Storm protection

It will likely enter local folklore - The Great Winter of 2008 - but this year's snow and ice storms are already subject of wide discussion as the economic toll is counted. The damage totals more than 100 billion yuan in direct economic losses, resulting the strongest calls ever for a sound catastrophe insurance fund.

"It is imperative we set up a catastrophe insurance fund and we are quickening efforts in this respect," Wu Dingfu, chairman of the China Insurance Regulatory Commission (CIRC) said at a recent work conference.

Sources say the insurance regulator is working on a catastrophe insurance plan with other ministries that will be submitted to the State Council, but it will take some time to finish.

According to Liu Jingsheng, president of China Reinsurance Group, the country began research into catastrophe insurance 10 years ago. "(Now) we are expecting to see some material moves soon," he says.

"Catastrophe insurance must be a multilevel system involving insurance companies, domestic and international reinsurance companies, government departments and even capital markets," Liu adds.

In fact, international practices show that innovative products tapping capital markets, such as catastrophe bonds and securitization products, are important elements in established insurance schemes.

"Issuing catastrophe securities could spread risks to the capital market to improve insurers' underwriting abilities," says Xu Jingfeng, a researcher with the Central University of Finance and Economics.

Henry Keeling, chief operating officer of XL Capital, one of the world's top-10 insurers, says the compilation of a database is now extremely important.

"Without the strong back up of sound statistics, you can hardly start the fund," says Keeling.

Jiang Caishi, general manager of the business development department of the PICC (Group), the country's largest non-life insurer, notes central management of a fund is crucial.

"The government could be the fund supervisor, allowing insurance companies to manage risks. Such mode could improve the efficiency of relief work."

The clarion call for a sound catastrophe insurance fund comes after severe ice and snowstorms hit southern and central regions in the past month, causing widespread devastation.

As of February 22, insurers had paid out more than 1.04 billion yuan for 851,000 storm-related claims, the CIRC says. The industry as a whole is expected to eventually pay out more than 8 billion yuan.

"A lack of preventative work for possible catastrophes and relevant risks is also a major reason for such a big loss," says Wu of the CIRC.

Most insurance companies are focused on business development and care little about risk and loss prevention that are also crucial to overall management, Wu says.

Of the paid claims thus far, more 900 million yuan went to property damage, while some 57 million yuan was paid out on health and life policies. Nearly 500 million yuan went to vehicle policy holders, 46.6 percent of all property claims.

"As traffic in snowstorm-hit provinces almost (completely) broke down, it is natural that vehicle insurance claims are soaring," says Yuan Li, spokesman of the CIRC. "As vehicle insurance usually accounts for 60 percent to 70 percent of the all non-life insurance revenue, its claims also take a high proportion."

Excluding industrial and mining firms, the direct economic loss from the heavy snow is estimated at 111 billion yuan, the CIRC says.

"Given the 1.04 billion yuan compensation paid out, insurance companies covered only 1 percent of the total direct economic losses, still a pretty low coverage," Wu says.

In contrast, when Hurricane Katrina hit New Orleans in 2005 and resulted in an economic loss of $100 billion, 30 percent was covered by insurance companies.

Chinese insurers have now paid out more than 40 million yuan in agriculture-related claimsand 200 million yuan paid for direct damage to crops over 445 hectares of farmland.

But when compared with 11.87 million hectares of farmland affected by the weather, the compensation paid is obviously extremely low, Wu says.

"This is mainly due to a lack of agriculture insurance products and farmers' low awareness of insurance," Wu adds.

Just one example is 90 hectares of cabbage in Hunan province that was killed by snow and cold - none of it was insured.

Insurers should do more in developing agriculture insurance products to meet rural needs, says Wu.

(China Daily 03/03/2008 page3)