WEF Agenda Blog – China 2017
Insurance – China's path to advancing a clean energy future, food security and city resilience
By Jayne Plunkett, CEO Reinsurance Asia, Swiss Re
China's rapid infrastructure development presents both great opportunities as well as big challenges for re/insurers in China.
Under the government’s 12th Five-Year Plan, China will continue to develop second- and third-tier cities and green and efficient energy. This will lend further momentum to infrastructure development, despite a temporary slowdown in 2012 due to the poor global economic environment.
By 2020, China’s metro line will span 7,000 km across 28 cities, accounting for 50% of the world's total metro length. The central government has resumed investment in nuclear power plant projects and China will build more than 100 units of new generation reactors over the next 10 years. An increasing number of large-scale integrated gasification combined cycle power plants (IGCC) and coal gasification/coal chemical plants will also be built. In addition, more record-setting long cable bridge, sub-sea tunnel and road/railway projects are expected in the pipeline.
China’s scale is very attractive to many re/insurers in terms of growth opportunities. However, project insurance is a very volatile type of business with a long-tail claim development pattern. Initial results may paint a nice picture . However, big losses always come a few years later, which can easily ruin this rosy picture. The RMB 700million loss posted by Shanghai Metro Line 4 is a good example, underlining the fact that the opportunistic cash flow underwriting approach never works.
In recent years, there're more than 10 new metro projects being launched by local governments across China. As a result, considering the 4-5 years construction period for individual project, there are up to 40 metro projects being constructed at same time, which leads to higher demand for experienced engineers and construction workers than market supply availability. As such, many young project engineers have been working on important positions as site chief engineers or managers, however, they do not have adequate experience and knowledge in resolving complex and unexpected challenges encountered during construction phase. How could P&C insurers in China manage the scale and speed of this challenging risk category through underwriting and risk management?
China is emerging as a "test field" for many new technologies. The country’s scale will significantly magnify the systematic risk exposure. This cannot be ignored and is a very critical consideration for project insurance because it is a long-term commitment, from the commencement of the project to the completion of all construction activities, which normally take four to five years. In extreme cases, the commitment could take as long as 20 years – and there is no exit door in halfway. Hence, in the event of any systematic risks, re/insurers will accumulate a large-sized portfolio with similar technology/exposure.
A typical example was the Japan nuclear power plant steam turbine (ST) loss. The equipment supplier was not aware of a potential design issue during the upgrading of the steam turbine capacity from 1,100MW to 1,300MW. The construction of two nuclear power plants using five units of the concerned ST started in 1999/2000. Testing and commissioning of the first concerned unit was conducted in 2004/05. In 2006, all five units reported similar losses. The primary insurer is still negotiating a claim today. The initial claim for all five units was above USD 300million. How could the insurer avoid bearing the equipment supplier’s research cost? How could the insurer manage the loss reserve and currency fluctuation over such a long period of time?
In addition, the heightening claim awareness in China is another big challenge for long-tail businesses like project insurance.
Project insurance is a marathon, not a sprint. The measure of success in this business is providing a company with a sustainable long-term profit income through wise cycle management /risk selection and timely identification of profitable opportunities.
We fully understand that China has its own unique market characteristics. Hence, we do not simply transfer international practices to China. Our mission is to work with our local clients to find tailor-made solutions that suit local market needs. Therefore, we build a strong local team who all speak Chinese and are equipped with strong local and international technical knowledge.
In order to help project owners and contractors improve how they manage projects, we have started to do risk management for metro/tunnel/road/bridge/IGCC/coal gasification projects in China. We bring internationally renowned experts into construction sites to help project principals and contractors identifying risks during construction and to provide recommendations to mitigate those risks. We have also introduced international best practices to the China market, including a Joint Code of Practice for Tunnel Works (JCOP) for metro projects and PSM (Dupont) for the chemical industry.
We have provided risk management services for the following projects in recent years:
• Hongkong-Zhuhai-Macau Bridge
• Qingdao Gulf Bay Bridge
• Fujian Xiamen-Zhangzhou Sea Bridge
• Shanghai Metro Line 2
• Shanghai Metro Line 8
• Shanghai Metro Line 10
• Shanghai Metro Line 11
• Shanghai Metro Line 12
• Shanghai Metro Line 13
• Shenzhen Metro Lines 1, 3 and 5
• Shenzhen Metro Line 11
• Suzhou Metro Line 1
• Ningbo Metro Line 1
• Ningbo Metro Line 2
• Harbin Metro Line 1
• Guizhou Tongyin Road
• Caofeidian Coal Jetty Project
• Tianjin Huaneng IGCC Project
• Yulin Coal Chemical Project
We have made a long term commitment to China market. We will sustainably provide not only capacity but also more importantly expertise and risk management to our clients.
For more details, please contact Jay Li, Head of China Engineering Underwriting, and Jimmy Lim, Head of Greater China Engineering Underwriting of Swiss Re (from the contact form on the top right).
Published March 2013