High loss potential, virtually no backstop
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 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.
Every seventh natural disaster is a tropical cyclone
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.
Great potential for insurers
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.