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High loss potential, virtually no backstop
High loss potential, virtually no backstop
© Jia Ce / picture alliance / dpa
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    As the level of prosperity rises, so too does the concentration of values in China's conurbations. The destructive potential is enormous if just one of the many tropical cyclones that sweep through the country each year were to hit one of the many cities with millions of inhabitants with full force. In the absence of increased insurance protection, there is the danger that the financial burden could impede economic and social development. And China's east-coast hazard exposure to typhoons is probably increasing even more as a result of climate change.

    The current year's typhoon season shows how important loss-avoidance measures are: By the end of August, 21 tropical cyclones had formed in the north-western Pacific, a substantially higher number than the long-term average. Ten of these storms reached typhoon strength – also more than usual. Nine tropical cyclones made landfall in China, one as a Category 2 typhoon with wind speeds of up to 150 km/h. In August, Typhoon Rumbia hit the Greater Shanghai area directly as a tropical storm, bringing with it extreme precipitation. Despite relatively low wind speeds, tens of thousands of buildings were damaged or destroyed.

    "The Middle Kingdom" – China's name for itself – is susceptible to natural disasters due to a number of complex geological and climatic factors. Inhabitants of the interior of the country, who live along the complex network of rivers, must expect to experience flooding. Up to now, the costliest flood year was 1998, when losses, particularly along the Yangtze, came to US$ 33bn (in 2017 values). More recently, following several quieter years, 2016 again saw exceptional losses of US$ 28bn, 98% of which was not insured. Despite similar baseline conditions and comparable overall consequences, there were significant differences between the events of 1998 and 2016. The floods two decades ago were predominantly caused by river flooding. By contrast, the 2016 disasters were a combination of many different, intense and often localised individual events.

    Quiet after the storm - Natural disasters caused lower losses than usual in the first half of 2018
    Earthquakes harbour an even greater loss potential. The 12 May 2008 tremor in Sichuan Province, which claimed the lives of over 87,000 people and caused losses of US$ 107bn (in 2017 values), remains the worst natural disaster in China on record. The western parts of the country, where catastrophic earthquakes can occur in the Himalayan region, are most exposed. But destructive earthquakes must also be expected in other parts of China from local fault lines.

    Every seventh natural disaster is a tropical cyclone

    The growing exposure to tropical cyclones, which can occur between June and November along virtually the entire south-east coast, is not yet sufficiently anchored in public consciousness. Of the total losses of US$ 630bn caused by natural disasters in China between 1980 and 2017, US$ 126bn – one dollar in five – was attributable to tropical cyclones. This equates to every seventh disaster in terms of the number of events. Typhoon Fitow, which swept along China's east coast in October 2013, ranks among the country's ten costliest natural disasters of the last ten years, with overall losses of US$ 8bn.

    Fitow illustrated a fundamental problem. Of the overall losses, only around US$ 700m (9%) was insured. The gap was even worse in the period between 1980 and 2017, when just 4.4% on average of the losses from tropical cyclones was insured. The situation is compounded by the fact that the loss potential has risen dramatically, and is continuing to rise, due to the rapid increase in values in an emerging country like China. The skylines of its largest cities, which have benefited from an unbroken trend to abandon the countryside, are the obvious symbols of its new prosperity. In 2011, for the first time in the country's history, there were more Chinese living in cities than in the countryside, and according to forecasts from the United Nations, the proportion is set to increase to 80% by 2050.

    The strong growth in the conurbations, particularly in highly exposed regions, leads to higher and higher concentrations of values. If such a concentration of values is directly hit by a typhoon, huge losses could result that are far in excess of the historical experience up to now.

    On top of which, based on research findings, the exposure of China's east coast to typhoons has increased somewhat, because the tracks of the storms have slightly shifted to the north. Scientists expect the future number of tropical cyclones in the western Northern Pacific to reduce as a result of climate change. However, their projections indicate that the number of very severe storms, in other words typhoons of the highest categories on the Saffir-Simpson scale (4 and 5), are more likely to increase in many parts of the western Northern Pacific.

    Prevention and insurance therefore become all the more important. China has already made great strides in terms of flood prevention. Following the flooding disaster in 1998, the government invested billions of dollars in an extensive programme that included both dykes and flood warning systems. And the measures have proved effective. Despite a higher concentration of values, the impact of the annual floods is declining. The new strategy also looks to manage flooding and reduce the risk, rather than trying to achieve the best possible protection. However, too little attention has been given to prevention against local torrential rainfall, as the events of the summer of 2016 illustrated.

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    Great potential for insurers

    Although the government has been campaigning for years for greater insurance take-up, insurance protection against natural disasters in general, and against tropical cyclones in particular, reveals a large gap. The most recent penetration in the lines of property-casualty and accident insurance was just 1.3% in terms of the gross domestic product. This puts China on the same level as emerging countries in Asia, which reach 1.2% on average, but well below the level of the world's industrialised markets. Moreover, a closer look reveals that in China just one tenth of property/casualty insurance premiums are derived from property insurance, while motor vehicle insurance accounts for a much larger share.

    One of the reasons for the low insurance penetration is a lack of risk awareness. As well, most people rely on the government to help them in emergencies. At the same time, initial efforts are being made in China to strengthen local resilience. This involves local authorities acquiring insurance protection on behalf of their citizens, which should at least compensate for a portion of the losses following a disaster.

    Thus far, however, there has been very little acceptance that this type of insurance is good for everyone involved. This could be remedied by lobbying, in conjunction with providing information about the conditions under which insurance solutions are actually possible. Specifically, such information could include hazard maps, claims statistics, and data on value distributions in the various regions. Greater insurance density would be a positive step towards helping more people to recover financially after a disaster. And it would make sense in economic terms since spreading the risks more widely makes them easier to absorb.

    Munich Re Experts
    Christoph Hoch
    Chief Executive Greater China