The insurance sector in China is one of the most exposed to the rising frequency of extreme events and Fitch Ratings expects insurance claims to cover an increasing portion of economic losses from natural disasters.
According to Swiss Re, insured catastrophe losses totalled around 10% of economic losses from natural disasters in China, a proportion that is much higher than in developed western markets such as North America.
The increasing use of agricultural insurance, aided by supportive government policies and local government subsidies, has mitigated the impact on the agricultural sector. Government subsidies cover 55%-90% of premiums on agricultural insurance, reducing farmers’ vulnerability to severely adverse conditions. In addition, the central government established a new state-owned reinsurance company, China Agricultural Reinsurance Corporation, in 2H2020 to promote insurance coverage in the agricultural sector. This is in addition to central reserve funds that the government often allocates in response to major natural disasters. For example, the central government earmarked CNY10bn ($1.4bn) in late August to relieve the recent drought and support autumn grain production. Local governments are then responsible for allocating the funds to farmers.
Supportive government measures, including government-subsidized reinsurance coverage, will mitigate Fitch-rated insurers’ exposure to higher environmental risk, in the global credit rating agency's view. The regulator also encourages Chinese insurers to issue offshore catastrophe bonds, which Fitch believes would help to diversify losses from natural calamities.
Fitch points out that the government has provided aid on multiple fronts, including pre-emptive measures, post-disaster recovery, and emergency policy response during natural disasters in recent years, with research from the World Bank projecting an increase in warming leading to a greater probability of hazards such as droughts, floods, and heatwaves. Policymakers utilize banks, especially large state-owned and policy banks, to support post-disaster relief and recovery. Chinese banks made CNY83.1bn in incremental loans in 2021 to support the post-disaster recovery of basic infrastructure, business operations, and agricultural activities. They also provided debt relief for CNY21.2bn of credit and extended CNY21.0bn in contingent emergency loans. The lending may have higher asset-quality risks, but we expect the credit volume to remain a small share of total lending. Their public-policy role also reinforces our expectation of extraordinary state support for the large state-owned and policy banks, if needed. Fitch says the likelihood of Chinese issuers facing a greater credit impact from extreme events could rise if economic growth decelerates over a prolonged period, raising fiscal pressure across local governments and limiting their capacity to focus on spending categories that seem less imperative in the short run, such as investment in climate resilience.