Bleeding Dragon: Catastrophe Management for a Rapidly Developing China: China's Booming Economy Offers Plenty of Opportunities for Foreign Investment. but How Manageable Is the Country's Natural Catastrophe Risk?

By Lai, Jenny; Powers, Imelda Y. | Risk Management, March 2009 | Go to article overview

Bleeding Dragon: Catastrophe Management for a Rapidly Developing China: China's Booming Economy Offers Plenty of Opportunities for Foreign Investment. but How Manageable Is the Country's Natural Catastrophe Risk?


Lai, Jenny, Powers, Imelda Y., Risk Management


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2008 was an extraordinarily bad year for natural disasters in China. In January, a quick succession of four snowstorms struck central and southern China with its most extreme winter weather in 50 years. The storms caused massive electrical disruptions and wrought havoc on the transportation system, stranding 500,000 Spring Festival travelers at the Guangzhou Railway Station for several days. A total of 107 people died during the storms, and the aggregate economic loss reached $15.3 billion. All together, the insurance industry processed approximately 800,000 claims, sustaining an insured loss of $139 million.

On April 18, Typhoon Neoguri made landfall in two provinces, shattering the previous record, held since 1971, for the earliest start of the Pacific storm season. The storm killed three and forced 120,000 people to evacuate.

On May 12, a magnitude 8.0 earthquake struck Wenchuan County in Sichuan province, leaving nearly 70,000 dead, 17,500 missing, 95,750 hospitalized and five million homeless. The economic loss totaled $87 billion, including the cost of 6.5 million destroyed homes. It was China's deadliest seismic event since the Tangshan earthquake of 1976, which killed more than 240,000 people, and it was China's strongest earthquake since the magnitude 8.5 Chayu earthquake of 1950. In November, the central government announced that it would spend some $146.5 billion over the next three years to rebuild Wenchuan County.

As severe as these events were, they are not uncommon for China. According to the Disaster Center, 24 of the 100 deadliest natural catastrophes of the 21st century occurred in China, killing a total of 13.1 million people. In fact, China has the worst natural disaster record of any country on the list, with the Soviet Union/Russia coming in a distant second.

Perhaps the most incredible lesson of 2008, then, is that it could have been much worse. The January snowstorms would have been much more disruptive had they blanketed areas farther north including Shanghai and Beijing, and the Sichuan earthquake could have been even deadlier had the epicenter shifted a mere 50 miles to Chengdu, the populous capital city of Sichuan.

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Self-Reliance or Insurance?

Despite its loss history, China actually has a good record of catastrophe management, especially in recent years. The Chinese Meteorological Association's early warnings worked well in recent storms to minimize casualties through evacuations, and the Chinese government plans to invest another $274 million to improve weather forecasting. Flood control is ongoing, and emergency responses are well developed to save lives and minimize property damage. The China Academy of Building Research develops building codes that take into account wind loads from typhoons. Since the 1976 Tangshan earthquake, China has developed strong building codes to make structures earthquake resistant (although compliance remains a problem). Domestic insurance policies generally cover wind and flood, while earthquake protection is provided as an add-on coverage.

The cost of rebuilding property and supporting victims is borne by the central and local governments, corporate and private donations, individual resources, and borrowing from extended family and friends. In the Sichuan earthquake, donations plus government funding exceeded $15 billion.

Not enough businesses or individuals take the proactive step of buying insurance, however. In many developed countries, insurance is a central solution to funding cat losses. But China's property insurance business is still in the early stage of development. Case in point: For the January snowstorm and the Sichuan earthquake, estimated insured losses constituted only about 5% of total damages.

Historically, China has relied on a public sense of determination, community and resilience to rebuild after a disaster. …

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