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Rain Checks

As the frequency of natural disasters increases, China’s insurance industry is exploring newer risk management and disaster prevention measures to weather the coming storms

By Ha Keli Updated Nov.1

Residents of Beijing’s Fangshan District check damaged vehicles on August 1, 2023 after ffoods inundated the area (Photo by VCG)

After rainstorms from typhoons Doksuri and Talim pounded eastern China in July and August, insurance companies across China received 260,600 flood claims for total losses estimated around 9.78 billion yuan (US$1.37b), according to the National Financial Regulatory Administration.  

The cities of Beijing and Tianjin, and the provinces of Hebei, Jilin, Heilongjiang in northern and northeastern China, and Fujian in the southeast, were hit hardest. As of mid-August, insurance companies had paid out a total of 1.45 billion yuan (US$199.7m) in 114,000 settlements.  

With the increase of extreme weather events, insurance claims surged dramatically over the past decade. In the summer of 2021, after extensive flooding in Henan Province caused 91 billion yuan (US$12.53b) in damages affecting 13.6 million people, the insurance industry paid out a total of 9.7 billion yuan (US$1.34b), yet it only accounted for about 10 percent of the total losses.  

During a 2021 interview with the Xinhua News Agency, Li Qinying, deputy dean of the Business School of Zhengzhou University in Henan Province, estimated that Henan’s insurance industry paid out as much as China’s entire auto insurance sector earned in 10 years.  

Seeking Coverage 
Zhang Xin, a manager at a major Chinese insurer, told NewsChina that most of the recent claims they received for vehicle damage involved flooding. Public data shows that as of August 8, insurance companies in Hebei, Beijing, Heilongjiang, Jilin and Tianjin had received at least 70,500 auto insurance claims, far exceeding claims for property damage and agricultural insurance, for estimated losses of 1.47 billion yuan (US$200.6m).  

Since 2020, auto insurance in China covers damage from natural disasters such as rainstorms, typhoons and floods. In most cases, policyholders can file claims if their car’s engine or battery suffers water damage.  

Agricultural insurance claims also spiked after the floods in July and August, the harvest season for many crops. Rains from Typhoon Doksuri slammed Wuchang in Heilongjiang Province, a major rice producer, leaving large swathes of paddies inundated.  

Wang Shouxin, director of Wuchang Agriculture and Rural Affairs Bureau, told NewsChina that 66,667 of the city’s 168,667 hectares of rice paddies had been affected by Typhoon Doksuri to varying degrees.  

A Wuchang rice farmer said he did all he could to save his crop from the August floods, such as clearing out collected sediment and spraying fertilizers. He estimated losses of around 150,000 yuan (US$204,667) on his family’s 40 mu (0.07 hectares) plot. Fortunately, he had agricultural insurance. “It won’t cover all my losses, but it’s better than nothing,” the farmer told NewsChina. 

However, many others did not take that precaution. This was especially apparent among farmers in China’s northeast, where flooding is rare. “We never encountered such huge floods before, and never expected the paddies would get that flooded, so we didn’t buy insurance,” a farmer told NewsChina.  

According to current rates, farmers paying a 5 yuan (US$0.68) premium are eligible for 376 yuan (US$51.3) in compensation per mu (0.0667 hectares) if floods damage their rice crops before the heading stage, or when buds are visible at the end of a rice stem. Those paying a 14-yuan (US$1.91) per mu can get 1,124 yuan (US$153.4) if their rice reached the heading period. On average, rice paddies yield 1,000 to 2,000 yuan (US$136.4 to 272.9) per mu.  

According to data from Wuchang Agriculture and Rural Affairs Bureau, the city’s farmland covered by insurance amounts to 3.27 million mu (220,000 hectares), accounting for about 70 percent of its total arable land.  

There are two types of agricultural insurance in China: “full-cost” and “income.” Subsidized by the central and local governments, the former covers costs for seeds, fertilizers, land and labor, and losses from natural disasters. The latter covers losses caused by price and output fluctuations.  

Zhang Xin said full-cost insurance dominates the market due to its lower premiums. Income insurance policies are much more complex and expensive, thus less attractive to cash-strapped farmers. But without income insurance, farmers can only partially mitigate their losses from natural disasters.  

As extreme weather events increase due to climate change, more people are seeking comprehensive policies beyond auto and agriculture, such as home and business insurance, Zhang Xin said.  

Home insurance in China generally covers damage from natural disasters with the exception of earthquakes, which requires a separate policy. Enterprises can also buy insurance that covers property, equipment and raw materials.  

But not all business properties are eligible, Zhang Xin said. During the devastating floods that submerged the city of Zhuozhou in Hebei Province in August, many booksellers were left ruined as there was no commercially available insurance policy for their warehouses.  

According to Huang Ping, general manager of BooksChina.com, an online bookseller that lost large portions of its stock to the Zhuozhou floods, the company previously had insurance for its warehouses. However, their insurer stopped offering the policy. “We weren’t able to buy any comparable insurance for the last two years,” Huang said.  

Huang’s situation is common. Most insurance companies in China do not offer policies to cover books, not only because they are vulnerable to water damage but also are easily outdated, making them a liability. The rare companies that do have very high premiums.  

“If books get wet, they can’t be sold anymore, so insurance companies are very cautious and rarely offer insurance for products like books,” Zhang Xin said.  

Better Options 
In the past, government-led disaster relief shouldered a share of individuals’ losses. However, this model has become less sustainable. “The model puts excessive strain on government relief funds amid the overall economic slowdown, while costs for post-disaster reconstruction projects keep increasing,” said He Xiaowei, a professor at the University of International Business and Economics in Beijing. “Therefore, the financial compensation mechanism will face more severe income and expenditure difficulties in this regard,” He said.  

Guo Shuqing, former chairman of the China Banking and Insurance Regulatory Commission, suggested in October 2021 that the insurance sector should be included in the national disaster relief and emergency management system, and China should involve insurance companies in disaster prevention, fundraising, post-disaster compensation, recovery and reconstruction campaigns.  

In 2006, the State Council, China’s cabinet, issued a document on insurance industry reform, which proposed the “establishment of a catastrophe risk insurance system supported by the State.”  

This means that insurance companies should cover property losses from earthquakes, floods, typhoons and other such events, as well as in cases of death or injury due to natural disaster.  

In China, catastrophe insurance is operated by commercial insurers, but with government support and regulation.  

Catastrophe insurance premiums are mostly shouldered by government funds. In recent years, more than 10 provinces, including Guangdong, Sichuan and Zhejiang, have implemented regional catastrophe insurance systems. Shenzhen, Ningbo, Xiamen and other cities have also piloted catastrophe insurance plans.  

In 2014, Shenzhen in South China’s Guangdong Province was the first to implement a catastrophe insurance system of three parts: government catastrophe relief insurance, catastrophe funds and individual catastrophe insurance. Shenzhen government funds cover catastrophe relief insurance annually to provide basic natural disaster insurance for all residing within the city’s administrative region, regardless of their household registration.  

China is also constantly improving its catastrophe insurance system for natural disasters. For example, some places have adopted the index model, where a predetermined index dictates payouts for loss of assets and investments resulting from weather events.  

When Henan Province began work on its catastrophe insurance system in 2022, it allowed pilot cities to choose from two models. Under the real compensation model, insurance coverage kicks in for disasters of a set magnitude, such as when evacuations reach 30,000 people or 1,000 homes become unlivable.  

The index model covers all claims when the cumulative rainfall at any national meteorological station within the city’s jurisdiction registers 150 millimeters (mm) over three consecutive days. 

Each city has specific insurance premiums. When an insured accident occurs, insurance institutions both public and private must categorize cities according to their rainfall levels and pay out accordingly.  

Catastrophe index insurance is used in many regions. During Typhoon Doksuri, areas in Taizhou, the first city to pilot catastrophe insurance in Zhejiang Province, saw over 140 mm of rain in a day, which qualified for claims.  

According to public data from the Guangdong Regulatory Bureau affiliated to the State Administration for Financial Regulation, after Typhoon Talim made landfall in the province’s Zhanjiang City on July 17, catastrophe index insurance paid out more than 200 million yuan (US$27.3m) for more than 10,000 claims, with the cities of Zhanjiang and Maoming paying a total of 35.9 million yuan (US$4.9m) under the same catastrophe index insurance mechanism. 

“When we saw what happened after the heavy rainstorms in Henan [in 2022], we became soberly aware that China’s catastrophe insurance is still in the initial stages of development, its products are not diverse enough, and urban flood insurance due to typhoons and heavy rainfall needs to be improved,” a former manager from the China Banking and Insurance Regulatory Commission told NewsChina under condition of anonymity.  

According to Guo Shuqing, the insurance industry should strengthen connections with government departments in agriculture, geology, meteorology, water conservancy and emergency response, and research mechanisms and prevention measures with other institutions.  

He also recommended improving risk diversification such as reinsurance, which involves insurers transferring risk to other companies to reduce the chances of large payouts for a claim.  

Risk Reduction 
According to Swiss Re Institute, a reinsurance provider, extreme weather events caused US$35 billion in insured losses in the first half of 2022 worldwide.  

Faced with thinning profit margins, some major insurance companies in the US pulled out of markets in high-risk areas. In early June, US companies StateFarm and Allstate stopped selling new homeowners insurance policies in California, citing high construction costs, inflation, wildfire risks and reinsurance costs.  

“With increasingly frequent natural disasters, insurance companies will gradually shift focus from a single post-claim function to pre-risk controls and risk prevention, and move from the traditional role of loss compensation provider to comprehensive risk management solution provider,” a manager at Ping An Property Insurance told NewsChina, requesting anonymity.  

This approach is called risk reduction, which uses scientific approaches and technology to reduce the likelihood of accidents and compensation costs for insurance companies.  

According to 2022 data from the Insurance Association of China, the insurance industry invested about 234 million yuan (US$33m) and mobilized about 136,100 people in disaster prevention and reduction efforts, sent more than 75 million early warning messages via text message, and reduced total disaster losses by about 2.277 billion yuan (US$310m).  

“Competition between insurance companies used to mainly focus on lower premiums and higher compensation rates. Now under the competitive idea of risk reduction, the importance of holistic risk management is highlighted. At the same time, insurance companies can assist the government in risk reduction,” He Xiaowei said.  

NewsChina has learned that many property insurance companies are using big data, artificial intelligence models, the Internet of Things and other technologies for risk reduction.  

According to the manager with Ping An Property Insurance, before Typhoon Doksuri hit Fujian Province, the company sent early warning messages to its policyholders through its integrated smart system.  

The company also contacted vehicle maintenance and tow truck companies inside the province in advance to carry out rescue, survey and claim settlement work.  

Risk reduction services are still in the development stage. “We should accumulate data and experience through risk reduction and constantly improve insurance products, to meet the needs of policyholders, and reduce losses caused by natural disasters,” said Guo Jinlong, researcher at the Institute of Finance and Banking, Chinese Academy of Social Sciences. 

Government offfcials and farmers check destroyed crops to estimate losses after ffoods inudated Beijing’s Mentougou District, August 14, 2023. Since August 7, insurers have paid out compensation totaling 10.28 million yuan (US$1.42m) for agricultural losses in the district (Photo by VCG)