China’s escalating extreme weather events are raising serious concerns in the insurance sector, highlighting the urgent need for more robust financial tools to address the economic impact of natural disasters. Despite being the world’s second-largest insurance market, China’s coverage lags significantly behind developed nations, particularly in terms of catastrophe insurance.
Insurance industry experts emphasize the necessity for China to expand its catastrophe insurance coverage. Peggy Ding, placement leader at Marsh China, stressed the need for insurers to address emerging risks associated with climate change. “There are areas where China’s insurers need to catch up, particularly in addressing emerging risks associated with climate change,” she told the Post.
As extreme weather events become more frequent due to climate change, insurers must innovate to develop products that effectively respond to these risks. Currently, only about 10 percent of natural disaster losses in China are covered by insurance, compared to a global average of 40 percent, according to the National Financial Regulatory Administration (NFRA).
Recent floods have devastated several parts of China, including Guangdong, Sichuan, and Henan provinces. The Ministry of Emergency Management reported that at least 20.7 million people have been affected and 86 have been killed or are missing due to extreme floods this year. In Shaanxi province, a highway bridge collapse caused by floods and heavy storms resulted in 12 deaths and over 30 missing individuals.
Flood-hit provinces have filed 95,000 insurance claims worth 3.21 billion yuan (US$441 million) this year, with insurance payouts and prepayments exceeding 1.1 billion yuan, according to the NFRA. Despite recent improvements in compensating for natural disaster losses, significant coverage gaps remain.
“The insurance industry is facing significant challenges due to climate change,” said Ding. Challenges include limited historical data, concentrated geographic risks, affordability and accessibility issues, and regulatory and policy constraints.
In March, the NFRA and the Ministry of Finance upgraded China’s catastrophic insurance system for the first time since its 2016 implementation. The upgraded system now includes coverage for disasters such as typhoons, floods, heavy rainfalls, and landslides, and doubles the minimum amount insured. However, Ding stressed the need for more new and tailored insurance products to address specific climate change risks and provide comprehensive coverage.
To enhance disaster risk diversification, Ding recommended establishing a multilevel catastrophic risk protection system. This system should include insurance, reinsurance, catastrophe risk protection funds, catastrophe bonds, and other measures supported by central and local finances to leverage the capital market.
Additionally, establishing climate information disclosure and sharing mechanisms is crucial for improving insurers’ risk models. Parametric insurance, which offers protection based on predefined triggers like temperature thresholds or wind speeds, is an example of innovative products that can provide quick and predictable payouts, enabling companies to recover and adapt more effectively.
China’s vulnerability to climate change is underscored by a list from the Cross Dependency Initiative (XDI), which ranks nine Chinese provinces, representing over half of the nation’s GDP, among the top regions globally at risk from extreme weather. The list includes 26 Chinese provinces in its top 50.
Beyond providing financial relief, insurers must educate clients on mitigating potential climate-induced disaster risks, according to Chelsea Jiang, chief technical and innovation officer of general insurance at AXA Greater China. “Insurers need to be able to simplify, disseminate, and educate our customers on information related to climate change and natural disasters,” Jiang said. This education helps clients understand the impact of these risks on their businesses and lives and encourages proactive measures to prevent losses.
