Asia is no stranger to natural catastrophes. Of all those that affect the continent, earthquakes are the most destructive and the deadliest.
An infamous earthquake in 2008 in Beichuan killed more than 1,000 children in a tragedy that still resonates across China today.
Rural communities are reluctant to purchase property insurance on either an individual or group basis. As a result of uninsured losses, local governments in China have received cash pools from the central government in order to provide interim compensation to local communities.
This is an unsatisfactory arrangement and so the central bank turned to the banks to find a remedy for this difficult situation.
Of all the loans issued by commercial banks in China, 32% are for assets located in areas of high earthquake risk. Borrowers who suffer damage and losses due to an earthquake are likely to default on their repayments.
Though traditional earthquake insurance is available, purchase is not mandatory and penetration is low. As a result, the probability of default risk remains high.
In seeking alternatives to compensate earthquake victims in China’s rural regions, the authorities have turned to parametric insurance products.
China’s first anti-poverty parametric insurance programme was rolled out across 28 rural counties in Heilongjiang province in 2016. It was designed to protect farmers against loss of income from excessive rain, floods, droughts and low temperatures.
The scheme helps the farming community mitigate the impact of natural catastrophe events on their livelihoods and provides funds to effect quicker recovery.
A second parametric programme was launched last month to cover seven counties in Shangluo, a region still grappling with poverty.
The network currently consists of about 15,000 observation stations that can detect ground tremors. When moderate tremors are detected – of the order of magnitude of five and above – the system alerts people in the region within seconds via SMS, social network and public broadcasts.
This scheme has already had $290 million committed to it. It is intended that stations placed 50km apart will cover the mainland by 2020.
Earthquakes continue to devastate China’s inner provinces, many of which remain low-income communities. A combination of state-backed infrastructure, public/private partnerships, and a focus on credit guarantee insurance demonstrate the Chinese government’s ability to not only foster innovation but to deliver it directly.