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Climate change as a challenge to Climate change

as a challenge
China’s insurance industry
Xian Xu
School of Economics, Fudan University, Shanghai, China
363

Abstract
Purpose – This paper aims to examine the risks caused by recent climate change in China and their
effects on the insurance industry. China has experienced more extreme events (floods, droughts and
storms) in recent years than ever before, causing the insurance industry to pay increasing attention to
the negative consequences of climate change.
Design/methodology/approach – This paper reports on the frequency and severity of extreme risks
caused by climate change. It examines what Chinese insurers are doing to address climate change risks
and discusses opportunities for expanding their role in providing relief against natural disasters.
Findings – Being professional risk managers, Chinese insurance companies need to identify and
assess the impacts of climate change to play a more prominent role in a market offering great future
opportunity.
Originality/value – The Chinese insurance industry has not been actively involved in the
management of increasing risks due to climate change. This paper will discuss the reason for this
limited involvement and the ways for the insurance industry to overcome obstacles, enabling it to
capitalize on future opportunities.
Keywords China, Natural disasters, Climate change, Catastrophe insurance, Insurance industry,
Extreme events
Paper type Research paper

1. Introduction
According to a survey by Ernst & Young (2008, p. 28), potential climate change is the
greatest strategic risk currently facing the property/casualty insurance industry, while
demographic change takes priority for the life insurance industry[1]. China may well
become the country where the risk of climate change materializes first because it has
experienced more extreme events (floods, droughts and storms) in recent years than ever
before. Extreme weather events have caused direct economics losses of $ 25-37.5 billion
in China per year during the past decade (NICNS, 2009, p. 3; Zheng, 2010). The country’s
insurance industry has, therefore, been paying increasing attention to the negative
consequences of climate change.
Extreme events such as hurricanes, floods, droughts and pandemics have
far-reaching implications for insurers who have to pay escalating damages for
catastrophic losses. Extreme climate events, in particular, constitute a long-term threat

Financial support from the Fudan University’s 985 Social Science Research Projects “Catastrophe International Journal of Climate
Change Strategies and Management
Insurance System: Institutional Arrangements, Product Design and Financial Innovation” Vol. 6 No. 4, 2014
(Project Grant No.: 2012SHKXQN006), Chinese Ministry of Education, Humanities and Social pp. 363-375
© Emerald Group Publishing Limited
Sciences Project “Measurement and Evaluation of the Dynamics of Earthquake Disaster 1756-8692
Economic Losses” (Project Grant No.: 12YJC790219) is gratefully acknowledged. DOI 10.1108/IJCCSM-04-2013-0041
IJCCSM to the growth and profitability of insurance companies. They constitute a challenge to
their risk management, which needs to understand and assess the risks they accept or
6,4 decline (The Geneva Association, 2009, p. 11).
Events such as the extreme frost that hit China in January 2008, and the extreme
drought in March 2010 have caused Chinese insurers to step up their efforts to develop
catastrophe risk modeling and extreme weather planning. As a consequence, Chinese
364 insurers should have acquired some sophistication in understanding, analyzing and
managing risk resulting from natural catastrophes. Scientific findings suggest,
however, that the future may be significantly different from the past as a result of
anthropogenic climate change (Hillerbrand and Ghil, 2008).
This paper examines the risks caused by recent climate change in China and their
effects on the insurance industry. While the physical impact of climate change has
implications for all lines of insurance, the onus will be on property-casualty insurance
providers, owing to their unique exposure to the increased intensity of hurricanes,
flooding, fires and extreme drought. The Chinese insurance industry has not been
actively involved in the management of increased risks due to climate change. This
paper will discuss the reason for this limited involvement as well as the ways for the
insurance industry to overcome obstacles, enabling it to capitalize on future
opportunities.
This paper is divided into five sections. After this introduction, the risk exposure
caused by climate change in China is discussed (Section 2), followed by the financial
impacts of weather-related natural disasters on Chinese insurers (Section 3). The
reasons for the failure of the insurance industry to contribute to risk management in the
case of climate change are discussed in Section 4. There are many ways for insurers to
redress this failure, improve their understanding of the impact of climate change and
help governments and society better identify and prepare for the risks associated with
the development of coastal and fire-prone regions. Insurers can also create products
through risk transfer that protect Chinese businesses and individuals from damages
caused by climate change (Mills, 2009). In the last section of this paper, it is argued that
the Chinese insurance sector would benefit greatly from adapting to and mitigating the
changes produced by climate change.

2. Risks caused by climate change in China

2.1 Indications of climate change
Climate change is one of the greatest challenges facing the world today. Although China
is one of the world’s largest emitters of greenhouse gases (NICNS, 2009, p. 13), it is also
likely to suffer a great deal from climate change caused by these emissions. Its
population and environment are vulnerable to the increased frequency of extreme
weather events. Indeed, China has experienced noticeable changes of climate over
the past 100 years. This is evidenced in the 2007 Intergovernmental Panel on
Climate Change (IPCC) (2007) report, which covers temperature, precipitation,
extreme climate/weather events, sea levels and glaciers (Table I).
Table I indicates that climate change has caused severe impacts on China, ranging
from increasing temperature to rising sea levels in coastal regions and glacial retreat in
the northwestern region. These phenomena are having a significant impact on China’s
natural ecosystem.
Objects Evidence of climate change Regional distribution
Climate change
as a challenge
Temperature Increase of 0.5-0.8°C annually More severe in western, eastern and
northern China than south of the
Yangtze River
Precipitation Decreasing at an average rate of 2.9 mm 10 Decrease in the northern and
annually eastern parts of northwest and
northeastern China, averaging 20-
365
40 mm/10a. Significant increase in
southern China and southwestern
China, averaging 20-60 mm/10a
Extreme climate/ Annual precipitation levels since 1990 Droughts in northern and
weather events higher than normal, with bipolar pattern, northeastern China, floods in the
causing frequent disasters in the North and middle and lower reaches of the
floods in the South Yangtze River and in southeastern
China
Sea level Rise along China’s coasts of 2.5 mm China’s coastline covers
annually approximately 14,500 km (9,010
miles), extending from the Bohai
gulf in the north to the Gulf of
Tonkin in the south
Glaciers Retreating with accelerating speed The glaciers of China’s Qinghai–
Tibet plateau are shrinking by 7%
annually Table I.
Climate changes over the
Source: IPCC (2007) past 100 years in China

2.2 Impacts on China’s natural ecosystem and natural disasters

China is one of the countries most affected by natural disasters, especially
weather-related disasters. It includes floods and droughts, maritime and ecological
disasters, as well as forestry and grassland fires (Zhang et al., 2010). Over the past 10
years, floods, typhoons and droughts have become the main weather-related natural
hazards in China.
River floods related to climate change and deforestation are very common in China.
Many inland areas located along China’s extensive river system are affected by floods.
Floods are a seasonal risk because precipitation in China is unevenly distributed over
the year, with June to August constituting the main rainy season. The Yangtze and
Yellow Rivers are especially prone to large-scale flooding. The most recent large-scale
flood disaster, the Great Flood of 1998, led to an estimated 3,000 fatalities, 18 million
damaged or destroyed homes and affected an area inhabited by an estimated 240 million
people (Swiss Re, 2006).
Sea-level rise is another consequence of climate change. It significantly contributes to
the total risk of flooding in China. Sea-level rise combined with land subsidence
increases the intensity and frequency of storm surges, causing the flooding of low-lying
regions, the erosion of beaches and saline infiltration of aquifers (Yin et al., 2012).
According to a report of the State Oceanic Administration of the People’s Republic of
China (2011), the sea level along the country’s coastline has been rising rapidly over the
past five decades. From 2001 to 2010, it was 25 mm (0.98 in) higher than the average level
from 1991 to 2000, and 55 mm (2.17 in) higher than the average from 1981 to 1990.
IJCCSM Therefore, the data points to an accelerating trend. If it continues over the next 30 years,
the sea level is predicted to be 60-260 mm higher by 2050. China’s coastal region has been
6,4 one of the most important economic belts in China. The area of China that would be
flooded or at risk of flooding includes most of the cities in eastern China and forms the
main socioeconomic area of the country, with 42 per cent of the total population,
producing 51 per cent of the gross domestic product (GDP) (Yuan et al., 2007). Hence, a
366 rising sea level would cause enormous losses to the Chinese economy (Xu, 2011).
China has also suffered severe droughts in recent years, especially in its northern and
northeastern areas. These droughts seriously affect daily living and socioeconomic
activities. Between 1950 and 2006, they triggered water shortages for about 29 million
people per year and reduced annual grain production by about 15 million tons (Asian
Development Bank, 2009). Figure 1 shows the distribution of droughts and floods, as of
August 4, 2011. Severe flooding in some regions and major droughts in others may
strike China.
Finally, the increased power of tropical cyclones needs to be mentioned as a likely
consequence of climate change. During the past 50 years, this power (measured by the
integral of the cube of maximum wind speed over time) has substantially increased
(Emanuel, 2005; Webster et al., 2005). On average, seven tropical cyclones make landfall
each year between June and November in China. The greatest exposure is in the
southeastern provinces of Guangdong, Fujian and Zhejiang, which frequently find
themselves in the path of tropical cyclones (Munich Re, 2010). Typhoons cause increased
rainfall, hitting China over large areas of typically 1,000,000 km2 (Rakhecha and Singh,
2009, p. 187). Physical damage and death are more often the result of heavy rains than

Figure 1.
Drought and flood
conditions in China in
August, 2011
high winds in China. Tropical cyclones tend to hit hardest in coastal areas. These areas Climate change
have elaborate networks of dykes and extensive practice in evacuating flood-prone
areas. For example, 900,000 people were forced to relocate when typhoon Sepat struck
as a challenge
southern and eastern China in August 2007, and the death of at least 14 people could not
be prevented. Sepat dropped up to 300 mm of rain in a 24-hour period, causing extensive
flooding (China Typhoon Website, 2011).
367
3. The Chinese insurance industry facing climate change
3.1 China’s insurance market and its developments
China’s insurance industry has achieved an astonishing development of reform over the
past three decades, opening up to the global economy. The numbers of insurance
companies, insurance asset management companies, specialized insurance agencies,
and insurance practitioners have all increased significantly. China became an official
member of the World Trade Organization (WTO) on 11 December 2001. According to
China’s major WTO commitments related to financial sectors, the insurance industry
took the lead in the opening of the insurance market to foreign participants and in
establishing a modern regulatory system, followed by the banking industry in second
place, and the securities industry (PBC, 2001; Liu, 2012). It has also played an
increasingly important role in social and economic development, which has, in turn,
paved the way for further growth of the industry (Chen and Xu, 2010).
In 1980, insurance premiums in China totaled only RMB 0.46 billion, but they have
increased rapidly to RMB 1,433.925 billion (some USD 221.858 billion) by the end of 2011
(Swiss Re, 2012, pp. 32-33), which amounts to an annual growth rate of 20 per cent. This
by far exceeds the GDP growth rate. The insurance industry has become one of the
fastest growing industries in China. China’s premiums volume can also be compared
with total insurance premiums in emerging markets which attained $ 700 billion in 2011
(Swiss Re, 2012, p. 20). Therefore, premiums in China account for one third of the total
emerging market premiums volume (Swiss Re, 2011, p. 19). In addition, this share is
likely to increase because recent growth rates in China have exceeded the value of 11 per
cent (as of 2010) achieved in emerging markets overall. In life insurance, premiums in
China soared by 26 per cent (2009: ⫹13 per cent), and in non-life insurance they
increased by 28 per cent (2009: ⫹19 per cent) (Swiss Re, 2011, p. 22). This growth has
been fuelled by a full pipeline of infrastructure projects, and a policy of encouraging
agricultural and liability insurance; but not climate change, as insurance companies in
China have so far not been very active in providing insurance coverage for climate
change disasters (see Section 4.3).

3.2 Natural disasters as a burden on the Chinese economy

As shown in Section 2.2, China is a textbook case of a country frequently hit by all kinds
of natural disasters, especially by weather-related natural disasters heavily influenced
by climate change. From an economic perspective, however, it is the economic loss that
counts. According to statistics of the China Meteorological Administration,
weather-related natural disaster losses account for around 70 per cent or more among
the various types of natural disasters (Liu and Yan, 2011; Chen, 2012). Table II provides
figures on economic losses caused by natural disasters from 2000 to 2012, comparing
them with GDP and its development. Total loss caused by natural disasters exceeded
RMB 160 billion every year since 2000. It is now valued at RMB 323.64 billion, with an
IJCCSM Economic loss caused
6,4 Total loss The rising rate of GDP The GDP by natural disasters
Year (RMB billion)a change of losses (%) (RMB billion) growth (%) relative to GDP (%)

2000 204.53 4.0 9,800.05 10.76 2.09

2001 194.22 ⫺5.04 10,806.82 10.27 1.80
2002 171.70 ⫺11.60 11,909.57 10.20 1.44
368 2003 188.42 9.74 13,517.40 13.50 1.39
2004 160.23 ⫺14.96 15,958.67 18.06 1.00
2005 204.21 27.45 18,408.86 15.35 1.11
2006 252.81 23.80 21,313.17 15.78 1.19
2007 236.30 ⫺6.53 25,925.89 21.64 0.91
2008 1,175.24 397.35 30,285.34 16.82 3.88
2009 252.37 ⫺365.68 34,090.28 12.59 0.74
2010 533.99 111.59 40,120.20 17.69 1.33
2011 309.64 ⫺42.01 47,211.50 17.68 0.66
2012 418.55 35.17 51,932.20 10.00 0.81
Mean value 323.64 12.56 25,483.07 14.64 1.41

Note: a Disaster losses, including the geological disasters which are not disasters caused directly by
climate change are reported here due to data availability; according to the China Meteorological
Table II. Administration, weather-related natural disaster losses account for around 70% of the total disaster
Losses due to natural losses
disasters and GDP, from Sources: National Bureau of Statistics of China (2013); Ministry of Civil Affairs of the People’s
2000 to 2012[2] Republic of China (2013)

average annual increase of 13 per cent. This increase by far exceeds the increase in GDP,
which has averaged nearly10 per cent per annum during the past thirteen years. This
means that losses caused by natural disasters have been an increasing burden on the
Chinese economy. China’s major weather-related natural disasters affected about 400
million people annually during this period, while the economic losses that the
weather-related natural disasters caused accounted for roughly 1-3 per cent of GDP (Liu
and Yan, 2011). Moreover, the economic burden caused by natural disasters is
characterized by a high degree of volatility. In contrast to GDP, disaster losses sank to a
low of 0.91 per cent in 2007, only to jump to their maximum of 3.88 per cent one year
later. This combination of growth and volatility constitutes both a challenge and an
opportunity to the insurance industry. It could contribute to the development of the
Chinese economy in two ways. On the one hand, it could compensate businesses and
individuals affected for at least part of the losses. On the one hand, it could encourage
new measures of loss prevention and control.

3.3 The role of insurance in disaster loss financing in China

As mentioned at the end of the preceding section, insurance has the potential to both
compensate disaster losses and create incentives for loss prevention and control. With
regard to the first function, however, the role of the Chinese insurance industry has been
minor. Among China’s four main ways of providing disaster relief, the first and most
important one is governmental support, followed by charities from non-governmental
organizations (NGOs) and donations by citizens. Compensations paid by commercial
insurance corporations are only in third place. In fourth place, comes the self-help Climate change
between affected individuals and businesses. Governmental support is financed using a
reserve fund designed to provide both financial and in-kind support in case of very
as a challenge
serious natural disasters. It comes from two levels of government: central and local. At
the central level, the support is divided into two parts, welfare funds for daily necessities
and funds for post-disaster reconstruction and investment for the prevention of future
incidents. Local governments (which comprise all levels below the central, down to the 369
county) are obliged to provide in-kind disaster relief and to integrate disaster prevention
in their planning for economic development. The cost of these activities falls on the local
budget. The limited role of Chinese insurance in disaster relief is illustrated in Table III,
taking the year 2008 as an example, as that year was characterized by the maximum loss
so far (Table II).
The blizzard that happened in January 2008 caused RMB 151.65 billion in direct
economic loss, of which only RMB 6.39 billion was covered by insurance. More than 80
per cent of compensation paid consisted of vehicle insurance, commercial property
insurance and group accident insurance in construction (Hou and Feng, 2008). In
contrast, the total direct economic loss caused by the Wenchuan earthquake of 2008
amounted to RMB 845.1 billion, of which only RMB 0.713 billion or just 0.08 per cent was
insured. An even more extreme recent case was the landslides triggered by rain on
August 8, 2010, which enveloped large parts of Zhouqu county in Gansu province.
Although at least 1,144 residents were killed and over 600 reported missing, only 76
claims were submitted as of August 12, 2010, and the insured loss valued at only RMB
9 million. This means that insurance compensation was less than 0.001 per cent of
incurred loss.
However, compensation paid by insurance is likely to become more prominent in the
future. In developed countries, it is the most important source of disaster relief.
According to Swiss Re (2010, p. 4), the global economic loss due to catastrophes was
around $62 billion in 2009, of which $40 billion was paid by insurance companies. The
precondition for such an expansion would likely have to be a withdrawal of both central
and local government from the direct financing of losses caused by natural disasters[3].
This is what experiences in other countries suggests (for the USA, see Kunreuther,
2006). In other lines of insurance, there is also evidence suggesting public coverage
crowds out the private alternative (see e.g. Cutler and Gruber, 1996 with regard to US
Medicaid).

3.4 The potential role of insurance in loss prevention and control

Insurance has the well-known side effect of inducing moral hazard (Zweifel and Eisen,
2012, Chapter 6.2). The ex-ante type of moral hazard means that since the insured do not
have to bear the financial consequences of a loss event anymore, they tend to reduce

Direct economic loss Insured loss Insured loss ratio of

Natural disasters (RMB billion) (RMB billion) total loss (%)
Table III.
Snowstorm 2008 151.65 6.039 3.98 Insured losses compared
Wenchuan Earthquake 2008 845.1 0.713 0.08 to total economic loss by
natural disasters in China
Source: Chinese Insurance Regulatory Committee (2010) 2008
IJCCSM preventive efforts. The ex-post type of moral hazard refers to the insured’s weakened
incentive to limit the amount of loss, given that compensation is expected. In the context
6,4 of natural disasters, farmers in mountainous areas may continue to cut down trees for
building and heating, which serves to increase the (ex-ante) risk of floods. Their interest
in reforestation as a preventive action is undermined by the fact that losses due to
flooding will be compensated at least partly. Once a flood occurs, they might also neglect
370 to protect their fields and homes (ex-post), again because compensation has been paid.
Note, however, that both ex-ante and ex-post moral hazard effects occur if the
insurers cannot adjust premiums to true risk, and risk retention mechanisms are lacked
in insurance policies[4], be it that they cannot observe preventive efforts, be it that
regulation does not permit them to do this. Therefore, moral hazard must be expected
much more in the case of public rather than private insurance. In fact, private insurance
charging a premium reflecting true risk is expected to induce the optimal amount of
prevention (Shavell, 1979, 1982). Also, optimality conditions for risk retention and risk
sharing is commonly practiced in private insurance (Doherty, 1975). In the case of China,
private disaster insurance holds the promise to provide the right incentives to both
businesses and households for stepping up their efforts designed to not only lower the
probability of loss occurrence but to also protect their life and property against the
onslaught of natural disasters. The condition for this promise to materialize, however, is
that Chinese regulators must abstain from interfering with the insurer’s premium
calculations and policy design. Premiums need to differ substantially if they are to
reflect true risk and hence increase favorable incentives; they should be experience-rated
(in the guide of bonus-malus scheme), provided the insured is able to pay for it, as
insurers learn about risk over time.

4. Obstacles to the insurance of risks associated with climate change

There are several obstacles preventing the insurance industry in China from providing
more protection against and incentives to contrast the risks associated with climate
change. Among them are lack of insurance awareness among consumers and reliance on
governmental help and the absence of insurance products designed to deal with natural
disasters associated with climate change.

4.1 Lack of insurance awareness

Although China has a history of more than 5,000 years, Chinese insurance only dates
back about 300 years. In relative terms, the Chinese insurance industry can be said to
still be in its infancy. In October 1992, the government allowed foreign capital to enter
China’s insurance market. Still, there was no commercial reinsurance company in China
before 1996, while domestic insurers were allowed to reinsure in foreign countries. This
would explain a certain lack of awareness of insurance and its potential on the part of
Chinese consumers and producers; another factor may well be the government’s role as
an insurer (see Section 4.2).
Despite rapid economic growth over the past 30 years, neither businesses nor
individuals in China are fully aware of the value of insurance as a risk-transfer tool.
Especially when it comes to natural disasters, such as floods or tropical cyclones, most
people know little about insurance. Even when insurance is available, there is much
misunderstanding as to what the products offered are designed to do, leading to many
legal disputes between policy holders and insurers. Also, as is typical of emerging
markets, the insurance products available in China are not sufficiently tailored to the Climate change
needs of the original risk carriers. Therefore, while there may be a recognition that
insurance should be purchased, available contract types may not reflect the risk
as a challenge
confronting a specific business or household (Shen, 2008). Most of the insurance policies
in China are homogeneous in a certain distance and cover only the basic risks. The
insurance policies with less individuation and specialization in China cause the
consumers to find it difficult to obtain suitable products to protect against the risks that 371
they are confronted with (Liu, 2004).
However, there is a growing awareness of insurance to provide protection against the
consequences of climate change. According to a survey released by Swiss Re in August
2011, 20- to 40-year-olds in China have become less willing to take risks in the past two
years and around 72 per cent of Chinese individuals plan to buy disaster insurance
during the next 12 months (Hu, 2011). This finding points to an opportunity for the
Chinese insurance industry to meet an increasing demand.

4.2 The prominent role of the government as an insurer

Chinese people simply rely on government assistance when natural disaster strikes
(Shen, 2008). From 2000 to 2012, the Chinese government has increased natural disaster
relief payment annually, raising it from 3.52 billion RMB in 2000 to 13.26 billion RMB in
2012. The average annual fiscal spending for disaster relief payment is 14.25 billion
RMB (Ministry of Civil Affairs of the People’s Republic of China, 2013). This support is
financed through taxation, which does not reflect an effort to prevent natural disasters
(and climate change) in any way. Therefore, consumers and businesses have little
incentive to execute such an effort. In addition, they also have little interest to learn
about products offered by private insurers, leading to high transaction costs – hence, the
frequent disputes about loss settlement (see above).
The role of the government as an insurer weakens the incentive for commercial
insurers to work on climate change risk mitigation. As productive insurer efforts such as
building codes, fire departments and product safety labeling are common practices in
developed countries, Chinese insurers do not serve as proactive risk managers
regarding weather-related natural disasters, as their own risk exposure is limited.
Finally, Chinese people have a long history of self-help. In addition to accumulating
savings they use loans and accept donations. Mutual help between individuals and
businesses constitute an important method for providing disaster relief in China, and it
is likely to remain the main method for a long time, especially in the less economically
developed areas of the country.

4.3 Absence of insurance products

Products designed to cover risks arising from natural disasters have been slow to
develop in China. Some risks of natural disasters (landslides and earthquakes) are
excluded from property-liability insurance contracts. Although risks like flood and
tropical cyclones are covered by property-liability insurance, the insurance rates are
calculated based on fire risk, while risks like flood, tropical cyclones are not considered
in premiums. Besides, the insurance coverage for flood and tropical cyclones varies by
company and by kind of insurance product. This makes it difficult for the insured to get
the claim when losses generated by climate change occur (Yuan, 2012). For example,
only 1-2 per cent of the $50 billion losses of floods in 2010 are insured in China
IJCCSM (Michel-Kerjan and Kunreuther, 2011). When the loss materializes, they are
disappointed to learn that their claim is only paid in a very limit amount or even rejected.
6,4 Of course, experience of this nature does not enhance the reputation of private insurance
companies in China.
In addition to these demand-side reasons, there are supply-side reasons for the
absence of insurance products facing climate change risk. First, climate change is a new
372 risk confronting the Chinese insurance industry. Companies have difficulty in collecting
the necessary data relating to climate change. Without adequate data, they cannot
structure their insurance products, calculate risk-based premiums or limit their risk
exposure in a sound way. Although catastrophe modeling companies like AIR,
EQECAT and RMS are providing risk modeling services to Chinese insurers, the
demand for such services is rather limited. The reasons for this limited demand are the
high price of such services and the different results generated from different models,
confusing the insurers when choosing the models (Fabbian, 2011). Besides, at present
the cost of product development has to be spread over a small premium volume, causing
loadings and, hence, unit premiums to be high. This in turn curtails demand for these
products. However, these supply-side impediments will be overcome quickly as soon as
the government decides to act as an insurer of natural disasters of zero premium.

5. Conclusion
Catastrophic risks of increasing frequency and severity are probably the most tangible
aspect of climate change. The debate about climate change has served to focus the
attention of the Chinese business community, the government and the economic
consumers on the losses caused by climate change-related natural disasters. The
insurance industry, as professional risk manager has a great opportunity to develop
creative loss prevention solutions and products that could help Chinese consumers,
businesses and the government to reduce climate change-related losses, both because of
its financial capacity and its ability to encourage loss-reducing behaviors more
effectively.
However, insurers face the challenge of translating climate change and its
consequences in terms of extreme weather and rising sea levels into the various adverse
effects on human lives and damages to assets. Being professional risk managers,
Chinese insurance companies need to identify and assess the impacts of climate change
to play a more prominent role in a market offering great future opportunity.

Notes
1. Surveys from other institutions confirmed that climate change is one of the main challenges
for the insurance industry (Deliotte, 2012; Ceres, 2013). Although the priority list of risks for
the insurance industry differs from institution to institution, there is no doubt that the trend
of damage to property and threat to lives due to climate change is increasing. As a
consequence, the risks and costs of insurers are growing.
2. The data of the disaster losses are collected from the China civil affairs’ statistical yearbook
edited by the Ministry of Civil Affairs of the People’s Republic of China (MCA) annually. The
data of the GDP are collected from the Statistical Yearbook of China edited by the China
National Bureau of Statistics of China (NBS) annually. In fact, for disaster and economic
statistics, MCA and NBS depend on reporting from provincially controlled branches, which,
in turn, depend on lower-level local branches. This reporting system can hence reduce the
 accuracy and reliability of China’s statistics. A comparison between the data used here and Climate change
the Chinese natural disaster losses reported by the OFDA/CRED International Disaster
Database (EM-DAT) is also done, which suggests that the data provided by MCA contains
as a challenge
more disaster events and generates higher disaster losses in China than EM-DAT. For more
detail, please contact the author.
3. In terms of businesses or individuals affected by natural disasters such as drought or floods,
most people in China rely at first on the government for assistance. It, therefore, reduces their 373
incentive to purchase insurance (Shen, 2008).
4. Thanks to the referee for pointing this out.

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About the author

Xian Xu is an Assistant Professor at the School of Economics and Deputy Director of the
Insurance Research Institute at Fudan University. In 2010, he has received his doctoral degree in
Economics from Karlsruhe Institute of Technology (KIT) in Germany, after obtaining a Master of
Economics from the University of Göttingen and a Master of Law from the University of
Osnabrück in Germany. Xian Xu can be contacted at: xianxu@fudan.edu.cn

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