Flood Insurance in China: Lessons & Opportunities
By Hongqiao Liu 18 August, 2016
With climate change, flood risk in China is increasing. CWR's Liu looks at the past & future role of flood insurance
RMB146.9bn in losses from 2016 floods; only 2% covered…
China, with its vast boundaries and various landscapes, suffers from floods – big or small – almost every year. This summer alone, over 1,500 cities and counties in 28 provinces experienced heavy rain and floods. From southern megacities like Wuhan to northern rural villages in Hebei, floods affected more than 60 million people with hundreds dead or missing. By the end of July, primary estimates on direct economic losses have exceeded RMB 146.9 billion – that’s almost 0.8% of the national GDP in the second quarter of 2016.
… up from 0.2% since 2008 but US storm coverage=70%
According to the Aon catastrophe report, only 2% of the damage from the July floods are likely covered by insurance and these are mainly claims from agriculture loss. The rate of insurance coverage had grown from 0.2% of the RMB85.51billion direct economic loss in Wenchuan Earthquake in 2008 and 1% of general disasters in China, according to official data quoted by Chinese media. However, when compared with the US, where 70% of storm damage is covered by insurance, 2% is next to nothing.
China needs flood insurance
All around the world and in China too, flood risks are rising. Increasing urbanization, population intensity, economic growth and climate change all add to the risks. Already scientists have warned that in the coming years, China should continue to expect extreme weather like heavy storms, typhoon and hail. And thanks to climate change, extreme weather will become more extreme over the years. Chinese government, with its limited financial budget on disaster relief, may face increasing funding pressure to cover future disasters.
Chinese govt likely to face more funding pressure… MOCA plays central role from relief to rebuilding
Under the current “National Disaster Relief System”, the Ministry of Civic Affairs (MOCA) takes lead in disaster relief from earthquake to floods. Only until recent years (mainly after the Wenchuan Earthquake in 2008) has civic society started to step into disaster rescue and reconstruction; albeit in a small scale. Unlike the US or UK where there are long-established national flood insurance programmes that engage partners from insurance companies, MOCA and local governments in China assume the primary role and are fully hands-on from the provision of funds, aid, disaster relief, reconstruction planning, infrastructure rebuilding to post-flood economic revival.
Unknown to many, as early as in the 1980s, when China introduced commercial insurance mechanism into the market after the “open door” policy, flood insurance was already on the cards with several pilot projects carried out in the Yangtze and Huaihe river basin. In the “Flood Control Law” launched in January 1998, China already showed encouragement and support towards carrying out flood insurance practice. Yet, decades have passed, and flood insurance is still not available for general households or private facilities. Trillions of assets in urban and rural China remain exposed to increasing flood risks that are covered by neither flood insurance nor property insurance.
Despite Premier Li’s statement to “launch catastrophe insurance mechanism” – no timetable has been given
In late 2013, the China Insurance Regulatory Commission (CIRC) approved two more new pilots in Yunnan province and Shenzhen city under the name of “catastrophe insurance”. While the Yunnan pilot focuses on earthquake cover for residential housing, the pilot in Shenzhen expanded from “flood risk” to cover 15 types of disasters including earthquakes, typhoons, violent storms, tsunamis, landslides, waterlogging as well as nuclear incidents induced by above disasters.
Then in 2015 and 2016, Premier Li Keqiang consequently initiated the need to “launch catastrophe insurance mechanism” in his annual government work report, signaling the central government’s determination. Yet no timetable has been given.
Lessons learned from the failure of flood insurance pilots in the 1980s-1990s
Since the 1980s, China has carried out various forms of flood insurance. The People’s Insurance Company of China (PICC) for example, had launched commercial property insurance and hydraulic engineering insurance. In 1986-1988 and 1992-1996, the Ministry of Water Resources (MWR) together with MOCA, PICC and the Ministry of Finance launched two periodic pilots for flood dredging and retention areas in Huaihe Basin.
Various pilots from 80s & 90s functional but not practical… farmers could not afford to pay
According to the policy, once crops are damaged due to flood dredging and retention, the insurance company would cover the damage with pay-outs instead of government relief aid. As a condition, embankments in the insured area must strictly follow national standards for the convenience of flood diversion and storage.
The pilots turned out to be functional but not practical – flood dredging and retention are normally in areas of deep poverty or relatively little development; farmers cannot afford to buy insurance, plus local governments found it difficult to subsidise the insurance service without central government funding.
In 1985, MOCA launched an eight-year program on rural disaster relief insurance in 102 pilot counties which also covered flood loss. One such was PICC’s 1992 pilot in Jiangxi province of downstream Yangtze river basin. According to the policy, villagers pay an RMB62 premium to permanently insure their households with up to RMB2,000 coverage. However, the premium was compulsorily collected by the local government or withdrawn from rural supply and marketing cooperatives, causing complaints from villagers who barely understand insurance or risk management. Many villagers later forced the insurance agent to return the money. After the big flood in 1998, only villagers who didn’t reclaim the premium earlier received pay-outs from PICC. However, after the large pay-out, the insurance company found it difficult to sustain this flood insurance for life model financially.
In another pilot in Jiangxi, PICC faced deficits of over RMB100 million after two floods in 1996 and 1998. For both pilots, the insurance company failed to manage the risk and later changed the policies or surrendered the remainder policies.
…risk pool not large enough in poor areas; central govt support needed
After studying the various pilots in the 1980s to the 1990s, Chen Xiaotao, Deputy Chief Engineer at the China Institute of Water Resources and Hydropower Research, argues that without government support, encouragement and mandatory policies, commercial insurance alone cannot create a large enough risk pool to spread the financial risks1. However, public awareness as well as government management ideas on flood risk control remains weak.
Challenges ahead: flood risk maps & transparency
China is testing out what kind of insurance system works best for the country. On 1 July 2016, China launched the first national urban and rural earthquake catastrophe insurance product for residential housing. It is not clear for now if China will establish a separate national flood insurance system like the Flood Insurance Program (NFIP) in the US, or continue the approach of insuring a basket of disaster risks with catastrophe insurance. But flood risk insurance is on the radar in China.
Official risk map developed but not publicised
Many technical and policy obstacles remain though. Mapping out the risks is the first step forward. In the US and UK, tools like accessible flood risk maps are provided by government and insurance companies to evaluate flooding risks. In China, no official public flood risk map is available at the moment. This is despite the fact that China had started to map flood risks back in 1997.
When the National Flood Control Office announced its “No.1 document”, it intended to join national forces to draw a flood risk map. A detailed “three-step” plan was later introduced, with the aim to build the map with real-time rain, water and industry information and to provide services for flood control and disaster evaluation. Sources from the MWR revealed that the national map is already in place but remains classified.
The lack of transparency leads to many other questions: Will the map be made open for commercial insurance companies to lay the groundwork for a national flood risk control project like NFIP? Will relevant hydrologic data and flood control information be made available for insurance companies who want to develop their own risk map? How can one distinguish man-made loss, like the failure of Hebei’s early warning system this year which resulted in hundreds of deaths, from natural flood loss? The government needs to work out a comprehensive mechanism to coordinate different approaches in flood risk control.
Insurance policy design: coverage issues & the way forward
Yet another challenge is in the design of the policy. Earlier pilots on flood insurance were all exposed to certain defects from risk evaluation to cost accounting. From urban to rural, flood insurance is not carved out as a specialized category. Policy holders are often offered insurance for a basket of risks. This may work well for those who only require basic insurance, but when it comes to particular disasters like waterlogging due to rainstorms, the policies can sometimes be vague and ambiguous.
≤3% of car owners able to claim for waterlogging damages in Beijing’s “7.21” rainstorm (2012)
According to Chinese media, back in the “7.21” heavy rainstorm in Beijing in 2012, only up to 3% of car owners who purchased accessory policies on water were able to claim for engine failure or stalling due to waterlogging.
In rural China, agriculture, forest, livestock and fishery loss in flood disasters are generally covered under the umbrella of “agriculture insurance”, which is designed to secure agriculture production and food safety. As mentioned above, a mere 2% loss result from the July floods was covered and the majority of the claims came from agricultural insurance.
Rural insurance needs to expand beyond agricultural coverage – how about household property?
What about the rest of the loss? The sad fact is that personal and property loss in rural China like residential damage from floods are hardly covered by existing insurance products. This is due to various factors like weak risk awareness, low purchasing power and the lack of insurance products that are in line with rural conditions. Should insurance for rural China stick to the agricultural production loss approach or should loss coverage be expanded to cover household properties?
From the perspective of strengthening rural resilience after floods, policy-makers need to think beyond securing production. Inherent thinking on providing government aids and compensations to rural population need to be expanded to cover their property loss in disasters.
Damage assessments may also be challenging. For those who already live in poverty, especially in mountainous areas where transportation and communication is vulnerable, they need immediate insurance pay-outs to cover basic living expenses in order to get back on their feet again.
China can learn from pilots abroad which target poor communities
In the climate insurance pilot in Caribbean designed by the Munich Climate Insurance Initiative (MCII), researchers developed weather-index based insurance products to manage climate risks like flood and tropical storm damage for the most vulnerable communities. The index insurance approach has been taken by some special agriculture insurance products in China on economical crops like tobacco and cotton. Could it be a practical approach in future designing of flood insurance in China? Maybe.
To be clear, certain variants of flood insurance already exists in China – flood loss in urban areas, from private cars to industry parks, is generally covered by property insurance depending on policies; while in rural China, agricultural loss in floods is covered by policy insurances on weather risk. However, China still lacks a national flood insurance mechanism that takes comprehensive approach in managing flood risks.
Increasing climate risks mean flood insurance can play a key role
Judging from various national policies, Chinese government has put flood insurance on the agenda and has been exploring practical approaches to manage the risk. With increasing climate risks facing China, insurance can really play an important role in adaptation and building resilience, as has proved from developed countries like the U.S and developing regions like the Caribbean. Will China speed up the process after the July floods this year? We hope so.
1Cheng Xiaotao and Yuan Ximin, “Investigation on Flood Insurance Activities in Jiangxi Province”, Journal of the China Institute of Water Resources and Hydropower Research, 1999
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