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
This report looks at the process of urbanisation globally and in China, as well as the new risk landscape presented during the urbanisation process.
Urbanisation is generally viewed as the transformation of rural areas into towns and cities. Between 1950 and 2014, the world’s urban population grew more than five-fold, with an average of 49 million more urban residents every year.
Generally, urbanisation represents the creation of dynamic and vibrant centres for modern production and industry, in which resources are used more efficiently to contribute to higher income and living standards. Urbanisation can lower production costs due to economies of scale. However, empirical studies show larger cities have had higher factor productivity than smaller cities up to a certain size, after which factor productivity displays decreasing returns. It is noteworthy that urbanisation is not only the creation of megacities. With metro lines and railways networks becoming high speed, travel times between cities have fallen sharply. This has resulted in a clustering structure of city-networks, linking cities of similar size performing different functions, achieving economies of vertical integration and division of labour.
The economic, social and environmental changes wrought by urbanisation give rise to a new and interconnected risk landscape. Some of these risks may have no or little significance nowadays, but can become concerns in the future, and some are the most talked. Recently more attention has also been given to greater threat of pandemics (eg Severe Acute Respiratory Syndrome, SARS) and environmental issues such as air and water pollution, as well as to the championing of green and sustainable cities. Further, there is growing recognition in emerging markets of the importance of providing migrants to urban centres with access to basic needs, and the threat of social unrest generated by lack thereof. Either way, the new risk landscape presents numerous challenges and opportunities for policy-makers.
China has undergone rapid urbanisation in the past three decades and today over half the population lives in urban agglomerations. This move is set to continue into the next decade as China needs still-growing urban centres to drive growth, to help rebalance the economy towards consumption, to rectify a widening inequality like household income and wealth gap, and to upgrade the country's industrial capability. Looking forward, urbanisation will remain a major force transforming the economic and social landscape of China.
This paper aims to offer some food for thought on specific measures to mitigate emerging risks during urbanisation under the New Normal Economy. Specifically, we would like to advocate:
Modern risk management relies on integrated risk assessment, which takes a portfolio view of risks and includes all risk categories and their interdependence – including technical, economic, natural and social risks in a geographic context. The potential benefits of an integrated risk management approach include: 1) an enhanced ability to coordinate and leverage highly technical expertise of formerly separate departments, and 2) pooling of resources to more efficiently allocate government funds.
Urbanisation brings with it a new and interconnected risk landscape, which will require insurance and reinsurance to help to manage. Re/insurance represents a contractual obligation whereas the re/insurer will pay a claim on a loss for a defined event in return for a premium paid in advance by the insured. The insurance business involves designing and marketing products, monitoring and underwriting risks, and administering premium and claims payment. Re/insurance can contribute through helping societies to better understand the risks and their interconnectivity, study different options in risk financing and transfer, evaluate risk mitigation and adaptation measures, and raise awareness through public education and pricing of risks.
The government has the power to set conditions that facilitate adaptive responses by individuals, households and corporations. In comparison, the private sector often has the financial resources and the expertise to deal with various risks in economic development, though they generally lack the power to set conditions. Public-private partnerships (PPP), especially those involving reinsurance and capital market solutions, aims to leverage on the strength of different stakeholders to complement each other, thus creating more vibrant and resilient solutions to cater for the consequences of urbanisation.
Published 18 June 2015