Fitch Ratings anticipates insurance claims to cover a growing percentage of economic losses from natural catastrophes. The insurance sector in China is one of the most sensitive to the rising frequency of extreme occurrences.
According to Swiss Re, insured catastrophe losses made up about 10% of China's economic losses due to natural disasters, a substantially larger percentage than in other advanced western markets like North America.
The impact on the agriculture industry has been lessened by the rising usage of crop insurance, supported by favorable government policies and local government subsidies. Agriculture insurance premiums are 55% to 90% covered by government subsidies, which lessens the vulnerability of farmers to extremely unfavorable conditions. To further increase insurance coverage in the agricultural industry, the central government formed China Agricultural Reinsurance Corporation in 2H2020, a new state-owned reinsurance company.
Additionally, the government frequently distributes central reserve cash in the event of catastrophic natural disasters. For instance, the central government set aside CNY10 billion ($1.4 billion) in late August to alleviate the current drought and support the harvest of grains. The money are subsequently distributed to farmers by local governments.
The global credit rating firm believes that supportive government actions, such as government-subsidized reinsurance coverage, will reduce the exposure of Fitch-rated insurers to heightened environmental risk. Additionally, the government encourages Chinese insurers to issue offshore catastrophe bonds, which, according to Fitch, would assist to diversify losses from natural disasters.
catastrophe reduction
Fitch notes that the government has recently offered assistance on a number of fronts, including preventative measures, post-disaster recovery, and emergency policy responses during natural disasters. According to World Bank research, global warming will increase the likelihood of hazards like droughts, floods, and heatwaves.
Banks, particularly sizable state-owned and policy banks, are used by policymakers to promote post-disaster aid and recovery. In order to aid in the post-disaster rebuilding of essential infrastructure, commercial operations, and agricultural activities, Chinese banks offered additional loans totaling CNY83.1 billion in 2021. Additionally, they offered CNY21.0 billion in contingent emergency loans and CNY21.2 billion in credit debt relief. We anticipate that the credit volume will continue to be a minor portion of total lending even if the lending may involve higher asset-quality risks. Their involvement in public policy further confirms our belief that, in dire circumstances, the huge state-owned and policy banks will receive tremendous state support.
If economic growth slows down for an extended period, local governments will be under more fiscal pressure and will be less able to concentrate on spending areas that seem less urgent in the short term, like investments in climate resilience, according to Fitch. This will increase the likelihood that Chinese issuers will experience a greater credit impact from extreme events.
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