Cover for certain cat risks is unobtainable in China. Sue Copeman investigates the options for multinationals.
While China’s non-life insurers can include cover for catastrophic events like typhoons and floods within standard property policies few are prepared to provide compensation for terrorist attacks, research shows.
Furthermore, Alex Yip, general manager of JLT Lixin Insurance Brokers Co*, told StrategicRISK that standard property policy conditions exclude earthquake damage. “Brokers can usually negotiate an extension of cover to include earthquake for their corporate clients although there may be limits, perhaps 80% of the total sum insured, and conditions on the structure of buildings to ensure they are built to resist collapse when an earthquake of a certain magnitude measured on the Richter scale occurs,” he said. The Chinese insurance market is currently considering insuring earthquakes in a separate policy rather than within the property programme, Yip added.
For European risk managers working for companies with assets in China, if they cannot get the cover and/or limits they require, there are other solutions.
Marie-Gemma Dequae, a board member of the Federation of European Risk Management Associations and a former president, said: “Risks in China have to be insured in the People’s Republic under national insurance legislation and there is a problem if some coverages that a company wants are not insurable in the country.
“Local cover should be linked to the corporate master global policy which is usually arranged in the country where the company is headquartered. This should provide difference in conditions/difference in limits cover which can certainly help.”
However, rather than directly insuring risks that cannot be placed in the Chinese market elsewhere and potentially falling foul of China’s regulatory authority, Dequae suggests using the master policy to cover the company’s insurable interest in its Chinese assets.
“This means that the claim will be paid to the company in its own country which then begs the question how that compensation can be channelled to the Chinese asset – but it’s easier to get money into China than it is to get it out!” For example, in the case of damaged machinery, it may be possible to export replacement machines into China.
However, Dequae added that the Chinese insurance market is constantly evolving in the types of cover that it is prepared to provide. “With some very large European insurance groups present in the market, it may be possible to find a solution which is acceptable to the Chinese regulator,” she said.
“Statistics from the China Insurance Regulatory Commission show the country’s current insurance coverage is incapable of adequate compensation for catastrophic losses
There does seem to be some uneasiness about insurers’ exposure to catastrophic risks in China, as demonstrated by speakers at the recent 21st Century Annual Finance Summit of Asia held in Beijing. “Chinese insurance companies should make more efforts to strengthen their international management and training, especially in the catastrophe insurance sector,” said Jin Jianqiang, chairman of the China Insurance Association.
A statistic cited at the Summit was that currently fewer than five per cent of catastrophic losses in China are covered by insurance, compared to around 30% in developed countries. This figure presumably reflects that comparatively few private citizens buy insurance compared to their western counterparts. Additional statistics from the China Insurance Regulatory Commission show the country’s current insurance coverage is incapable of adequate compensation for catastrophic losses.
Not surprisingly, both insurers and the Chinese government are concerned about potential exposures and losses. PICC, the country’s largest non-life insurer, recently established a research centre to study catastrophe insurance, as well as an annual 10 million yuan fund to finance catastrophe insurance research. According to vice president Wang, the centre will cooperate with government departments to research new techniques for risk evaluation and management.
According to a report in the China Daily a special team led by the Ministry of Finance has also been established to work on a catastrophe insurance plan. And according to research by California State University at Fullerton and 21st Century Business Herald 70% of insurers advocate an Asia catastrophe insurance fund to deal with large disasters.
While western multinational corporations may be satisfied that they can plug any gaps in their catastrophe coverage through various means, they cannot afford to ignore the fact that their activities in China frequently depend on local workforces and domestic suppliers. A catastrophe that affected these quite possibly uninsured sectors would almost certainly have a rebound effect on their business.
In the meantime, some industry commentators believe that the largely uninsurable risk of drought could be one of the greatest catastrophes to affect China in the future. The multi-stakeholder Economics of Climate Adaptation (ECA) Working Group produced a case study focused on the important crop growing regions of North and Northeast China, which are the most vulnerable areas to drought in terms of historical loss and size of crop land affected.
This showed that by 2030 climate change could lead to a 50% increase in annual drought loss in North East China to $1.7bn, compared with a six per cent rise in North China, still representing the significant amount of $0.9bn. The implications for the country’s economy, its people – and its investors – could be truly catastrophic.
* JLT Lixin is a joint venture, majority owned by Jardine Lloyd Thompson Group, partnering with Guangdong Ricsson Enterprises Co, which operates as an insurance and reinsurance broker across the People’s Republic of China.