Massive insurance claims are expected to cause a significant impact on the domestic economy following the Tianjin chemical explosion two weeks ago.
The tragic incident has demonstrated the danger China faces by not diversifying its insurance risks, according to John Nelson, chairman of Lloyd's of London's reinsurance market.
He called the Tianjin disaster, which claimed the lives of nearly 200 people, a "wake-up call" for Chinese authorities who need to liberalize the country's insurance and reinsurance industry by allowing foreign firms to enter the sector.
Unlike mature markets, the amount of risk in China that is reinsured outside the world's second-largest economy is small. And that means the Tianjin blast will place a substantial burden on public sector funds.
Estimates by Credit Suisse, a leading global financial services company based in Switzerland, showed that insurances losses could total nearly 1 billion pounds (S$2.2 billion).
Lloyd's of London already has subsidiaries in Shanghai and Beijing, but the regulatory maze is challenging. "Because the Chinese insurance regulator has not developed separate regulations for the reinsurance market (which) Lloyd's (is involved in), it is regulated like a reinsurance company. This means some regulations are less well suited (for the reinsurance market)," Nelson said.
There are other major hurdles. China's capital account controls restrict the inflow and outflow of cross-border money, and that limits the amount of risk that can be reinsured overseas. Restrictions like these make it more expensive for Chinese insurance firms to reinsure their risks outside of China compared to doing it domestically.
In principle, the Chinese regulator is trying to open up the market by allowing foreign competition and encouraging domestic insurance firms to expand overseas, according to Nelson. But a great deal more still has to be done. As China becomes an increasingly sophisticated economy, integrating its insurance sector with global markets will be crucial.
In the meantime, Nelson revealed that Lloyd's syndicates will have already received claims after the Tianjin tragedy. But at this stage it is impossible to estimate the final amount. Exposure is likely to be small and will not affect the Lloyd's market as a whole.
In addition, insurance companies, including Zurich Insurance Group Ltd, based in Switzerland, and Allianz SE, based in Germany, have already received claims from clients that had been affected by the blast.
"We have received some claims notifications and are currently analysing the total situation. Businesses (affected) are property, marine and employer liabilities," Zurich Insurance said in a statement. "It is too early to make any (comments) on our net impact. Reinsurance is in place to provide us with additional protection. We and the whole industry have been requested to report the claim situation and progress to the regulator."
Allianz issued a statement pointing out that the company is contacting clients to assess any claims.