China Quake Reveals Lack of Insurance

Only 5 Percent of Damage Is Covered

The most powerful earthquake in China since 1950 shows that the nation's insurance industry is decades behind those of the world's other big economies.

Just 5 percent of the more than $20 billion of damage from the quake in Sichuan province is covered by insurance, according to estimates from an official at the China Insurance Regulatory Commission. By contrast, about half of the $120 billion of estimated costs from Hurricane Katrina, the most expensive storm in U.S. history, was insured by companies or the federal government, according to data compiled by analysts at Property Claim Services.

"The earthquake underscores how much room insurers have to penetrate into rural China," said Zhang Ling, who oversees $1.1 billion for ICBC Credit Suisse Asset Management from Beijing and holds Ping An Insurance shares. "There'll be much more momentum and government support to do that after this year's natural disasters."

China Life Insurance and Ping An, the nation's biggest insurers, have yet to extend their reach across China, where only 4 percent of the 1.3 billion people have insurance, according to KPMG.

By contrast, 77 percent of Americans own some type of life insurance policy.

China's insurance penetration, which is measured in terms of premiums as a percentage of gross domestic product, was 2.9 percent last year, ranking 49th in the world, according to Swiss Re. That compares with 9 percent in Western Europe and 7.6 percent in the United States in 2006.

Sichuan province, in south-central China, accounted for 4.8 percent of the country's 2007 premiums. Earthquake insurance is provided at an additional premium at the policyholder's request, said Peter Zimmerli, a vice president in Swiss Re Asia's property and casualty group.

"Earthquake insurance penetration is generally very low and, for residential covers, practically nonexistent," he said.

The 7.9-magnitude quake has killed more than 22,000 people since May 12, damaged and destroyed homes and buildings in 44 counties and districts in Sichuan, and directly affected about half of the 20 million people who live in the region. At least 30,000 people remain buried under rubble.

"If a disaster like this happened in Europe or the U.S., the claims situation would be very different," said Michael Spranger, an earthquake analyst for Munich Re in Hong Kong. "Natural-disaster coverage rates are very low across Asia, in the single digits."

The Niigata earthquake, which struck central Japan in July, caused $3 billion in damage, with insured losses equivalent to 10 percent of the total, according to Clarence Wong, chief economist for Swiss Re Asia in Hong Kong.

China's quake occurred four months after the country's worst snowstorms in 50 years forced the evacuation of more than 1 million people and damaged at least 1 million homes. Insurers probably will get more aggressive about pursuing policy sales in rural areas as this year's 26 percent decline in China's benchmark CSI 300 index threatens earnings growth, Zhang said.

China Life's net income dropped 61 percent in the first quarter, while Ping An's rose at the slowest rate since its initial public offering in 2004. China Life stock has fallen 19 percent in Hong Kong trading this year, and Ping An's has fallen 16 percent.

Developing rural and natural-disaster insurance is a top priority for the Chinese government, and there's even greater momentum now, according to the industry regulator in Beijing. China may soon set up a natural-disaster insurance system, which would be subsidized by the government and would include private-sector involvement, said the official without providing further details.