INSURANCE COMPANIES FACE the prospect of picking up at least a $1 billion-1.5 billion bill for the fatal Tianjin chemical explosions, according to an early estimate by Fitch Ratings. Regardless of the final number, the disaster is shaping up to be one of the most expensive recent man-made disasters in China for insurers.
By comparison, the previous largest claim on insurers resulting from a natural rather than man-made disaster in China was for the havoc wreaked by Typhoon Rammasun. The storm made landfall in July 2014, killing 202 people and injuring a further 125 — a similar human toll to Tianjin. Rammasun caused damage estimated at $5.15 billion, of which only 250 million was covered by insurance.
The coverage to loss ratio will be less favorable to insurers in Tianjin. For one, a reported 10,000 vehicles were damaged, as the photo above shows. Mainly foreign marques such as Volkswagens, Renaults, Hyundai and KIAs, they could be worth as much as $300 million and all likely to be insured. Other claims will be under cargo, liability and property insurance.
In general across China, an estimated 90%-95% of properties owned by enterprises are not insured except for cars. Nonetheless, the industry regulator, the China Insurance Regulatory Commission, says non-life premiums written in Tianjin amount to 11 billion yuan ($1.7 billion). This figure leads Fitch to conclude that the explosions will cause some stress to the insurers who wrote business in the city.
That will bring back the painful memories for insurers of the losses they suffered in 2008 as a result of the Sichuan earthquake and the southern snowstorm of that year.
The insurance companies most exposed in Tianjin will be the property and casualty arms of PICC (China’s largest property and casualty insurer with a one-third market share overall), Ping An, China Pacific, China Continent, Sunshine and Taiping General. These six account for more than three-quarters of the non-life insurance premiums written in Tianjin, according to Fitch.
Some of the risks will have been laid off to re-insurers; 10%-15%, we are told but suspect that number is a guestimate. The government will likely cover much of death and injury claims. However, balance sheets will feel pain, and especially as fierce premiums competition has been squeezing profitability for some time.
China’s insurance markets have been among the world’s fastest growing in recent years. Coverage is still low by international standards, given the size of the Chinese economy and its increasing exposure to natural and man-made disasters.
In 2013, the latest year for which the National Bureau of Statistics has published comprehensive figures, total premiums amounted to 172.2 billion yuan ($27 billion). Life insurance accounted for 110.1 billion yuan and property and casualty for 62.1 billion yuan.
The property and casualty total accounts for barely 5% of the world’s total premiums for that line of business. However, that was up from 1% a decade earlier.
Premiums are forecast to grow at an average annual rate of 11% to 2018. That would likely let China leapfrog Japan to become the world’s second largest insurance market behind the United States. It would still take it to only a 9% world market share, though, still out of proportion with what would be expected of an economy that accounts for more than 15% of the world economy.
Geographical differences in insurance penetration within China are also great. The prosperous provinces of the eastern seaboard are the most insured.
Motor insurance (commercial vehicle and compulsory car) account for almost three-quarters of the property and casualty premiums, making China the world’s second-largest market for that line of business. It does not make the world top five in either property or liability insurance written, however — although China’s are still $20 billion and $15 billion markets respectively.
Crop insurance is a small but significant market, at $3 billion (out of a global total of $22 billion; and second only to the United States in raw size). It is one that is fast growing and spawning specialist insurers, one of the objectives of the current five-year plan that concludes this year. It is also a line of business that the government has prioritized as part of its campaign to shore up rural incomes.
Catastrophe insurance is another sector thought poised for rapid growth given China’s familiarity with flood, drought and earthquakes. Pilot programmes were approved in 2013 for Yunnan and Shenzhen as precursors of a possible national scheme. Should that happen, the business would experience rapid growth for some years.
The five-year plan’s replacement is expected to include goals to sustain the expansion of the market, including further development of specialist companies, international expansion of Chinese insurers, and an expansion of their role as institutional investors at home.
The market gradually opened to foreign firms between 2004 and 2012 and is now fully unrestricted. The foreign presence is growing, usually by joint ventures to overcoming the considerable challenges of distribution. Of the 67 insurance companies in total, 22 are foreign funded.
Zurich Insurance and Allianz are among the foreign insurers who have reportedly already received Tianjin-related claims. Swiss Re, Hannover Re, Munich Re are among foreign reinsurers active in the market.
However, foreign-funded companies still only write around 1% of non-life business and are largely consigned to specialist areas within the property and liability sectors. PICC, Ping An and China Pacific, China’s three largest insurers, have a firm grip on their 65% market share. The top 10 companies, all Chinese, have 85% of the market.