Beijing is pushing domestic insurers to fast-track compensation to relatives of the missing passengers.
The government's pressure comes as a double whammy to Malaysia Airlines, which is already staring at a costly legal battle if the passengers' kin decide to sue for alleged shortcomings in its security procedures.
Security has come under the spotlight after officials confirmed at least two passengers used stolen passports to board the plane even though they feature in an Interpol database.
With the likelihood of heavy payouts by insurers and airlines increasing, investors were quick to dump related stocks. Kuala Lumpur-listed Malaysia Airlines plunged 10 per cent at one point in yesterday's trading, while the Hong Kong-listed China Southern Airlines, which has a code-sharing arrangement with Malaysia Airlines, fell 3.85 per cent.
Cathay Pacific slipped 0.38 per cent, China Insurance 2.28 per cent and Ping An Insurance dropped 1.68 per cent, on a day that the Hang Seng Index fell 1.75 per cent.
Major mainland insurers have contacted families of some of the 153 Chinese passengers on the missing plane after an urgent notice issued by the China Insurance Regulatory Commission on its website that stipulated all insurance companies should take urgent measures to make their staff work around the clock to check if their policyholders were among the passengers. All insurers should contact the families of the insured victims to provide assistance or compensation, the notice said.
Ping An Insurance could be the hardest hit as it confirmed it had 38 customers on the plane and was trying to confirm if there were 15 more.
PICC said 15 of its policyholders were on the plane. China Life Insurance also said it has contacted the families of its policyholders on the flight but did not give the number of them.
Bernard Chan, a member of the Hong Kong Executive Council and president of insurer Asia Financial Holdings, said once the missing plane was confirmed to have crashed, insurers would start paying compensation to the families even if no bodies are ever found.
"However, if it's confirmed to be a terrorist attack, certain travel insurance policies may not apply. But families of those who purchased life or accident policies would get compensation under all circumstances."
Chan said there could also be liability insurance payouts if airlines with liability insurance were sued. "It is always possible for airlines to face class-action lawsuits, as past experience shows," he said.
There were three American passengers, including two children, on the plane, which could trigger lawsuits from the US that other passengers could join.
A group of 83 passengers aboard an Asiana Airlines flight that crash-landed in San Francisco in July last year filed a class-action lawsuit. Three Chinese students died in the incident.