Despite the rapid development of technology, natural disasters remain a major challenge facing the global community. With the intensification of climate change and the impact of human activities, the losses caused by natural disasters to human society are increasing. How to improve the disaster prevention, reduction and relief capabilities of the entire society has become an urgent problem that needs to be solved.
From the perspective of the financial industry, catastrophic insurance is an insurance product designed to deal with natural disasters or safety accidents with large scales and wide-ranging impacts. It effectively disperses the risks of large-scale property losses, casualties and other risks that may be caused by natural or human-caused disasters.
1. Rapid growth of the catastrophic insurance market
From past experience, China has a wide range of natural disasters, large historical losses, and high disaster risks. Against the background of global climate change, China's disaster risks have increased.
According to statistics, in the past 12 years, the annual direct economic losses from natural disasters in China have exceeded 360 billion yuan, with an average of 206 million people affected each year. The proportion of direct economic losses from natural disasters to national GDP is about 0.5%. Among them, flood disasters account for more than 50% of the average annual losses, making them the most devastating. In the third quarter of 2023, the direct economic losses caused by the heavy rain and flood disasters in the Jing-Jin-Ji region reached 165.79 billion yuan.
In view of this, attention has been paid to the construction of the catastrophic insurance system. The Central Financial Work Conference has deployed key tasks such as "accelerating the construction of a financial power" and "playing the role of the insurance industry as economic stabilizer and social stabilizer". The Central Economic Work Conference emphasized "promoting high-level security with high-quality development and ensuring high-quality development with high-level security." These series of conference spirits and work requirements are the fundamental principles for the next stage of catastrophic insurance work.
Taking commercial catastrophic insurance as an example, with the deepening of insurance depth and density in China, earthquake risk exposure has achieved a compound annual growth rate of 19.2% from 2014 to 2022. During the same period, the compound annual growth rate of the industry's typhoon/flood risk exposure was 10.6%.
In the face of extreme disaster events, catastrophe insurance claims have become an important market compensation method. For example, in the Henan flood in 2021, the direct losses exceeded 110 billion yuan, and insurance claims were nearly 12 billion yuan, accounting for more than 10%.
It is worth mentioning that according to practical experience, catastrophic insurance claims show the characteristics of "the greater the industry's catastrophe losses, the higher the reinsurance share". This also means that reinsurance plays an important role in the construction of the catastrophic insurance system and cannot be ignored.
In addition to commercial catastrophic insurance, government catastrophic insurance is also an important part of the catastrophic insurance system.
On April 16, 2015, the China Residential Earthquake Insurance Pool was officially established to establish a multi-level risk transfer plan composed of the earthquake pool, reinsurance company, special reserve and emergency financial plan, in order to provide protection for more than 21 million households in China by the end of 2023, with a cumulative insured amount exceeding 785.5 billion yuan.
With the continuous enhancement of policy, the China Residential Earthquake Insurance Pool has been upgraded to the Catastrophe Insurance Pool, which will expand and add typhoons, floods, heavy rains, debris flow, landslides and other natural disasters on the basis of earthquake protection. The basic sum insured of the catastrophic insurance will double, and commercial insurance supplements will be provided, which is expected to usher in a significant increase in premium scale.
2. China Reinsurance provides a solution
Although the catastrophic insurance market is growing rapidly, the pain points in insurance programs, product innovation, disaster prevention and loss reduction can not be ignored. For example, catastrophic incidents have obvious "low frequency, high damage" characteristics, which means that some years will not see claims, while large claims will appear in years of major natural disasters, making medium and long-term risk management critical.
China Reinsurance, as the domestic lead reinsurer, has provided its own solution.
In 2018, China Reinsurance established the first financial technology company focused on catastrophic risk management in China——China Re Catastrophe Risk Management Co., Ltd. (hereinafter referred to as "China Re Catastrophe Management Company"). It has launched China earthquake model, China typhoon model and China flood model for China's unique climate and environmental conditions, and built the technology foundation for the industry in catastrophic insurance, providing reliable basis for product design and pricing.
China Re, which first launched the China earthquake model, achieved a zero breakthrough in the independent intellectual property rights of the country's catastrophe model. At present, China Re continues to iterate and upgrade the independent intellectual property rights of China's earthquake, typhoon and flood catastrophe models. It has obtained 6 national patents and is applied in more than 30 insurance and government agencies.
In addition to scientifically reasonable risk pricing, it is also very important to carry out pre-disaster prevention.
For example, China Re's typhoon model can dynamically calculate the disaster intensity information brought by the typhoon in the next three days based on the 72-hour weather forecast of the meteorological station, and customize and push warning information to help the emergency departments and insurance companies of the government do well in risk reduction management.
At the same time, China Re also assists local governments in establishing catastrophe management platforms, relies on China Re's catastrophe models to achieve accurate predictions of disasters. For example, the flood risk monitoring platform that China Re helped establish has data covering a national whole-basin flood model, which can more accurately evaluate the areas that may be inundated based on rainfall.
It is worth mentioning that China Re uses financial innovation to expand the capital market solution for catastrophic risk. As early as 2015, China Re issued the first domestic catastrophic bond in Bermuda, successfully transferring China's earthquake risk to overseas capital market. In 2021, China Re issued catastrophic bonds in Hong Kong, successfully transferring China's typhoon risk to the capital market, and paved the way for the establishment of a special purpose insurance company in Hong Kong for catastrophic risk securitization.
III. Conclusion
Overall, the role of insurance in the catastrophic risk management system is becoming more and more prominent. As the main channel of China's reinsurance industry, China Re deeply participates in all 19 provincial and municipal catastrophe insurance pilot projects, serving as the chief reinsurer in more than 80% of the projects. China Re fully participates in the construction of the catastrophe insurance system, deeply participates in top-level system design, product development and tariff calculation of the catastrophe insurance; the developed catastrophe model has built a solid technological foundation for the construction of the domestic catastrophe insurance system.
The good practice of China Re in the construction of the catastrophe insurance system shows its irreplaceable industry position, data advantages, technological advantages, and platform advantages. In the context of the central financial work conference giving reinsurers a greater historical opportunity, it is believed that China Re can seize the strategic opportunity of insurance and reinsurance industry, achieve stable and healthy growth in underwriting efficiency, and realize a more quality growth paradigm.