WEF Agenda Blog – China 2017

Insurance – China's path to advancing a clean energy future, food security and city resilience

Almost exactly a year ago, Xi Hu PhD Student at the Environmental Change Institute, University of Oxford posted an interesting blog on the WEF Agenda channel arguing that the world’s largest infrastructure investor, China, will have a lot to lose when it comes to climate change.

We are seeing an increased occurrence of climate-related disasters such as drought, flood, cold spells and typhoons. Not only does this have grave consequences for productivity, it also creates serious repercussions for natural environment and infrastructure, threatens the lives of billions and aggravates poverty.

Taking leadership on the Paris agreement

President Xi Jinping was vocal about the importance of governments sticking to the Paris Climate Agreement in his opening speech at Davos in January this year. Under the government’s 12th Five-Year Plan, China will continue to develop second- and third-tier cities and green and efficient energy. Last year seven ministries noted the need for insurance to protect against climate related events in their guidelines for establishing a green financial system to support environmental protection and clean energy.

Rural and urban resilience – how speedy insurance payouts benefit farmers and city dwellers

While China has a strategic plan to develop urbanisation and its agriculture base, many of these zones are in high risk areas. Extreme weather events can therefore take a heavy toll on communities that depend on farming to live. They can also hurt China’s booming economic hubs that see a greater concentration of assets, people and technology. Furthermore, global supply chains and economic development could suffer over the longer term.

New pioneering insurance models coming out of a close and fruitful collaboration with Chinese authorities and regulators, aim to increase both urban and rural resilience, and bear testimony to the flexibility of this kind of insurance tool. In these solutions, and index such as cyclone wind speed or rainfall amounts can trigger policy claims. This makes the payout process quicker as it no longer relies on surveys and lengthy damage assessments, as in more traditional insurance schemes.

This allows local governments to count on readily available funds to help their people in the immediate aftermath of a natural catastrophe and start reconstruction soon after the event. Two such schemes have now been piloted in the provinces of rural Heilongjiang and urban Guangdong – where in both cases the governments are insured, rather than as in traditional insurance which covers individuals and enterprises.

In the case of Heilongjiang, the policy covers poor farming families in 28 counties for loss of income caused by flood, excessive rain, drought and low temperature. In Guangdong, the model has already proven its worth, paying out just days after the city of Shanwei was hit by Super-typhoon Haima last year.

With an increase in climate related weather disasters, lack of such insurance schemes in other parts of China will cause a significant financial burden on public budgets. In addition, the longer the recovery process is delayed, the more it can hamper long-term economic prospects for the whole region. This can reverse the hard-won development gains, making the risk of slipping into poverty very high for those who stand without a safety net.

Driving a clean energy future

Climate resilience not only has to do with protection and adaptation against weather events, but also about controlling emissions. China is already the world's leading nation when it comes to electricity production from renewable energy sources, with over twice the generation of the United States. However, wind and the sun are volatile resources, and attracting investors to renewable energy projects will be dependent on the predictability of revenue streams. If the wind does not blow, the sun does not shine or a drought hits a hydro-electric power plant, the installations do not generate any income.

By complementing the traditional insurance covers during construction and operation, companies like Swiss Re offers additional protection with index-triggered insurance solutions, similar to those for Heilongjiang and Guangdong. With these new (re)insurance protections, operators and investors receive steady revenues in case of wind or solar resource volatility and can concentrate on growing their business while maintaining a more stable cash flow. The actual wind speed or solar irradiation amount of a given year is calculated with data from third party providers, like for example NASA. This is a very transparent mechanism, which also ensures prompt indemnity payments.

Insurance as an enabler for clean energy

As its renewable manufacturing has grown, the costs of renewable energy technologies have dropped dramatically. Innovation has helped, but the main driver of reduced costs has been market expansion. In 2015 China became the world's largest producer of photovoltaic power, with 43 GW of total installed capacity, and the country is emerging as a "test field" for many new technologies, including renewable energy.

While this is a very positive development, China'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 a project to the completion of all construction activities. This 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. Here insurance shows its value because it minimizes the risks for the investors along the value chain, assuring them that cash flows are steady even if disaster strikes during construction or operation.

China is clearly taking some very important steps to improve not just climate and energy resilience, but finding a way to address poverty and food security at the same time. They are using insurance in a very pioneering way – not just to help close important protection gaps - but also to act as a catalyst to advance clean energy investments and disaster resilient infrastructure. We are hoping more provinces in China, and other governments around the world, will watch these examples and consider how similar approaches could become a useful resilience tool in their own striving to meet the Paris agreement.

Published 27 June 2017