Through the first three-quarters of 2016, natural disasters in China claimed more than 1,300 lives, destroyed or damaged 3,681,000 homes, and impacted almost 255 million hectares of agricultural land, according to data from the Ministry of Civil Affairs (MCA). Total economic losses from January through September 2016 were listed at more than US$69 billion.
The most significant event in China in the first three-quarters of 2016 was a prolific flood episode across the Yangtze River Basin Region from May through August that left many areas enduring catastrophic inundation. It was the most significant flood event to impact the region since the devastating floods of 1998. This year’s flood event left at least 475 people dead in 11 provinces and damaged or destroyed more than 500,000 homes.
The floods were triggered by particularly heavy seasonal “Mei-Yu” rainfall that was enhanced by lingering impacts from El Niño. These torrential rains led to extensive riverine flooding in parts of Anhui, Zhejiang, Fujian, Jiangxi, Hubei, Hunan, Guangxi, Chongqing, Sichuan, Guizhou, and Yunnan. Combined economic losses reached $28 billion.
Costliest floods preceded by El Niño events
To date, the 2016 Yangtze River Basin floods are the second costliest flood event on record in China, only behind the devastating floods of 1998. The third costliest flood event to affect the basin occurred during the summer months of 2010.
It is interesting to note that all three of these events were preceded by moderate to very strong El Niño events; while the 1998 and 2010 floods were followed by moderate La Niña events. At this time, forecast models continue to indicate the possibility of a weak La Niña event developing by the end of 2016 or early in 2017.
Large disparity between economic and insured losses
Despite the exceptional overall economic cost from the 2016 Yangtze River Basin flood, only a small fraction of the damage will end up being covered by insurance given very low penetration levels in China.
In Hubei and Anhui provinces, total combined economic losses were almost $9.5 billion. Latest data from the China Insurance Regulatory Commission (CIRC) indicated that almost 79,000 claims were filed in these two provinces with total payouts at roughly $245 million. This suggests that less than 3% of all losses were covered by insurance, and a large proportion of those claims were related to agricultural losses.
The large disparity between economic and insured losses in China highlights a common theme across many Asian countries: the lack of insurance penetration. As populations and urbanisation continue to increase in these regions of the world, there is also rapid growth of exposures. This is particularly true along coastal locations. With insurance penetration levels remaining very low, this leaves many parts of the continent highly exposed to losses when large natural disasters strike.
Compound annual growth rate of 12.5%
China is an emerging market for the insurance industry and as of 2014, insurance penetration in China was just 3.2%. (Life insurance accounted for 64% of the market while non-life insurance accounted for the remaining 36%). This was significantly lower than the global average of 6.2% but slightly higher than the average rate throughout the emerging Asian markets (3.1%).
From 2009 to 2014, in terms of gross written premiums, China’s insurance sector showed a compound annual growth rate of 12.5%. Past large flood events in Asia have had large impacts on the insurance markets in the affected territory. For example, following the historic flooding in Thailand in 2011, the growth in treaty and facultative premiums ceded the following year (2012) was 35%.
Significant natural catastrophe events in China in 2016
A separate significant flood event was reported in parts of the North China Plain during the second half of July.
Hebei, Henan, Shanxi, Shandong, Beijing, and Tianjin were impacted by the episode which endured from 16-24 July and claimed almost 300 lives. Hebei was worst affected. Economic losses due to floods reached $4.6 billion with insurance expected to cover just a tiny fraction of this.
Other significant natural catastrophe events to impact China during the first three-quarters of 2016 included: severe summer drought in the Northeast; several tropical cyclone landfalls including Super Typhoons Nepartak and Meranti in July and September; a widespread outbreak of winter weather that affected most of the country in January; and several summer severe weather outbreaks.
A summary of the top 10 economic loss events in China to the end of September 2016 is given in Table 1.
ImpactOnDemand tool
With the potential exposure to catastrophe events and subsequent impact they can have on a company’s operation and financial performance, it is imperative for risk managers to have access to the right tools and insight to help mitigate and plan accordingly. Pre event forecasting, preparation and post event claims management are all areas that can be addressed with access to the right tools.
An example of this is Aon Benfield’s ImpactOnDemand which enables clients to visualise and quantify their exposures to risk on a versatile platform. (See Figure 1).
Forecast event footprints for typhoons can be used in advance of landfall to understand and communicate potential exposure and mobilise the appropriate response. While following an event, it can serve as a claims management platform rapidly and frequently reviewing the pattern and severity of claims as they are received. Beyond this, risk managers can readily and automatically quantify and visualise peak accumulations on their portfolio at local, regional or global scale.
Managing peak exposures to China floods
A more rigorous approach to manage financial performance is to use scientific models for catastrophe risk assessment.
Aon Benfield’s Impact Forecasting group developed two RDS (Realistic Disaster Scenario) models in 2014 to manage peak exposures to China floods. These models address surface flooding in the Shanghai area due to heavy rainfall and riverine flooding in the Guangdong province in Pearl River delta.
Extending the purpose of RDS beyond the usual stress testing, the models are provided with multiple scenarios along with their hazard/event return periods. The forecasted flows in rivers are computed from the historical data maintaining the spatial correlations, and 2D hydrodynamic analysis is done using a third party software for generating flood inundation maps. The models are available on Impact Forecasting’s award-winning loss calculation platform, ELEMENTS. This helps insurers make more informed decisions on accumulation control, capital management, reinsurance purchasing and underwriting.
As Chinese re/insurers begin to analyse their losses from this year’s floods, an analysis of the impact provides a foundation to help prepare for the imminent renewal season. While it is still early days to predict the full impact of the summer events, it is clear that the low insurance penetration will provide a potential for growth – both locally in China and globally from international insurers – going forward.
Ms Claire Darbinyan is Associate Director (Meteorologist) at Impact Forecasting. Impact Forecasting is the catastrophe modelling development centre of Aon Benfield.
Aon Benfield is the 2016 winner for Reinsurance Broker of the Year at the 20th Asia Insurance Industry Awards.