Tag Archives: insurance

Tianjin Blasts Likely To Cause Pain To China’s Insurance Companies

Cars burned in the Tianjin chemical explosions, August 13, 2015. Flickr/Karl-Ludwig Poggemann. Licenced under Creative Commons.

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.

P&C Lines of Business, 2013

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.

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A Disastrous Half Year

With the death toll in Tibet from the recent northern Indian earthquake reaching seven, it is timely to remember that it has been a horrible year for disasters, and earthquakes in particular. Those in Japan and New Zealand were especially tragic and costly. Swiss Re, a reinsurance company, has completed its half yearly preliminary estimate of the cost of natural and manmade disasters worldwide. January to June saw economic losses of $278 billion, up from $166 billion in the same period of 2010. The Japanese quake and tsunami accounted for three quarters of the losses in the first half this year. Insured losses were $70 billion, up from $29 billion a year earlier. It was the second worse first half of the year since Sigma started keeping track.

Despite the severe drought and flooding in various parts of China in the first half of this year (and continuing into the second half, with the death toll topping 100 and more flooding possible as southern coasts brace  for Typhoons Nesat and Haitang), the country escaped the worst wrath of the weather. No Chinese event made the list of the five costliest disasters of the first half. However, one does in terms of the heaviest cost of all, life. The floods and landslides in June killed 305 people, which is fourth on Sigma’s list after the Japanese earthquake (20,362 victims), January’s floods and earthquakes in Brazil (>900) and the severe storms and tornadoes in the U.S. in April (354).

At this point, Swiss Re’s tally does not include what it calls “the full humanitarian and economic consequences of severe drought that caused wildfires and crop losses” in several parts of the world, including China. The full year report will likely make for grim reading.

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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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The Cost of A Year Of Catastrophes

The heavy rains that brought deadly floods and mudslides earlier this year are a fading memory. But a sobering reminder of the devastation they caused across 28 provinces, particularly in human life, comes from the preliminary version of an annual assessment by the reinsurance company Swiss Re of the costs of catastrophes around the world.

It counts 260,000 deaths from natural catastrophes and man-made disasters this year, making it the deadliest since 1976. The overwhelming majority of them (220,000) occurred as a result of the Haiti earthquake. But three of the five most deadly occurred in China; the summer floods that killed 2,480; the Qinghai earthquake in April and its aftershocks  that killed 2,280; and the autumn flooding that killed 1,785. The two other events in the top six were the summer heatwave in Russia that killed 15,000 and the floods in Pakistan that killed 1,980.

None of the Chinese catastrophes were among the most costly to the insurance industry; the earthquake in Chile cost it $8 billion, almost a quarter of its total payout, to top the list of the most costly insured catastrophes of the year. By comparison the May 2008 quake in Sichuan, which killed 87,500 people, cost the insurance industry $372 million. Much of the destroyed property, typical of rural areas, would have been uninsured. The same is likely to have been true for this year’s Qinghai quake and floods. Only 1%-2% of the estimated $135 billion of total economic losses caused by the 10 largest floods in the country since 1980 was insured, according to a recent study by another reinsurer, Munich Re.

Swiss Re reckons total economic losses from catastrophes around the world this year will be $222 billion, more than triple 2009’s $63 billion. We’ll be able to see Swiss Re’s figure for China alone when the full report is published early next year. We expect that to be in the high tens of billions of dollars.

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From Steel To Insurance

Baosteel, China’s largest steel maker, is making a measured diversification into financial services in general and insurance in particular. The moves are worth following as a case study in the shaping of a national champion.

This month the company has upped its stake in New China Life, the country’s fourth largest life insurer, to 17.3% from 9.7%, making it the third largest shareholder, reports the People’s Daily. That puts it behind Zurich Insurance (20%, the maximum permitted) and the state insurance protection fund (30.6%), which stepped in last year to bail out the insurance company after financial scandal.

Through its Huabao Investment subsidiary, Baosteel is already the largest shareholder in China Pacific Insurance Co. with a 21.4% stake. It has a small stake in Huatai Property & Casualty, and there are reports from Japan of a joint venture in the offing with Dai-Ichi Mutual Life, Japan’s second largest life company.

Japan’s largest life company, Nippon Life, has had a similar joint venture with Shanghai’s SVA Group since 2003. An earlier proposal for a Baosteel-Nippon Life tie up went nowhere because of Baosteel’s competitive stake in China Pacific, which may get sold if the Dai-Ichi joint venture is approved by regulators as expected. The U.S. private equity firm, Carlyle Group, holds a position in China Pacific, so there is ample scope for deal making.

There are a lot of Japanese firms operating in the Yangtze River Delta while Baosteel is based in Shanghai. The model, though, would appear to be Generali China Life, a joint venture between Italy’s Generali and state-owned energy giant China National Petroleum, that is successfully selling group life insurance policies. Baosteel brings cash flow from its steel-making business and a large customer base for potential group policies should it be tempted to go beyond taking passive investment stakes into more active involvement in the insurance business.

Tempting, too, to see the hand of Beijing at work in the background here, moving a large state-owned firm into an industry that is not only strategically important for China’s economic development, and set to be expanded over the next few years, but that also can play a role as a stabilizing institutional investor in Shanghai’s wild-west stock market, or as a conduit for foreign investment. In the first 11 months this year, Chinese insurers’ investments reached 1.83 trillion yuan ($250 billion), according to the state regulator, China Insurance Regulatory Commission (CIRC).

Baosteel has invested a reported 5.3 billion yuan in financial services firms, even as it works with Beijing to shut down steel mills — only outdated and heavily polluting ones; it is not getting out of the steel business. As well as its insurance investments, it holds stakes in Shanghai Pudong Development Bank, Bank of Communications and Industrial Bank.

Developing Japan put financial firms at the heart of its keiretsu; South Korea, heavy and light manufacturing at the heart of its chaebol. China’s version looks to be being built around giant state owned national champions.

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Financial Expansion

The steady movement overseas of Chinese financial institutions continues with Ping An Insurance taking a 4.2% stake in Fortis, the Belgo-Dutch group, for $2.7 billion. China Life, Ping An’s larger rival, said earlier this week it planned to buy a stake in a big European or North American insurance company.

In part this is reflection of Beijing’s switch from conservative management of its huge foreign exchange reserves to more return-oriented portfolio investment, but is also marks a widening of the range of companies Beijing is pushing out into the world. Last year a quarter of China’s $21 billion of outward investment went into natural resources. That focus is diffusing.

So far China’s banks have led the way for its financial services firms. ICBC took a 20% stake in Standard Bank in South Africa for $5.5 billion as well as a 90% stake in Indonesia’s Halim Bank. Bank of China is reportedly interested in buying Standard Chartered Bank. CITIC has taken a cross holding in the U.S.’s cash-strapped Bear Stearns investment bank and China Development Bank has taken a stake in the U.K’s Barclays and is tying up with the United Bank for Africa in Nigeria.

China is stacking up the reserves fast enough for this foreign buying spree to continue — just as European and American financial firms are stepping up their complaints that they aren’t getting fair access to the Chinese market.

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