In September, typhoons frequently hit the coastal areas of our country, causing huge economic losses. Taking the insurance claims for the strong typhoon "Yagi" as an example, official information shows that as of 12:00 on September 16th, the insurance industry had received a total of 92,000 claims for the strong typhoon "Yagi", with an estimated loss amount of about 3.5 billion yuan, and the amount paid and prepaid was 1.48 billion yuan.
This has also attracted the market's attention to the construction of the catastrophic insurance system to prevent and resolve disaster risks.
The reporter noticed that recently, the State Council issued "Several Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry" (hereinafter referred to as "Several Opinions"), proposing to enrich the forms of catastrophic insurance protection. Adhere to the principle of government promotion and market operation, and explore the establishment of a multi-channel and multi-level catastrophic insurance protection mechanism.
Experts believe that from the global average level, about 40% of the loss compensation for major disaster accidents is undertaken by the insurance industry, while our country's current proportion has just reached 10%, and it is the right time to develop catastrophic insurance.
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Exploring the construction of a multi-level system
Public information shows that since China's catastrophic insurance system exploration took the first step in April 2015, by the end of 2023, the earthquake catastrophic insurance for urban and rural residents' housing has provided catastrophic risk protection of 791.8 billion yuan for 21.34 million households across the country, with a total payment of more than 100 million yuan.
In March 2024, the catastrophic insurance system was upgraded. The State Financial Supervision and Administration Bureau and the Ministry of Finance issued the "Notice on Expanding the Scope of Urban and Rural Residents' Housing Catastrophic Insurance Protection and Further Improving the Catastrophic Insurance System", expanding the scope of protection for urban and rural residents' housing catastrophic insurance. On the basis of earthquake disasters, disasters such as typhoons, floods, heavy rains, and landslides were included in the scope of protection, and the basic insurance amount was doubled.
It is understood that in recent years, China's insurance industry has been continuously promoting the construction of a "multi-disaster cause, multi-year period, multi-level" catastrophic insurance protection system, and various regions are also actively constructing a multi-level catastrophic insurance protection system that includes the basic layer, expansion layer, and supplementary layer.
The above urban and rural residential catastrophic insurance protection system belongs to the basic layer.
In the expansion layer, since 2013, the insurance industry has cooperated with local governments to explore local catastrophic insurance pilots suitable for local conditions. The local government provides policy subsidies and strengthens catastrophic protection.Currently, 15 provinces including Fujian, Zhejiang, Jiangsu, Shandong, and Hainan, have initiated pilot programs for catastrophic insurance in 74 cities, tailored to their regional risk characteristics. From the pilot situations of catastrophic insurance across various regions, the coverage has expanded from single disaster causes to multiple disaster causes. In addition to typhoons, floods, and landslides, some local catastrophic insurances also provide related liability coverage for personal injuries and fatalities.
Taking Guangdong Province, which has a higher risk of natural disasters, as an example, it began piloting catastrophic insurance in 10 cities including Zhanjiang, Shaoguan, and Meizhou in 2016. By 2023, all 20 cities in Guangdong Province (excluding Shenzhen) have launched catastrophic index insurance.
A responsible person from Ping An Property Insurance Company of China, Ltd. (hereinafter referred to as "Ping An Property Insurance") introduced to the reporter that in 2023, Ping An Property Insurance participated in catastrophic insurance projects in 16 cities of Guangdong Province. The innovation and characteristic of Guangdong's catastrophic insurance lie in the application of index insurance. The policyholder and the insured are the government, the protection target is the local finance, and the compensation basis is the rainfall intensity and typhoon wind speed index. When the rainfall intensity and typhoon wind speed reach or exceed the preset thresholds, the insurance company does not need to inspect and determine the loss and immediately pays the insurance compensation to the relevant city government. The government coordinates the use of the compensation for disaster relief and reconstruction.
In recent years, insurance companies have also continued to increase investment in the number of catastrophic insurance products, pricing, and technical service innovation. Wang Yuxiang, a member of the Party Committee and Vice President of the China Insurance Industry Association, disclosed publicly that from 2017 to 2024, the insurance industry registered a total of 165 catastrophic insurance products on the China Insurance Industry Association's registration platform, including 98 products on sale and 33 national products.
China Reinsurance Corporation (hereinafter referred to as "China Re Property Insurance") stated to the reporter that the company's developed blizzard-extreme temperature index insurance product, through cooperation with direct insurance companies, has achieved the landing of the country's first non-agricultural blizzard index insurance and extreme temperature index insurance.
In the supplementary layer, the insurance industry is actively exploring commercial catastrophic insurance. This type of insurance encourages insurance institutions to develop insurance types that protect personal property and interests through commercial operations, and consumers can voluntarily underwrite according to their needs. At present, many large insurance companies have launched commercial catastrophic insurance products, mainly including comprehensive property insurance and all-risk property insurance, with coverage mainly including catastrophic events such as heavy rain, floods, earthquakes, typhoons, and blizzards.
Through multi-level and wide-coverage catastrophic insurance, more and stronger financial support is provided for disaster event response, achieving reasonable mobilization and use of insurance funds, reducing government fiscal fluctuations and impacts on social livelihood.
Implementing Catastrophic Risk Transfer Mechanism
While the coverage is expanding and premiums are increasing, the proportion of loss compensation borne by catastrophic insurance is also continuously increasing.
Data released by the Swiss Re Institute shows that in 2023, 142 natural disasters worldwide set a historical record, with a total insurance loss of $108 billion. According to its forecast, as global temperatures rise, the frequency and intensity of extreme weather events will further increase. In the next 10 years, insurance losses may double, and risk mitigation and adaptation measures need to keep up with the changes in risks.A mature catastrophic risk insurance system requires effective risk dispersion, expanded underwriting capacity, and stable business outcomes through proper reinsurance arrangements, making catastrophic risks insurable and encouraging insurers to take on such risks. At the same time, new mechanisms for risk transfer, such as catastrophe funds and catastrophe bonds, are needed to provide protection.
Journalists have noted that the latest "Several Opinions" have added expressions about the risk transfer of catastrophic insurance, such as proposing to study and explore catastrophe bonds and to use reinsurance to disperse risks reasonably.
In April of this year, the "Guiding Opinions on Promoting High-Quality Development of Green Insurance" issued by the State Financial Regulatory Administration also proposed to use reinsurance to effectively disperse risks, to study and explore new risk transfer methods such as catastrophe bonds to broaden the channels of risk dispersion, to promote the formation of a multi-level and multi-dimensional catastrophic risk dispersion system, and to enhance the industry's ability to bear catastrophic risks.
Public information shows that as one of the insurance-linked securities (ILS) varieties, catastrophe bonds are special bonds that determine interest payments and principal repayment based on the occurrence of agreed-upon catastrophic losses, aiming to transfer the risk of natural disasters and mitigate potential losses.
It is reported that in 2015, China Re Property Insurance issued China's first catastrophe bond in Bermuda, taking the first step in connecting China's insurance risks with the capital market. In 2021, China Re Property Insurance issued a catastrophe bond in Hong Kong, China, mainly covering domestic typhoon risks, with a raised amount of $30 million. After the issuance of this catastrophe bond, it is equivalent to加厚ing the financial protection for domestic typhoon risks in the reinsurance end.
China Re Property Insurance stated to the journalists that issuing catastrophe bonds and building a multi-channel, high-efficiency catastrophic risk dispersion system is of great practical significance for the company's catastrophic risk management and maintaining the long-term sustainable and rapid development of catastrophic insurance business.
So far, there have been a total of 5 catastrophe bonds issued in the Hong Kong market, with issuers including China Re Property Insurance, Ding Rui Reinsurance, PICC Property and Casualty Insurance, as well as the World Bank issuing 2 bonds for the Chile earthquake and the Jamaica storm, with a total issuance scale of about $700 million.
The latest data shows that the returns on global catastrophe bonds are also increasing. Taking the two catastrophe bonds listed on the Hong Kong Stock Exchange mentioned above, the coupon rates (floating) are 10.375% and 12.525%, respectively.
In addition, since the beginning of this year, the market activity represented by catastrophe bonds, as part of the insurance-linked securities (ILS) market, has continued to climb. According to data from Artemis, a data compilation organization related to insurance securities, in the first half of 2024, the issuance volume of catastrophe bonds and ILS market reached $12.6 billion. Among them, in the second quarter of 2024, the issuance of catastrophe bonds and related ILS exceeded $8 billion for the first time in a single quarter, reaching $8.4 billion.
Promote the implementation of top-level design and legal systemsA person in charge of Ping An Property Insurance told the reporter that there are still difficulties in the development of catastrophe insurance in China, mainly including insufficient coverage of catastrophe insurance and lack of unified cognition of catastrophe risks among various parties.
"Firstly, the geographical coverage of catastrophe insurance is insufficient, and risks cannot be fully transferred. At present, the pilot work of China's catastrophe insurance is mainly concentrated in a few southern provinces and cities such as Guangdong and Yunnan, where the concentration of catastrophe risks is high, and the regional coverage rate is less than 30%, which is not conducive to the full transfer of social catastrophe risks. Secondly, there is insufficient sharing and interconnection of disaster meteorological data. The optimization of catastrophe products and the realization of long-term high-quality development require sufficient meteorological data and disaster loss data support, and there is a lack of sharing and interconnection between various places and the insurance industry in this regard." The person in charge of Ping An Property Insurance told the reporter.
In this regard, the person in charge further told the reporter that according to the difficulties and pain points in the development of catastrophes, it is suggested to promote from the aspects of improving the top-level design of catastrophe insurance, unifying the cognition of catastrophe risks, and strengthening social publicity to improve the catastrophe insurance system.
Wang Yuxiang also publicly stated that the legislative work of catastrophe insurance should be accelerated, and the development, support, and standardization of the catastrophe insurance system should be included in the national legal system.
"In terms of improving the top-level design of catastrophe insurance, it is suggested to absorb domestic pilot and foreign advanced experiences, promote domestic catastrophe insurance legislation, and standardize the construction of product development, pricing, and claims systems for catastrophe insurance, providing a policy basis and institutional guarantee for catastrophe insurance. At the same time, it is suggested that provincial and municipal governments establish special fiscal funds for catastrophe insurance and establish a long-term assessment and evaluation mechanism that matches the return period of catastrophe insurance." The aforementioned person in charge of Ping An Property Insurance said.
Regarding how to further expand the underwriting scope of catastrophe insurance in the future, China Re Property Insurance told the reporter that on the one hand, the development, support, and standardization of the catastrophe insurance system should be included in the national legal system; promote central and local finances to motivate the catastrophe insurance market through fiscal and tax policies; handle the spatiotemporal focus of disaster protection, track the spatiotemporal migration trends and interannual changes, and establish an adaptive protection system; establish a complete supply system of catastrophe insurance products, covering various types of disasters, to meet differentiated needs.
On the other hand, leverage the advantage of the insurance industry in risk reduction and improve service quality. Penetrate the catastrophe insurance service into the entire process before, during, and after the disaster, enhance the sense of gain of the public and the government for catastrophe insurance through risk reduction services, and fundamentally release the potential demand for catastrophe insurance.