Rising cat losses in Greater China put risk exposures under the lens
September 25 2024 by Mithun Varkey
(Re)insurers in the region are increasingly focusing on understanding and analysing risk exposures and are more willing to invest in data collection, says Guy Carpenter’s Kitty Bao.
As the world grapples with the growing severity and frequency of natural catastrophes, the Greater China region has been among the worst affected in the recent years.
Natural catastrophes that affected China in the first six months this year including flooding, earthquakes, typhoons, wind and hail, freezing, forest and grassland fires, and sandstorms, which have caused a direct economic loss of CNY93 billion (US$13 billion) to the country.
And in the past two months, the region has seen two windstorms – typhoons Yagi and Bebinca – cause large-scale damages across Hainan, Guangdong and Shanghai.
While the (re)insurance market has been bearing the brunt of the increasing cat losses, they are “increasingly aware of catastrophe risk management, focusing on understanding and analysing the risk exposures, they are more willing to invest in data collection”, according to Kitty Bao, managing director, head of analytics & advisory, Asia Pacific, Guy Carpenter.
Beyond traditional perils like wind and earthquakes, floods are gaining attention, especially following recent events in China.
“From the direct side, insurers are incorporating natural perils as default coverage in property and motor policies, along with developing innovative products,” Bao said.
There has also been an increase in the formation of government schemes to cover casualty and household property loss.
“We have observed a gradual increase in the purchase of catastrophe protection, albeit limited by budgetary constraints. As a result, some companies have shifted up their programs accordingly.”
“While traditional catastrophe excess of loss cover remains prevalent, insurers are also exploring alternative solutions, such as multi-year covers and catastrophe bonds,” according to Bao.
To diversify catastrophe risks, insurers are seeking overseas reinsurance support and tapping into the insurance-linked securities (ILS) market and catastrophe bonds.
“We have observed a gradual increase in the purchase of catastrophe protection, albeit limited by budgetary constraints. As a result, some companies have shifted up their programs accordingly.” Kitty Bao, Guy Carpenter
While reinsurance capacity is abundant, rate adequacy issues hinder efforts to deploy it effectively, noted Bao.
“Insurance companies rarely align catastrophe loading in their direct product pricing with reinsurance rates, leading to potential underpricing of risks, especially when there is a clean loss history. Consequently, reinsurance costs are often seen as an increasing expense in primary pricing,” she added.
In a competitive market, it takes time for insurers to include catastrophe loading systematically in their pricing models. Instead, companies implement other underwriting and claims management measures to control catastrophe exposures, complicating reinsurers’ ability to quantify risk, Bao said.
Energy transition
Given the focus on the region’s transition to a low-carbon economy, there is much opportunity for the (re)insurance industry to help the region achieve its ambitious targets.
“China’s significant role as a global producer of wind and solar energy has prompted state-owned insurers to provide insurance capacity in support of this transition. As a result, there is an increasing demand for overseas reinsurance capacity to manage risks from the expanding portfolio, with tailored reinsurance arrangements being sought to maximise support,” Bao said.
New energy insurance is rapidly developing in both personal and commercial sectors, particularly in electric vehicles (EVs) and renewable energy. The surge in the EV market has led to increased demand for EV insurance, but high costs in Hong Kong and China hinder adoption. To address this, the Chinese government has introduced new rating guidelines for more flexible EV insurance pricing based on risk levels.
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