Insuring Against Earthquakes, Floods And Typhoons

China is underinsured. At least when it comes to catastrophes. A new working paper from the World Bank proposes the government creates an insurance fund to cover the part of the population that most suffers from floods, typhoons and earthquakes.

The Bank reckons the direct property damage from these natural disasters to be typically $15 billion a year. Add in the costs of business disruption and disaster relief and the number jumps significantly. Add in further a devastating ‘quake such as last year’s one in Wenchuan and the cost tops $100 billion.

Yet only 5% of property in China is insured, mainly commercial and industrial premises. The Bank says only one in 100 private dwellings is insured. Given the magnitude of the potential losses, and the domestic insurance industry’s limited capacity to write business against them, the Bank proposes a national catastrophe insurance fund, the China Catasrophe Insurance Pool, to cover all private property and all small and medium sized enterprises against initially earthquakes in return for a mandatory premium.

The pool would act as a national aggregator of the risk but its management and insurance operations would be outsourced to the private sector. This is not an original idea in as much as similar insurance schemes exist in places such as New Zealand and California.


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Filed under Environment, Industry, Markets

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