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Earthquake wake-up call for reinsurance use

(Agencies)
Updated: 2008-05-22 11:50

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Standard & Poor's said earthquake-related insurance claims may act as a wake-up call for the country's insurers to review their risk management practices and reconsider their use of reinsurance.

The ratings agency said the development and availability of reinsurance for earthquake risk is still limited, partly due to inadequate statistical data and natural catastrophe modelling in China.

"Apart from the market's highly competitive pricing, insurance policies for properties tend to have very limited or no earthquake risk coverage. As a consequence of recent catastrophic events in China, the demand for insurance coverage against natural catastrophes is likely to increase over time," said S&P credit analyst Connie Wong.

Despite this, Wong said that China's earthquake will have little impact on the financial strength of China's main insurers.

"The earthquake has had a devastating impact on many lives and resulted in considerable property losses," Wong said.

"Despite this, we expect that the total insurance claims will be no more than a few percentage points of the total economic loss caused by the earthquake due to the low insurance penetration within China, especially in the impacted areas."

Life insurers are expected to face larger claims than non-life insurers as life insurance policies include earthquake risks while most of the property insurance policies exclude such risks.

The ratings agency said that China Life, which has 40 percent of the nationwide market and dominates in county and rural areas, is likely to attract most life insurance claims. Ping An on the other hand, which is second to China Life in terms of size, is mainly focused on urban areas.

"Given that China Life and Ping An reported net profits of 39 billion yuan ($5.62 billion) and 10 billion yuan respectively in 2007, Standard & Poor's expects that the claims amount will be manageable for the key insurers," Wong said.

"However, the 2008 earnings of the listed insurers in China could be significantly impacted by the combined result of earthquake and recent snowstorms claims, as well as investment market volatility," she said.

S&P noted that most property insurance coverage in the affected areas does not cover earthquakes, meaning that non-life insurers will not be significantly affected. However the actual level of exposure remains unknown given that the claims investigation processes are being held-up by difficulties in accessing the sites.

Most property insurance claims are likely to relate to large buildings, industrial plant, or properties in construction that have specific earthquake coverage, and these properties are most likely to be located in urban areas such as Dujiangyan and Chengdu which were not as badly hit as rural areas.