary, such as the set up of a financial compensation fund for disasters, Wang said.

Subsidies for coverage would be a direct driver, Swiss Re said, including tax incentives for insurers that run such government programmes.

How long before insurance comes to China, is an investor at risk?

We expect government policies like premium subsidies to prevent insurers from taking persistent underwriting losses, Kwok said.