Henan flood led to record breaking insurance losses of CN¥11.2b

S&P Global said China’s extreme weather conditions are testing its domestic property and casualty insurers.

The Henan flooding last July led to a record for single-event insurance losses in China at CN¥11.2b ($1.7b) for life and property/casualty insurance (P/C) claims combined as of 3 August which dented the profitability of domestic P/C insurers, according to S&P Global Ratings Credit Analyst WenWen Chen.

Chen said continued extreme weather conditions in the country could test the profitability and risk-selection processes of major P/C insurers. 

“We continue to view credit trends for the P/C sector as negative, given constrained underwriting performances and competitive pricing. The overall impact of the recent weather events on the P/C sector's combined ratio is just 1% but shows the pressure on underwriting results is deepening. The brunt of the claims resulted from exposure to auto, property, and agriculture,” Chen said.

As of 9 August, China has recorded CN¥133.7b ($20.6b) in economic losses due to the flooding in Henan province. Chen said the gap between economic and insurance losses is still sizable and underpins huge potential demand for catastrophe insurance protection. 

Chen views that adverse weather will bring greater awareness among the public of the need for the insurance protection to indemnify against losses, coming on the back of the authorities' renewed push to boost agriculture and catastrophe insurance penetration.

“We anticipate that insurers will aid this push by introducing an enhanced range of product offerings over the next two years. At the same time, the insurers' risk controls and selection processes will strengthen in response to associated volatilities from underwriting these exposures. More comprehensive auto insurance coverage since September 2020 protects against flood events and will mean greater sensitivity towards flood-related risks,” Chen added.

Chen predicts that the record levels of flooding for two consecutive years will likely be a wake-up call for Chinese local governments in terms of urban planning, prompting authorities to revisit the sufficiency of drainage systems and improve water absorption/release capabilities in major cities. Thus, technological innovation related to pre- and post-disaster management will play an increasingly important role.