Increasing demand for natural catastrophe insurance has provided the world’s largest reinsurer, Munich Re, with its biggest market in the Asia Pacific region: China. But how will Munich Re classify disasters, such as earthquakes, in a country where seismic events are a growing subject of debate as to how many are natural and how many are man-made?
This report by South China Morning Post on rising demand in China for natural catastrophe insurance makes us wonder: how will insurance coverage address the earthquakes and secondary disasters China’s scientists and environmentalists are linking to the country’s breakneck dam-building program in earthquake-prone regions? [For more on this, see: Are dams triggering China’s earthquakes?]
Demand in China for insurance products on the rise, but margins on the low side
By Kwong Man-ki for South China Morning Post [original version available here]
Munich Re, the world’s largest reinsurer by premium volume, said rising demand in natural disaster insurance backed by government support and increasing awareness will boost growth in the Chinese market although margins were lower than others in the world.
“China is the largest market in Asia Pacific for Munich Re, and I think that part will continue to grow,” Ludger Arnoldussen, management board member of the German reinsurer, said in an interview with the South China Morning Post in Beijing. China will remain Munich Re’s largest market in the Asia Pacific region.
Premiums from the Chinese market grew by 25 per cent year on year to 1.39 billion euros in 2013, while total premiums for Asia Pacific dropped 6.5 per cent to 4.65 billion euros for the same period.
Despite the growth potential in the Chinese market, Arnoldussen said the profit margins of the Chinese market were lower than others in the world.
“We will see higher margins because of changes in risk-bearing natural catastrophe business,” he said.
The State Council released 10 directives in August to boost the development of the insurance industry. Catastrophe insurance is one of the areas named by the cabinet, while the others also included pension, health and agriculture insurance.
As the penetration rate of insurance was low in China, the effects of major natural catastrophes on the Chinese economy would be significant as there was a big insurance gap, he said.
Munich Re’s exposure on natural catastrophe at the moment was very low, Arnoldussen said, blaming it on the lack of awareness in the country for the product.
“But I would expect we would probably have three to five times the premium that we have written now [in natural catastrophe insurance] over the next three to five years’ time,” he added.
Munich has participated in the catastrophe pilot programme, which was launched in the southern city of Shenzhen and southwestern Yunnan province, while the German insurer is also developing new products which will need Beijing’s regulatory approval.
“[The pilot scheme] maybe provide only basic coverage, but there would be room for private individuals to top up this basic cover,” Arnoldussen said.
The German reinsurer is also investing in a modelling system, gathering information including geographic data, along with the frequency of various disasters such as floods and earthquakes.
“Compared with Germany, China is a bigger trunk to work on. But such a modelling system will help calculate the right prices for properties,” he said, and that would allow the company to price products at more attractive prices.
“Many heavily built-up areas and areas of big industrial investments are highly exposed to flood typhoon and earthquake. There is a lot of value that would make it worthwhile to invest in it [the modelling system],” Arnoldussen said.
China’s premiums were expected to more than double until 2020, making it the third-largest insurance market in the world, he said. Reinsurance premiums would grow at a slower pace. The implementation of C-ROSS – China risk-oriented solvency system – would change the demand pattern for reinsurance, while a consolidation would be expected, he said.
The China Insurance Regulatory Commission began work on the C-ROSS project in 2012 to reform the mainland’s solvency system. The second-generation solvency system, expected to be launched this year, seeks to ensure that insurers maintain capital levels that match specific risks and improve capital efficiency.
A large part of Munich Re’s business China was to substitute capital by reinsurance to support Chinese companies in their strong growth. However, the capital needs would change after the implementation of C-ROSS and that posed uncertainties to the company, Arnoldussen said.
“There will be some uncertainties as the parameters for some of our clients will change under the new C-ROSS regulations, with some business lines needing more capital and some needing less,” he said.
“But we still see strong growth in reinsurance as our Chinese clients have maintained strong growth that will boost reinsurance demand,” Arnoldussen said, adding that major clients achieved 15 to 20 per cent, even 30 per cent business growth in 2013.
The insurance industry earned every dollar that it makes from global warming — its sharp-eyed marketers spotted the potential before anyone else.
Let’s play Chicken Little
“If we’re to conjure up a new species of insurance based on blue-sky speculation of catastrophe – let’s call it Chicken Little insurance – surely we can do better than to grasp at climate change.”