Sichuan Eartquakes a Major Test for Insurers

The devastating earthquakes in Sichuan Province, China this week have left a currently reported death toll of over 12,000 persons. Still the death toll from this earthquake is apparently much lower than the Tangshen earthquake in 1976 that is purported to have killed 240,000. The photo to the right is the Tangshen Memorial. Courtesy, Alexis Rondeau.

Earthquakes can devastate national insurers. In the United States, the 1994 Northridge earthquakes caused $12.5 billion in covered claims for U.S. insurers and caused the creation ot the California Earthquake Authority (CEA). The CEA is a public body to assist insurers by limiting claims faced by insurers when earthquakes strike. It also enables homeowners and business owners the ability to afford earthquake insurance premiums.

Unlike the U.S. insurance market, China's insurance market and Chinese insurers are newborns in the world of insurance. The Chinese Insurance Regulatory Commission is less than ten years old. The industry is growing in China in the wake of many economic reforms. But, the industry is divided between newer development and older construction.

According to experts, much of the area hit by the quake consists of newer post-1978 development designed specifically to withstand a Tangshen type disaster. Newer development in China is often insured, with 40% or more of structures being insured, while older structures and rural structures - those least able to withstand an earthquake - are not insured, with less than 4% of structures being insured. Reports from China Daily state that 60% of the buildings in the epicenter were destroyed.

Unlike 1976, China's infrastructure is vastly more modern and insured or reinsured increasingly with foreign insurers. China's telecommunications industry is reporting severe damage from the quake and newer businesses in the reformed economy are reporting severe damage as well. Damage estimates are being compiled, but it appears this will be the first test of the Chinese insurance market.