The Development of Catastrophe Insurance in China: an Exploration

The Development of Catastrophe Insurance Public Disclosure Authorized in China: An Exploration

Learning from Experience: Insights from China’s Progress in Disaster Risk Management Public Disclosure Authorized Public Disclosure Authorized

Professor Tao Ye and Mr. Qingyan Mu

Public Disclosure Authorized Academy of Disaster Reduction and Emergency Management, Faculty of Geographical Science, Beijing Normal University 2 The Development of Catastrophe Insurance in China: An Exploration

hina’s system of compensation for catastrophic loss has relied heavily on government relief and public donations; insurance has played a rather weak role. According to Chinese government figures, insurance claims in China have historically accounted for less than 1 percent of direct economic losses in major large-scale disasters.

According to preliminary statistics, direct mechanism, the Chinese government has economic losses from the 2008 snowstorm and ice accordingly put forward a national guideline that storm disaster, the 2008 Wenchuan Earthquake, allows for local innovations and pilots based on and the 2010 Yushu Earthquake were 151.7 billion local characteristics, with the goal of developing a yuan, 845.1 billion yuan, and 64 billion yuan system that fully addresses risk protection needs respectively;C by contrast, insurance indemnity for across the country (Figure 6.1). the three disasters were only 5 billion yuan, 1.66 billion yuan, and 0.08 billion yuan, respectively. Under this guideline, the country has laid the foundations for a diversified catastrophe Since the 2008 Wenchuan Earthquake, the insurance product system, which consists of both Chinese government has recognized the national standards and localized policies, single- importance of catastrophe insurance in ensuring peril (earthquake) versus multiple-peril, and rapid rehabilitation and recovery in the aftermath indemnity-based and index-based types (Table of a disaster. China is a large country with a 6.1). Besides, as the public in China still has a vast territory, and its disaster risk profile is relatively low awareness and acceptance of natural characterized by significant regional variation. In disaster insurance (Wang et al. 2012), in some establishing a catastrophe insurance protection local pilots—including in Ningbo, Shenzhen, and Key Messages 3

➊ In the aftermath of the 2008 Wenchuan Earthquake, the Chinese government recognized the importance of catastrophe insurance in promoting rapid rehabilitation and recovery following a disaster.

➋ China has since made significant progress in establishing a catastrophe insurance indemnity mechanism that allows for local innovations and pilots based on local characteristics.

➌ Looking ahead, major challenges for catastrophe insurance in China include its very limited coverage and the underdevelopment of supporting techniques such as catastrophe risk models.

Damaged bridge construction after super typhoon Mangkhut in 2018. Photo: lzf. 4

Figure 6.1. The Development of China’s Catastrophe Insurance System

2014: In a policy document titled “Opinions on Accelerating the 2016: The then-CIRC and Development of Modern Insurance the Ministry of Finance Service Industry,” the State Council of issued “The Implementation 2010: The then-CIRC research China requested the incorporation of Plan for Establishing an project titled “Catastrophe insurance into the country’s disaster Earthquake Catastrophe Insurance System” suggested prevention and relief system and the Insurance System for the overall frameworks of gradual formation of a multi-layer Urban and Rural Residential China’s catastrophe insurance catastrophe risk spreading mechanism Buildings”. That same year, system, including plans for with financial support. The State Council the product received its first natural catastrophes and also encouraged local explorations of underwritings in Beijing, agricultural disasters. effective disaster risk protection. Shanghai, and Shenzhen.

2008 2010 2013 2014 2016

2008: After the 2008 2013: The then-CIRC 2014: Pilot programs were 2016: In the second half Wenchuan Earthquake, the published the China launched in Shenzhen, of that year, Guangdong then-CIRC, now part of the earthquake insurance Ningbo, Yunnan, and started pilot catastrophe China Banking and Insurance system report as well as Sichuan. index insurance in 10 Regulatory Commission two pilot program plans prefectures, covering (CBIRC), and other relevant for earthquake insurance typhoons, rainstorms, government departments and in Sichuan and Yunnan, and earthquakes. research institutions, such respectively as Beijing Normal University, conducted catastrophe insurance studies, which were reported to the State Council and the National Commission for Disaster Reduction. 5

August 9, 2019—Typhoon Lekima (left) and Tropical Storm Krosa (right) aiming for eastern China bringing as much as 15 inches of rain. Photo: NASA.

Guangdong—local governments are purchasing north of Sichuan. People’s Property and Casualty insurance on behalf of all the citizens. Insurance Insurance Company of China (PICC P&C), indemnity covers many areas that were previously Guanyuan Branch, paid a total of 25,000 yuan handled by government relief. for earthquake house damage.5 This was the first indemnity case of the pilot program. On China’s catastrophe insurance system is still in its June 17, 2019, a magnitude 6 earthquake hit pilot stage and there are many challenges ahead. It Changning County, Sichuan Province, claiming is worth noting that, despite the progress that has the lives of 12 people and causing the relocation been made in expanding the reach of catastrophe of over 4,000 people. In total, more than 10,000 insurance over the past decade, overall coverage houses were damaged. Two days after the quake, is still very limited. Moreover, the pilot areas are the insurance industry received 65 claims with 6 mostly in economically developed areas. Most an estimated total indemnity of 596,100 yuan. provinces in the central and western regions, as well as most rural areas, still have no coverage. • Yunnan. On March 27, 2017, three consecutive Certain types of insurance—flood insurance earthquakes with magnitudes of 4.7, 5.1, and and typhoon insurance for example—as well as 4.3 struck Yangbi County, Dali Prefecture. supporting techniques such as catastrophe risk The index-based earthquake insurance was models, are still underdeveloped. triggered. Indemnity was computed and paid within 32 hours after the quake, for a total 7 Indemnity Stories amount of 28 million yuan. • Sichuan. On September 12, 2018, an earthquake • Ningbo. Since 2015, Ningbo’s program has had of magnitude 5.3 occurred in Hanzhong City, six mass indemnities triggered by catastrophes. Shannxi Province, a province neighboring the In August 2019, Super Typhoon Lekima hit

[5] Sina News. http://news.sina.com.cn/o/2018-11-15/doc-ihnvukff4923490.shtml (in Chinese). [6] Sina News. http://news.sina.com.cn/o/2019-06-19/doc-ihytcerk7959547.shtml (in Chinese). [7] YNY DC. http://www.ynydc.com/webNews/content.do?id=5682 (in Chinese). 6 The Development of Catastrophe Insurance in China: An Exploration

nine provinces on China’s eastern coast. For the 1.2 million and 10 million yuan were paid city of Ningbo, total direct economic loss was to bank accounts specified by Yangjiang and estimated to be 1.97 billion yuan. By August Yunfu city governments respectively.10 In 2018, 12, insurance companies had received reports Super Typhoon Mangkhut triggered insurance of more than 53,000 cases with total claims up indemnity for Yangjiang and Maoming. Within to 460 million yuan. By August 15, total claims 24 hours, insurance companies paid 5.5 million had reached 634 million yuan, and the estimated and 20 million yuan to the departments of final indemnity could be over 700 million yuan.8 finance of Yangjiang and Maoming cities, according to index calculation, respectively.11 • Shenzhen. On April 11, 2019, a rainstorm struck Shenzhen, causing a flash food and claiming Reference nine lives. Shenzhen catastrophe insurance paid China National Committee for Disaster Reduction. 2015. a final indemnity of 250,000 yuan for each dead Review and Prospects of China’s 25-year Comprehensive or missing person, and an extra 20,000 yuan for Disaster Reduction. UN World Conference on Disaster the relocation of family members.9 Risk Reduction, March 14–18, 2015, Sendai, Japan. Shi, P. and R. E. Kasperson. 2015. World Atlas of Natural • Guangdong. On August 23, 2017, Typhoon Disaster Risk. Beijing: Beijing Normal University Press Hato landed in Zhuhai. According to the and Springer. https://doi.org/10.1007/978-3-662-45430-5 formal report from Guangdong Province’s Wang, M., C. Liao, S. Yang, W. Zhao, M. Liu, and P. Shi. climate center, the wind speed of Hato 2012. “Are People Willing to Buy Natural Disaster exceeded the threshold of predefined index Insurance in China? Risk Awareness, Insurance Acceptance, and Willingness to Pay.” Risk Analysis for Yangjiang City and Yunfu City; insurance 32 (10): 1717–40. https://doi.org/10.1111/j.1539- indemnity was triggered. Within half a day, 6924.2012.01797.x

[8] ZJOL. http://money.zjol.com.cn/bxdt/201908/t20190823_10866566.shtml (in Chinese). [9] Baidu. https://baijiahao.baidu.com/s?id=1631235789146363426&wfr=spider&for=pc (in Chinese). [10] EPICC. http://www.epicc.com.cn/renbao/zixunzhongxin/meitiguanzhu/201708/t20170830_9829.html (in Chinese). [11] Sina News. http://gd.sina.com.cn/finance/observer/2018-09-19/cj-ihkhfqnt0535235.shtml (in Chinese).

3D Render of Guangzhou City. Relief texture SRTM data courtesy of NASA. Phoro: FrankRamspott. Learning from Experience: Insights from China’s Progress in Disaster Risk Management 7

Table 6.1. China’s Catastrophe Insurance: National and Local Systems Compared

Government- Supported Earthquake Insurance for Rural National Earthquake Sichuan Earthquake Residential House in Ningbo (Zhejiang) Shenzhen (Guangdong) Guangdong Catastrophe Insurance Catastrophe Insurance Yunnan Province Catastrophe Insurance Catastrophe Insurance Catastrophe Insurance Destructive Destructive Earthquakes of Typhoon, strong 15 types of disasters Typhoon and flood earthquake earthquakes of magnitude 5 (and tropical storm, (storm, rainstorm, (heavy rainfall). vibrations and magnitude 4.7 above) and secondary tornado, rainstorm, cliff collapse, Typhoon: Typhoon secondary disasters (and above) and its disasters. flood, and blizzard lightning, flood, track enters the including tsunami, secondary disasters. and their secondary tornado, squall predefined spatial fire, explosion, disasters. line, typhoon, extent and reaches subsidence, mudflow, tsunami, mudflow, Losses of family the threshold (the and landslide. landslide, sinkhole, property (> 2,000 2-minute average hail, waterlogging, households) or speed of the earthquakes of casualties (> 3 maximum wind near magnitude 4.5 (and people). the eye reads 32.6 above) and their m/s, force 12). secondary disasters. Heavy rainfall: Heavy Perils and triggers Perils rainfall events occur in the insured area, and the maximum rainfall of any effective observation station reaches the disaster threshold. Urban residential From 50,000 yuan for Rural house loss: 420 Casualty benefits: Casualty benefits: Indemnity limits houses: 50,000 ~ urban housing and million yuan/a in total. 200,000 yuan/ 100,000 yuan/ are determined by 1,000,000 yuan per 20,000 yuan for rural person, 300 million person, 2 billion yuan/ the local financial Resident death: household. housing, with upper yuan/accident. accident. budget. For the 100,000 yuan/ limits of 1 million yuan procurement bidding Rural residential person, 80 million Family property: Nuclear emergency per household. of 2017–2020, houses: 20,000 ~ yuan/a. 3,000 yuan/ relief: 2,500 yuan/ typhoon insurance 1,000,000 yuan per The upper limit of household, 300 person, 500 million has an upper limit of household. an annual aggregate million yuan/ yuan/accident. 1.07 billion yuan and payment is either 8 accident. Given that this House loss: 20,000 heavy rain insurance times the premium segment of insurance Public event yuan/household, has an upper limit of revenue, or 800 industry is still relocation: 13,500 200 million yuan/ 1.09 billion yuan in 10 million yuan. If the nascent, the initial yuan/person. accident. prefectures. annual total insurance insurance amount loss exceeds the Indemnity limits apply will not exceed 1 Sum insured Sum insured sum of the limit only to events. No million yuan, and and insurance annual upper limits. will be gradually reserve fund, the improved according policy callback is to the operation proportional. situation. The part that is greater than 1 million yuan can be supplemented by commercial insurance. Indemnity-based. Indemnity-based. Index-based and Indemnity-based. Indemnity-based. Index-based. indemnity-based. Damages classified Classified into 5 Casualty: Follows Casualty benefits: After the occurrence into 5 levels levels of damage Indemnity for Life-Insurance Refer to Life- of the disaster event, according to the according to the housing is decided Disability Evaluation Insurance Disability the index calculation national standards National Standard by the earthquake Standard. Evaluation Standard. institution shall formulated by the Classification of magnitude, as long as compute the disaster Family property China Earthquake Earthquake Damage the epicenter is within index and issue a damage relief: Administration and Level of Buildings specific location (in report according Depends on the depth the Ministry of Civil (Architecture). Dali Prefecture or to the typhoon or of water logging or Affairs. Level I and II Similar to the national in the surrounding rainfall data. After actual damage. (slight damage), no standard policy. area). Mortality confirmation by the indemnity. Level III is indemnified government and

Loss-adjustment Loss-adjustment (medium damage), according to the insurance companies, 50% of the sum actual number of the insurance insured. Level IV deaths. company shall (severe damage) indemnify according and level V (total to a pre-defined collapse): 100% of structure. the sum insured. 8 The Development of Catastrophe Insurance in China: An Exploration

Using risk-based Set 4 levels of Premium rate of 2016 Casualty: 4.17%. Total premium for premium rates premium rates is 6.43% year 2017 is 123.8 Family property according to the according to million yuan. damage relief: 8.33%. regional risk level, earthquake risk and building structure, building structure Unknown. urban and rural and rural and urban differences. difference. Premiums and rates Premiums

Policyholders pay Policyholders pay Fully paid by the Fully paid by the Fully paid by Fully paid by the the premium, but 40% of the premium, Dali Prefecture government. the Shenzhen government. premium subsidy is and government government. Municipal and county government. encouraged. provides 60% (district) finance premium subsidy. cover 60% and 100% premium 40% of the cost, subsidy is applicable respectively. for households

Premium payment Premium needing special assistance. A portion of the Premium surplus If no claims, 70% of Premium surplus will premium revenue will (total revenue annual revenue will be fully reserved. be used to set up a subtracting the be reserved or 60% Besides, Ningbo special reserve fund, cost of reinsurance, of premium surplus municipal which rolls over in an indemnities, will be reserved. The government arranges independent account operating expenses, predefined profit rate another 10.2 million year by year. and predefined is 6% after tax. yuan each year to profits) will be fully The extraction, The fund shall be put support the reserve put into the a reserve accumulation, and in an independent fund. fund. use of of the fund is account, subject The fund shall be subject to specific The contractor shall to independent supervised and management set up separate accounting, and roll managed by the Unknown. Unknown. measures defined account for the over year by year. relevant departments by the financial reserve fund. The designated by the Reserve fund Reserve department. fund is subject Ningbo municipal to independent government. accounting. Insurers can apply for funding when simple loss ratio exceeds 125%, and the funding is up to the total fund available in the reserve. In the initial stage Multi-layer risk- Multi-player Multi-layer risk- Multi-layer risk- Not specified. of operation, the sharing mechanism pooling by involving sharing: sharing: general idea is total of insurance- approximately (1) Total indemnity (1) Insurance. control and quota reinsurance-reserve 2–3 insurance ≤ 300 million, paid by management. On fund-government and reinsurance (2) Reserve fund. insurance company. one hand, define contigent fund. companies. To cover the cost of the upper limit of a (2) Total indemnity casualty assistance single earthquake so exceeding 300 million and nuclear that the loss can be yuan, paid by the emergency relocation shared by layers of reserve fund, up to the that is beyond the insurer, reinsurer, and maximum fund raised. limit of insurance. reserve fund. On the (3) Residents are 3) Personal other hand, define encouraged to catastrophe insurance sales quota Catastrophe risk sharing Catastrophe purchase commercial insurance, in high-risk areas of catastrophe coverage which residents earthquakes. on their own. should purchase independently. Learning from Experience: Insights from China’s Progress in Disaster Risk Management 9

Table 6.1. Cont. Government- Supported Earthquake Insurance for Rural National Earthquake Sichuan Earthquake Residential House in Ningbo (Zhejiang) Shenzhen (Guangdong) Guangdong Catastrophe Insurance Catastrophe Insurance Yunnan Province Catastrophe Insurance Catastrophe Insurance Catastrophe Insurance In 2018, premium By the first quarter During 2015–2019, From 2015 to 2018, In 2016, the program revenue reached of 2018, 18 cities the program collected the program paid provided 2.347 124 million yuan, (states) in Sichuan in total 140 million 193.3 million yuan to billion yuan of risk providing risk Province have joined yuan in insurance more than 333,000 protection. In 2016– protection of 159.9 in the earthquake premiums, and households affected 2017, the program billion yuan. In total, catastrophe the corresponding by disasters. paid indemnity of 89 risk protection of insurance program. protection reached million yuan to 10 266.5 billion yuan It has benefited 1.65 1.186 billion yuan. In cities. was provided, and million urban and 2015–2018, there In 2017–2018, 14 5.33 million yuan has rural residents and were four earthquakes cities paid 185 million

Impact been indemnified provided total risk of magnitude 5 or yuan in premiums to 10.08 million protection of 43.1 above, and in total and received 493 households since billion yuan. 69.69 million yuan million yuan of implementation. was indemnified, indemnity. taking 11.4% of the total residential loss. The payment was as quick as 32 hours after the quake.

Note: Data about the national standard program, the Sichuan program, the Ningbo program, and the Shenzhen program are provided by People’s Property and Casualty Insurance Company of China. Data about the Yunnan program was provided by the Yunnan earthquake risk management innovation laboratory and Champion Property & Casualty Insurance Co., Ltd. Data about the Guangdong program was provided by the Guangdong Meteorological Administration.