Thursday, January 19, 2012

Earthquake Insurance: Lessons from International Experience and Key Issues for Developing Earthquake Insurance in the PRC

ADB. This note reviews the earthquake and catastrophe insurance in New Zealand, Japan, United States, Turkey, Taipei,China, Indonesia, and examines the key issues for developing earthquake insurance in the People's Republic of China.

The earthquake that struck Sichuan Province on 12 May 2008 left more than 88,670 people dead or missing, injured 374,000 people, and destroyed 5.5 million buildings. Total property damage from the earthquake is estimated as $20 billion, but only 5% of that damage was insured.

The low rate of insurance and high levels of physical damage has revived interest in earthquake insurance and in catastrophe insurance more generally. Catastrophe insurance refers to a contract sold by insurance companies to people exposed to risks from disasters, to compensate for losses. While disasters can put a huge financial burden on the government to fund relief and recovery of the affected population, catastrophe insurance can help relieve the burden by spreading the risks and hence the costs of disasters. Pricing of catastrophe insurance policies can also provide proper incentives and thus help limit future damage from natural hazards by influencing investment and land development decisions.

Earthquake insurance had an early start in the People’s Republic of China (PRC) but ceased operations in the late 1950s. The Government resumed its earthquake insurance scheme in 1980, motivated partly by the 1976 Tangshan earthquake. That scheme operated until 1996, when earthquake prediction expectations led insurance companies to start excluding earthquake damage from the general terms of property insurance. 1 Since then, disaster recovery has been supported mainly by government funds and donations from the general public including private individuals and entities (hereafter will be referred to as ‘public donations’).

Earthquake insurance already has a basis in law and other policies in the PRC. Earthquake insurance is also important in the Government’s 11th 5-Year Plan. This Plan calls for reinforcing the country’s ability to prevent and reduce disasters, including earthquakes. The “National Plan for Comprehensive Disaster Reduction During the 11th 5-Year Plan” lists the lack of disaster insurance as one of the country’s weak links in the current disaster reduction program. The “National Plan for PRC Earthquake Prevention and Disaster Mitigation (2006-2020)” calls for establishing a cofinancing mechanism that incorporates government funds, public donations, and earthquake insurance.

Despite the country’s previous experience with earthquake insurance, and calls for earthquake insurance over the past 10 years, earthquake insurance has not yet been widely established in the PRC. This note reviews some of the challenges in establishing such insurance, briefly describes international experience, and recommends priority issues for the Government to consider in developing earthquake and catastrophe insurances

No comments:

Post a Comment