In recent years, governments at all levels have been exploring catastrophe insurance from the perspective of implementing the requirements of deepening reform of the central government and the innovative development of the insurance industry. As the main body of the industry, PICC has underwritten or co-insured most of the local catastrophe insurance pilots and made positive contributions to the catastrophe insurance scheme development and business practice.
In May 2016, the CIRC and the Ministry of Finance issued the Implementation Plan for the Establishment of Earthquake Catastrophe Insurance System for Urban and Rural Residents, proposing to promote a nationwide earthquake catastrophe insurance system for urban and rural residents based on the principle of “government promotion, market operation and protection of people’s livelihood” . Under the leadership of CIRC, more than 40 property insurance companies initiated the establishment of a residential earthquake community based on the principle of “voluntary participation and risk-sharing”, with PICC as the chief co-insurer and the executive body of the community.
2 Clause Design
On June 18, 2016, the Residential Earthquake Community submitted the model terms and conditions of earthquake catastrophe insurance products for urban and rural residents to CIRC. This is the first catastrophe insurance product in the true sense in China.
2.1 Insurance Subject Matter
The subject of insurance refers to the dwelling and interior appurtenances within the address stated in the insurance policy, excluding interior decoration, interior property and appurtenances. Interior appurtenances refer to the heating, sanitation, water supply, piped gas and electricity facilities fixed inside the house. Accessory buildings refer to fences, gates, garages, storage sheds or storage rooms, swimming pools, courts, fountains, ponds, livestock rooms, etc. that are attached to the exterior of the house or independent of the house.
2.2 Insurance Liability
During the insurance period, the insurer is responsible for the direct loss of the subject matter of insurance up to damage level III (medium damage), level IV (serious damage) and level V (destruction) caused by the following reasons in accordance with the agreement of this insurance contract
2.3 Insurance amount
The insurance amount shall be determined by mutual agreement between the insurer and the insurer (with RMB 10,000,000 as the smallest unit) and shall be stated in the insurance contract, and the minimum amount shall not be less than the following amounts, and the aggregate maximum insurance amount of the insurer’s earthquake catastrophe insurance for urban and rural residential buildings shall not be higher than RMB 1,000,000 for the same insurance subject, and the excess shall not be valid: RMB 50,000 for urban residential buildings; RMB 20,000 for rural residential buildings; RMB 20,000 for urban residential buildings. The maximum amount of earthquake catastrophe insurance for urban and rural residential buildings shall not exceed RMB 1,000,000.
2.4 Compensation treatment
Referring to the damage level standard of the National Earthquake Administration and the Ministry of Civil Affairs, the actual loss and compensation liability will be determined into three grades of compensation. When the damage level of the insurance subject belongs to Grade III (medium damage), the loss will be determined according to 50% of the insurance amount; when the damage level of the insurance subject belongs to Grade IV (severe damage) and Grade V (destruction), the loss will be determined according to 100% of the insurance amount.
3 Rate design
The rate determination of the model product follows two principles: first, the rate should reflect the risk difference and correctly reflect the high and low risk of earthquake; second, it should be integrated and balanced to achieve the rate subsidy from low-risk areas to high-risk areas through the smoothing mechanism.
3.1 Measurement Process
① Basic assumptions and data input.
The earthquake catastrophe insurance for urban and rural residential buildings takes urban and rural residential buildings as the coverage object. Considering the diversity of China’s geographic environment, regional disasters and the differences between urban and rural dwellings, the sixth census of 2010 housing distribution is used as the basic data input, which contains data on the distribution of houses in each province, autonomous region and municipality directly under the central government of mainland China specifically at the county level, and is currently a more reliable database of urban and rural dwellings in China. It is assumed that the insured amount of urban residents’ houses is 50,000, and the insured amount of rural residents’ houses is 20,000.
The catastrophe model is used as the basic measurement tool, and two international catastrophe models, AIR and RMS, are used to measure the above data inputs, and the results obtained are weighted average. Meanwhile, for the situation that the international catastrophe models only simulate earthquake losses of magnitude 5 or higher, the historical event set of earthquakes in mainland China from 780 B.C. to present is used and combined with the earthquake hazard mechanism to supplement the parts that cannot be simulated by the catastrophe models.
③ Risk zoning.
The rates obtained above can be specific to each county-level administrative unit, but they are not operable and do not conform to the basic principles of insurance rate determination. For this reason, combining with the actual situation, the provincial administrative unit is used as the basic rate to smooth out the earthquake risk in the province. At the same time, for some areas with higher risk and larger provincial area, further divide the sub-region according to the earthquake risk and design and measure the regional adjustment factor. In addition, taking into account the actual situation of residential structures at the present stage in China, the adjustment factors for three types of structures, namely, steel and mixed structures, brick and wood structures, and other structures, are designed and measured with mixed structures as the base rate.
④ Rate adjustment.
On the basis of the above base rate, regional factor and structure factor, and based on the provincial insurance rate of household property insurance in recent years, the rates of each place are appropriately smoothed to realize the subsidy of low-risk areas to high-risk areas. Finally, with the idea of “total control and limit management”, the earthquake tail risk is removed and the overall rate is reduced.
3.2 Price comparison
(1) Steel or steel-composite structure.
This type is the building type with the highest seismic performance in earthquake insurance practice in various countries: the earthquake insurance rate for this type of structure in Japan is between 0.04% and 0.15%, with an average of 0.10%; the earthquake insurance rate for this type of structure in Turkey is between 0.04% and 0.22%, with an average of 0.13%; the rate for this type of structure in China’s model products is between 0.01% and 0.06%, with an average of 0.04%, is currently the lowest in the international.
（2） Brick and mortar structure.
This type of seismic performance second to the steel structure: Japan’s earthquake insurance rates for this type of structure between 0.04% and 0.21%, an average of 0.13%; Turkey’s earthquake insurance rates for this type of structure between 0.05% and 0.29%, an average of 0.17%; China’s demonstration products for this type of structure between 0.02% and 0.15%, an average of 0.09%, also remains a low international low level.
(3) Brick and wood structures.
This type of structure is the worst type of building in the international earthquake insurance policy: the earthquake insurance rate for this type of structure in Japan is between 0.09% and 0.33%, with an average of 0.21%; the earthquake insurance rate for this type of structure in Turkey is between 0.06% and 0.55%, with an average of 0.31%; the rate for this type of structure in our model product is between 0.03% and 0.30%, with an average of 0.17%, and international rates are basically the same and slightly lower.
This type of structure is not insurable by foreign earthquake insurance, but China’s earthquake catastrophe insurance system for urban and rural residential buildings also provides coverage for this type of building for the sake of people’s livelihood, and the current rate for this type of structure is between 0.04% and 0.36%, with an average of 0.20%.
4 Loss Sharing
According to the Implementation Plan for the Establishment of Earthquake Catastrophe Insurance System for Urban and Rural Residents, losses to urban and rural residents caused by earthquakes will be shared according to the principle of “risk sharing and graded burden”. The overall limit of the loss stratification scheme is set by insurance companies, reinsurance companies, special reserve for earthquake catastrophe insurance and financial commitment.
Insurance companies bear the first tier of losses corresponding to their own premiums for earthquake catastrophe insurance, reinsurance companies bear the second tier of losses corresponding to their premiums for earthquake catastrophe insurance, and the special reserve for earthquake catastrophe insurance is withdrawn in accordance with the specific management measures of relevant departments, and the balance of the special reserve is used to bear the third tier of losses.
In the event that the fourth tier of state financial payment commitments cannot be fully funded, the relevant departments will apply for approval and then initiate the payout ratio callback mechanism to implement a proportional payout for earthquake catastrophe insurance contracts up to the sum of the previous four tiers of sharing and the emergency funds already in place.
Based on the above model, the maximum possible loss caused by one earthquake is simulated and the following three scenario assumptions are designed.
Scenario I, assuming a national average insurance coverage rate of 1%; special reserve is provided at 20% of gross premiums.
Scenario 2, assuming an insured rate of 3% in high-risk areas and 1% in low-risk areas; the special reserve is set at 20% of the gross premium.
Scenario 3, with a national average of 3% insured and a special reserve of 20% of gross premiums.
In the case that the direct insurance community and reinsurers can afford the limit of 3 billion yuan, for example, in Scenario 3, the direct insurance + reinsurance + fund is 3.034 billion yuan, assuming that a 100-year earthquake disaster occurs in the year of coverage, the maximum possible loss is 1.6 billion yuan, and no additional financial input is required. In the case of a 200-year earthquake, the maximum possible loss is 2.7 billion yuan, and no additional financial input is required. In the case of a 400-year earthquake, the maximum possible loss is 3.8 billion yuan, and the additional financial contribution is 3.8-3.034 = 766 million yuan. As the special reserve accumulates each year, the additional financial contribution required for underwriting will gradually decrease.
Losses of less than 1 billion yuan in a single accident or annual accumulation will be shared by direct insurance members of the residential earthquake community, losses of more than 1 billion yuan or less than 3 billion yuan in a single accident will be covered by reinsurance companies, and losses of more than 3 billion yuan in a single accident will be covered by a special reserve for earthquake catastrophes or financial support. Based on the assumptions of willingness to insure and regional sales limits at this stage, direct insurance and reinsurance layering can cope with the maximum possible loss (about 2.7 billion yuan) in a 200-year event nationwide.