Enabling recovery: China's growing resilience to climate risks

On 12 May 2008, a magnitude 8.0 earthquake struck Wenchuan in China's populous Sichuan Province, claiming close to 70,000 lives, injuring over 370,000 and leaving millions of people homeless. Total damage was estimated to amount to RMB 845.1 billion with only a small portion covered by insurance. The earthquake was the worst to strike the Sichuan area in over 30 years and the devastating incident garnered worldwide reaction and till this day, continues to provide valuable lessons learned on the need for resilience against catastrophic events.

China is one of the most exposed countries to natural catastrophes – its vast territory, complex geographical environment and climate can mean growing risks for its people. Of the different natural perils, earthquakes can be the most destructive, both in terms of loss of life and property damage. According to data from the China Earthquake Network Centre, there have been 1774 earthquakes of magnitude 5.0 and above in China, on average 37 such magnitude events each year1. In terms of economic damage, the 2008 earthquake in Wenchuan was the second highest ever in China on Swiss Re Institute's sigma records, after the 1976 Tangshan Earthquake.

Natural disasters are estimated to affect one in six people in China leading to thousands of deaths each year and significant economic implications for both the country and its people2. While government-led efforts are comprehensive, these levy strong financial burden on the local government. In the case of the 2008 Wenchuan Earthquake, the event affected the financial revenues of Sichuan counties and cities to varying degrees, with some county financial expenditures increasing by nearly 10 times in comparison with 2007.

It is no surprise that insurance is recognized to have an important role in facilitating recovery and enhancing resilience in China's disaster relief machinery. In December 2018, ten years after the earthquake occurred, the People's Government of Aba Tibetan, Qiang Autonomous Prefecture of Sichuan Province, and Groupama AVIC signed a landmark agreement to strengthen resilience in China's Mao County, located just 70 kilometers away from Yingxiu, the epicenter of the 2008 Wenchuan Earthquake. The partnership provides China's first county-level natural catastrophe programme that insures Mao County and the Tibet Plateau, against earthquakes, landslides, heavy rainfall and public safety accidents. The parametric cover also means that payouts satisfying pre-agreed conditions can be triggered in the event of a disaster, which can help in rehabilitation, relief and reconstruction efforts.

Extreme weather on the Rise

Besides geological disasters, China is also highly exposed to extreme weather events such as floods, typhoons and droughts are happening more frequently, resulting in huge impact on the country's social economic development. In 2017, heavy rains caused the Yangtze River to flood, impacting 11 provinces and displacing 400,000 homes. Economic losses from that single event were estimated to be USD 6 billion, the largest in the year in Asia. 3In September 2018, after leaving a devastating trail in the Philippines, Hong Kong and Macau, Typhoon Mangkhut headed towards Shenzhen and Guangdong. 2.45 million were evacuated, businesses in the capital city Guangzhou were shut down for the first time since 1978 and caused total damages amounting to USD 2 billion4

The world is getting warmer and according to the World Meterological Organisation, 2018 is the fourth warmest year on record. Besides resulting in drier surface conditions increasing the risk of wildfire outbreaks and drought, the warmer climate is changing precipitation patterns that contribute to more frequent and intense tropical cyclones. The impact of frequent extreme weather events on population growth and urbanization can lead to huge resulting damage and losses.

In a rapidly urbanizing economy like China, which was urbanizing at a rate of 58.52%5 in 2018, the rising population density in cities and accumulation of assets can mean damage and losses in the event of natural catastrophes will continue to grow. The number of Chinese cities has more than tripled to 661 over the last 40 years, with 16 cities home to more than 5 million residents according to household registration data6. As a result, the likelihood of a tropical storm striking a large urban area, such as China's coastline, has increased manifold. 

Mitigating Climate Risks in cities

Swiss Re Institute's recent sigma report reveals that total economic losses from natural catastrophes was USD 155 billion, of which insurance covered only about USD 76 billion. In Asia, economic losses from natural catastrophes and man-made disasters amounted to USD 55 billion, of which less than half – only USD 20 million in losses – were insured.

At the same time, there is more risk-absorbing capacity available in the market. By the end of 2018, total capacity in the global non-life re/insurance market was more than USD 2 trillion. For 2017 and 2018 together, only USD 219 billion of the total economic loss from natural disaster events was insured. In other words, the industry is well capitalized to deal with these losses, but underinsurance remains a challenge across advanced and emerging markets.

The existing protection gap is an opportunity for the insurance industry to both grow and to help more of the population be better prepared to manage the financial hardship that disaster events can inflict. For example, parametric covers pegged to extreme weather triggers, can provide a first step in recovery efforts in the aftermath of a catastrophe event. Soon after Typhoon Mangkhut landed in Guangdong, the local insurance regulator announced that the province's parametric catastrophe index facility was triggered, which provided payouts to support recovery efforts from the resulting floods in the province. 

Protecting people's livelihoods

The sigma analysis also showed that more than 60% of the claims globally were utilized to help populations manage the secondary impact such as torrential rains, landslides and storm surge-induced flooding arising from extreme weather. Physical damage and economic losses in cities aside, extreme weather events also lead to devastating impact on the rural community that threaten their livelihoods. China is the world's largest food producing country with more than 300 million farmers7.

In 2016, severe drought in the eastern and northeastern China affected nearly 10 million people in 102 counties across 19 cities in Heilongjiang province, Inner Mongolia Autonomous Region and Jilin city. 15 million acres of agriculture land were affected, resulting in USD 3.3 billion direct economic losses. Claims in crop insurance grew by 100% while claims from affected counties grew by 3 to 5 times. In the same year, the summer floods in Anhui province brought varying degrees of losses to 73 counties across 11 cities. According to statistics from the province's Ministry of Civil Affairs, more than 10 million people were affected, 2.7 million acres of crops were damaged, resulting in USD 8 billion of direct economic losses.

In the face of mounting risks from more frequent weather events, there is much at stake, not only in terms of food production and global supply chains, but also when it comes to protecting the farming population. Provincial governments are increasingly using insurance instruments to finance insurance relief programmes or facilitate recovery and rebuilding efforts. In 2016, China's first anti-poverty parametric insurance programme was adopted in Heilongjiang province, providing protection to farmers against the loss of income from floods, excessive rain, droughts and low temperatures. Covering 28 rural counties in Heilongjiang, the scheme helps the farming community mitigate impact of natural catastrophe events on their livelihoods and provides funds for a quicker recovery. In 2019, an agriculture natural catastrophe parametric programme was launched to cover seven counties in Shangluo, where deep poverty was a major issue. The programme mitgates the risk of further financial instability due to natural catastrophes, providing critical foundations for strengthening Shanxi's resilience towards agriculture catastrophe events. These are significant developments in the development of agricultural insurance market, which contributes to greater stability for farmers’ earnings and food security through stimulating investment in agriculture and technology.

China's resilience building efforts highlight the significance Insurance have in fostering financial preparedness to strengthen people's resilience to natural catastrophes. There are ways to alleviate both the impacts and costs of natural catastrophes by planning, where insurance plays a critical role in effective disaster risk management helping communities get back on their feet faster. Having the right insurance measures can help mitigate the impact climate change levies on its people and economy and close the protection gap.

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