Munich Re chief makes China plea for PPP quake fund

Nikolaus von Bomhard, chief executive of German insurer Munich Re, has called on China to create a public-private partnership that would improve protection against earthquakes for businesses and people in the world's most populous nation.

Von Bomhard told the Financial Times he expected continued rapid growth in the Chinese insurance industry but that private home insurance was still uncommon and that only 5 percent of commercial property policies had any earthquake cover.

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Swiss Re, the rival reinsurer, estimated recency that out of Rmb990bn (USD 157 billion) potential losses from earthquakes in China, only Rmb9bn is insured.

"The awareness of catastrophe exposure in many parts of Asia needs to be further developed," von Bomhard said.

Last year, flooding in Thailand took insurers by surprise, causing far more damage and lasting far longer than had been expected, he said, and China's exposure to natural disasters may also be underestimated.

"China is exposed to a very wide amount of catastrophe risk," he said. "We think there should be a public-private partnership for earthquake cover particularly."

The state council approved proposals from the China Earthquake Administration and the China Insurance Regulatory Commission for a national earthquake pool to encourage quake insurance in late 2003, according to the Asian Development Bank. However, almost a decade later no scheme has been created.

The country's insurance industry is growing rapidly and Munich Re predicts it will be the world's second biggest market in the world after the US by 2020 in terms of gross written premiums - a simple measure of the amount of insurance sold.

Munich Re's own business in China is growing by almost 20 percent annually, von Bomhard said, mainly as a result of the capital needs of the country's domestic insurers. As fast growing Chinese companies, particularly motor insurers, increase their new business they need fresh capital to support the extra risk. The quickest way to raise this capital is often to buy financial reinsurance.

Von Bomhard said this kind of business was driving Munich Re's growth in China and he did not expect that to slow in the near future.

The increasing urbanisation and growing wealth of China is behind the growth in insurance buying for motor cover particularly, although private property cover is much less common.

China is highly prone to earthquakes. The 2008 Sichuan quake, which killed an estimated 100,000 people, cost about USD 85 billion in total economic losses, the third most costly on record, according to Munich Re estimates. But it cost the insurance industry just USD 300 million, because of the lack of cover.

Public-private partnerships, such as the government-owned Earthquake Commission in New Zealand, have improved cover by writing insurance for residential property that industry was unwilling to provide at an affordable cost. It collects premiums, buys reinsurance from companies like Munich Re and others in the global market and enjoys a government guarantee.

Its existence meant that more than 80 percent of the roughly USD 16-billion losses from the February 2011 earthquake in Christchurch were covered by insurance, according to industry estimates.

However, in Japan - where a government insurance scheme covers most of the risk and payouts from both private and public insurance are capped - the insurance industry saw losses of just USD 35-USD 40 billion from the total USD 210 billion cost of last year's earthquake and tsunami.