Promoting Nat Cat insurance to flatten impact curves - A conversation with John Chen, President Swiss Re China

COVID-19 has demonstrated how extreme events can adversely impact our lives in today's highly connected environment. As the world face the economic impact that this crisis brings, there are other risks, such as climate change and natural catastrophes, that we need to watch out for.

Swiss Re Institute's recent sigma research revealed that the effects of global warming are becoming more evident, driving an increase in frequency and intensity of weather-related effects. The consequence to urban societies: ever-increasing losses.

Disaster events in 2019 resulted in economic losses of USD 146 billion, which is lower than that of the previous two years but still a significant cost that impacts societies everywhere. What does this mean? How has natural catastrophe insurance developed in China? How did COVID-19 impact the insurance industry? John Chen, President of Swiss Re China shares his views.

Q1. Globally, economic losses from disaster events in 2019 were lower than that in 2018, or the annual average of the past decade. What do you think is driving the decline?

John Chen: In 2017 and 2018, we saw losses far exceeding historical averages. While this figure returned to relatively "normal" levels last year, we have seen continued evidence that "secondary" perils are contributing more than half of the losses from weather events. For example, Typhoon Hagibis unleashed extreme precipitation after making landfall in Japan, resulting in the biggest loss event in 2019 (USD 8 billion). In Australia, record-high temperatures kept wildfires burnt millions hectares of bushland and farmland. One thing caught our special attention is that the secondary perils are causing bigger and bigger damages, more than primary perils sometimes.

Q2. How has nat cat insurance developed in China market during recent years?

John Chen: The gap between insured and economic losses is often an indication of a market's maturity. Globally, insurance covers 30-40% of total economic losses from disasters. In North America, insurance covers up to 50-60%. In China, this figure is 10%. This means that our government and individuals need to bear the remainder when disaster strikes. The good news is that we have seen significant progress in China over the last decade. For instance, in 2008, insurance covered only about CNY 2 billion, or 0.2% of the economic losses from the Wenchuan earthquake.

The re/insurance industry has a bigger role to play in closing the protection gap to mitigate natural catastrophe risks. A lack of insurance awareness, low coverage and low insurance penetration rates are some of the challenges we are facing today.

Q3. How long will it take for catastrophe protection in China to reach a 50-60% level?

John Chen: Our society's insurance knowledge has begun to grow with motor insurance when the state made it compulsory, followed by health and pension insurance. Once these basic insurance demands are fulfilled, people will start to look at protection for less frequent events, such as natural catastrophes, loss of income and so on. China's insurance market is developing rapidly and I am confident that we will soon see a rising demand for natural catastrophe solutions.

Strong government support has been instrumental in driving growth and insurance penetration. The next decade will be a critical milestone and if current trends persist, we will see a very different risk landscape.

Q4. What do you think is driving the development of nat cat insurance in China?

John Chen: First, natural catastrophes are becoming more frequent and severe and because of this, there is increasing interest from governments and corporations in natural catastrophe insurance. 

Second, China's economic development and wealth accumulation has contributed to a sharper awareness of insurance as an advanced financial risk mitigation instrument. As the market matures over the next 10-20 years, we expect to see a new phase of natural catastrophe insurance.

Third, the government has assigned greater value to the insurance industry. Today, insurance is playing an increasingly instrumental role in China to strengthen societal resilience, improve financial stability and fiscal administration.

Finally, insurers have become more sophisticated. Improving underwriting capabilities and capital strength has enabled insurers to offer more innovative products while reinsurers have played a key role in sharing their expertise and capital reinforcement to support this development.

Q5. How can reinsurance companies play a bigger role in mitigating nat cat risks?

John Chen: At Swiss Re, we want to make the world more resilient and we do so by helping our clients and government partners to close the protection gap. Through active participation in Public-Private-Partnerships, Swiss Re has assisted local governments in tailoring protection schemes, as well as leveraging insurance mechanisms to mobilise disaster relief funds and mitigate fiscal volatility resulting from shock events.

Sharing our lessons learned from global markets and tapping on our data analytics and pricing capabilities, we are supporting the development of customised solutions for local markets. For example, Swiss Re's global flood map, which has a map precision of 30m*30m, is the most accurate among the commercial solutions in the market, and helps local insurers cater better flood insurance.

Technology and innovation help create more efficient products, better and more dynamic underwriting and smarter claims management processes. One example is how we use satellite technology and meteorological data to tailor-make weather index products for agriculture and property insurance. This facilitates quicker payouts and accelerates reconstruction and recovery efforts.

Q6. Do you see the possibility of including public health events, such as COVID-19 in the catastrophe insurance system? Where can we start?

John Chen: There is still much to be learned about COVID-19 and its implications, unlike natural catastrophes. We have been studying natural disasters for a long time. This experience has equipped us with ample data points, in-depth knowledge of typhoon formations or the structure of earthquake belts, which in turn translates into a good understanding of the risks we are facing.

However, just as how disease prevention measures help flatten the coronavirus curve, natural catastrophe insurance plays a similar role in mitigating climate risks and enhancing societal resilience. As extreme weather becomes more frequent and severe, shock events can result in economic losses that well exceed societies' capacities. Insurance can help flatten the loss curve, mitigate disaster impact and improve financial stability of economies.

Q7. What do you think is the outlook of the Chinese insurance market in 2020?

John Chen: The way forward looks optimistic. COVID-19 has increased societies' awareness of what insurance can offer. We are already seeing strong growth in the health insurance sector. The government is implementing a stimulus program to mitigate COVID-19's economic impact, especially in infrastructure spending. These measures will provide opportunities for the industry, such as in engineering and property lines of business.

We can also anticipate huge government investments in China's rural areas, where insurance penetration remains low. These areas will be a major source of growth in the near future. China's macroeconomic background continues to present favourable opportunities for the insurance industry to grow.