Parametrics to play significant role in China's growing property catastrophe market

By Henry Gale

May 21 - (The Insurer) - China's catastrophe (re)insurance market could be bigger than the U.S. market within 10 years, with parametric coverage for governments leading the way, according to reinsurance broker Continental Insurance Brokers (CIB).

Last year, catastrophe insurance programs for cities in China represented $100 million in premiums, said Yufeng Liu, head of treaty and innovative products at CIB. The programs cover 19 cities and around half of them are parametric.

This month, the northwestern province of Shaanxi decided to buy catastrophe coverage across all its 10 cities for the first time. "The demand is increasing rapidly," Liu said, adding that he expected many of China's other cities, which number more than 600, to follow soon.

"Each city has a budget for catastrophe events," he continued. "But if there are no events in a year, the budget is simply wasted; they can't use the cash … So almost every city government in China has the incentive to use the budget and turn it into insurance coverage."

These government insurance programs have helped establish data sources suitable for parametric risk transfer, overcoming a hurdle that had held back private sector parametric covers. Now insurers, including captives, are increasingly considering parametric reinsurance too, Liu said, with some likely to adopt it within the next 12 months.

Liu gave an example of an insurer whose modelled losses for earthquake risks, as calculated by a catastrophe modelling vendor, were highly concentrated in just a few provinces, in a way that he said didn't fairly reflect its exposures.

If three provinces were removed from its excess-of-loss cover, the technical price could be reduced by more than half, and a parametric cover could be adopted for those provinces targeted at the earthquake risks it is most exposed to.

MARKET POTENTIAL

The Chinese catastrophe insurance market is also likely to grow overall as more households purchase property coverage. According to Swiss Re, just 6% of catastrophe losses in China in the 10 years to 2024 were insured.

Given China's geography, population and economy, an increase in insurance coverage could mean a large new market for international reinsurers. Liu suggested catastrophe insurance could follow the route of agricultural insurance in China.

"Really from 2006, the Chinese government decided to promote agriculture insurance and it was almost zero back in 2006 … it took only about 10 years for China to be bigger than the U.S., to rank number one in the world on agriculture insurance," he said.

With the number of cities buying catastrophe insurance growing fast, Liu said he expected businesses to follow, and that the government is currently promoting insurance for households too. "So, we are quite confident that the market will be bigger than the U.S. very soon."