Lack of insurance hampers Chinese county’s recovery after deadly earthquake
Plight of Sichuan residents and businesses that were not protected in event of natural disaster highlights how far the industry has to develop
Thirty-six hours after a magnitude 7 earthquake shattered the mountainous Sichuan county of Jiuzhaigou earlier this month, a white sedan carrying four employees of China Pacific Insurance company was among a fleet of ambulances, bulldozers and trucks risking rock falls and cracks in the ground to reach the epicentre.
The insurance staff were there to check the damage to the Jiuzhai Songcheng Romance Park, a theatre entertaining tourists, as the venue has a policy worth 200 million yuan (US$30 million) with the insurer.
The four, donning helmets and split into two teams, trudged through the shattered glass and fallen roof tiles to survey the devastation caused by the earthquake. It was just the beginning of many follow-up visits from the insurer to decide how much they will eventually pay for the damage claims.
“We need some drone footage to give us a bird’s eye view of the damage,” Su Qin, the head of the team, told the South China Morning Post.
But many damaged houses or buildings, especially private ones, were not covered with sufficient insurance. Other guest houses and hotels near the theatre are now struggling to find ways to recover – especially since the earthquake has also driven away the tourists they rely on.
The contrast underlines the “low penetration” of insurance services in the world’s second biggest economy despite the fact that the industry holds assets of more than 16 trillion yuan.
On one hand, a number of Chinese insurance firms have amassed funds through selling wealth management style policies to investors. The money generated has been used to fund short-term speculation in the stock market, increasing the risks to the country’s financial system and angering the political leadership in Beijing.
But many Chinese farmers, factories and shop owners are still exposed to natural disasters without financial protection.
Following the devastating earthquake in Sichuan province in 2008 that killed more than 69,000 people, insurers in China paid out 1 billion yuan in compensation – less than 1 per cent of the official estimates that put the damage to property at 845 billion yuan.
By contrast, insurers in New Zealand covered 80 per cent of the losses caused by an earthquake in Christchurch in February 2011.
A decade later, the situation has not improved much. The temporary booths set up by the China Pacific Insurance and the People’s Insurance Company at the scene of the Sichuan earthquake were receiving few visitors.
“There is a lack of catastrophe insurance,” said Li Jian, an Hong Kong-based analyst of the Chinese insurance market from Autonomous Research.
“Although the government has offered support for it, little progress has been made thus far.”
It is a big mismatch that Chinese President Xi Jinping is trying to tackle. At a nationwide financial work conference held last month, Xi said that China’s financial industry must return to its roots to “service social and economic development”.
Serving the real economy is “the starting point and ultimate purpose” of finance, according to Xi’s speech published by the official Xinhua news agency.
Since 1980, the average premium paid by a Chinese individual for insurance has ballooned from 0.47 yuan to around 2,239 yuan last year, according to the Insurance Association of China.
During the same period, the ratio of gross premium to the country’s GDP, defined as the penetration rate, has risen from 0.1 per cent to an all-time high of 4.16 per cent last year.
It is rapid growth but is still far from enough. China’s life insurance accounts for about 2.4 per cent of its GDP, falling behind more than 5 per cent in many European economies as well as Hong Kong and Taiwan.
Non-life insurance, including property and health, was less than 2 per cent of China’s GDP, compared with more than 5 per cent in US and South Korea.
It is also imbalanced. The Chinese authorities clipped the wings of a few aggressive private insurance firms this year.
Wu Xiaohui, the chairman of Anbang Insurance Group, was detained for questioning in June, and an attempt by Yao Zhenhua, the boss of Baoneng Group, to take control of the property developer Vanke failed.
Xiang Junbo, the former chairman of China Insurance Regulatory Commission, is under investigation for alleged corruption.
According to an estimate from the Sichuan authorities, the earthquake in Jiuzhaigou, which killed 25 people and injured more than 500, caused economic damage of at least 110 million yuan.
But the lack of earthquake insurance coverage in the region will hamper reconstruction efforts.
To fund the recovery, the government will seek loans from international organisations, heightening the country’s debt risk.
In future China’s insurance coverage may become more extensive and balanced as the economy expands.
“In general, once the economy continues to expand with more activities, then you need insurance for protection purposes,” Terrence Wong, an insurance analyst from rating agency Fitch, said.
The Chinese government intends to increase China’s overall insurance penetration to reach 5 per cent and lift average spending on insurance to 3,500 yuan by 2020, a target that is not too hard to meet, given the pent-up demand for life insurance, according to Li at Autonomous Research.
“I don’t think it’s necessary to set up such a goal, because it feels like a planned economy,” Li said. “But since they have decided to have one, it’s not aggressive, either.”