Quake to have limited impact on insurers

BY    2013-05-02 20:22:25

  Finance analysts have said that a massive earthquake that recently jolted southwest China is unlikely to have a significant impact on Chinese insurers, even though their stock prices tumbled following the quake.

  A 7.0-magnitude quake hit Lushan county in Southwest China's Sichuan province on April 20, leaving at least 196 people dead and more than 13,400 others injured. It also displaced nearly 300,000 people and caused widespread property damage.

  The shares of Shanghai- and Shenzhen-listed insurers took a hit in the week after the quake, with leading companies like China Ping An and China Pacific Insurance down 7 percent.

  The benchmark Shanghai composite index moved down 3 percent after the quake. The market is closed until May 2 for the May Day holiday.

  Analysts cited investor concerns about potentially large insurance payouts as a reason for the fluctuation, but maintained that the panic is unwarranted.

  The initial response from the market was only "psychological and emotional," said Peng Yulong, an analyst at Guotai Junan Securities.

  "It was largely a mental impact and it will took some time for the market to absorb it. But we do not expect it to drag on for long," wrote Chen Jiangang and Tong Nan, both analysts at Sinolink Securities.

  Insurance payouts for the quake currently total more than 10 million yuan ($1.62 million), as reported by the China Insurance Regulatory Commission (CIRC) on April 21, one day after the quake.

  Predictions for the total payout have varied substantially. GF Securities estimates the payout will be between 40 and 90 million yuan, while China Securities believes it will run up to 2 billion yuan.

  However, even a large payout would only cause limited damage to insurance companies, China Securities said. Losses would come out to about 1 percent or less of an individual company's annual profits, according to the company's research.

  The amount is insignificant compared to the 1 trillion yuan in direct economic losses that resulted from the deadly 2008 Wenchuan earthquake, which also occurred in Sichuan. Total payouts amounted to 1.66 billion yuan for the Wenchuan quake, according to CIRC.

  Lack of insurance

  Low insurance penetration in the affected area and the fact that most Chinese insurance policies do not cover catastrophes like earthquakes have been cited as factors that will limit the quake's impact.

  However, the quake has also laid bare challenges facing the insurance industry.

  The insurance penetration rate, or premiums as a share of GDP, was just 3 percent in 2011, according to statistics from the People's Bank of China.

  The number is far below the global average, according to analysts, who added that a general lack of insurance awareness in China is acting as a roadblock for the expansion of the sector.

  Disaster insurance is almost non-existent in China. Although the government and charities typically spend large amounts of money on relief and reconstruction efforts in the event of a disaster, the majority of property insurance policies do not cover natural disasters.

  People with home and automobile insurance policies, which account for 70 percent of the total number of insurance policies currently held, cannot be compensated in the event of an earthquake.

  During national legislative sessions held in March, Xiang Junbo, chairman of the CIRC, reportedly said that insurance regulators will soon consider state-supported insurance plans for dealing with natural disasters.

  "In countries with fewer financial resources, a catastrophic event can result in higher deficits and debt for the public sector, which must not only shoulder the cost of relief efforts, but is also held responsible for rebuilding public infrastructure," according to a report by Swiss Re, a leading global re-insurer.

  It is high time to establish an effective catastrophic risk transfer mechanism, Chen and Tong said.

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