Earthquake Risk and Earthquake Catastrophe Insurance for the People's Republic of China

The year 2008 witnessed the renewed interests in earthquake risk management and insurance in the People's Republic of China (PRC), after the Wenchuan earthquake hit the country in May. Located along the southeastern edge of the Euro-Asian Plate, the PRC has a relatively high seismicity, which is manifested by the frequent occurrence of large and disastrous earthquakes. Buildings and infrastructure in the earthquake-prone regions of the PRC have relatively low earthquake resistance levels. Hence, disastrous earthquakes result not only in large numbers of injuries and fatalities but also in huge economic losses from property damages. While the PRC began testing earthquake insurance programs in the late 1980s, the overall penetration rate remains very low. The low penetration rate not only creates disruptions for the government after a major earthquake but also, in some cases, delays the reconstruction efforts. Moreover, as a result of the low penetration of earthquake insurance in the PRC, the government serves as the predominant bearer of financial risk from earthquake catastrophes. This paper discusses historical earthquakes and earthquake risk in the PRC and the recent developments of PRC's earthquake risk reduction efforts. The general principles of earthquake programs are explained and the critical issues of formulating earthquake programs in the PRC are discussed, including lessons from earthquake insurance in other countries and other catastrophe insurance in the PRC, data issues, loss risk modeling issues, financial risk modeling issues, legislative issues, and public awareness issues. The paper concludes with several policy directions that the Asian Development Bank can take to help the PRC in its design and implementation of earthquake insurance.