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Climate Change and Catastrophe Management in a Changing China

Government, Insurance and Alternatives

Qihao He

China is the largest greenhouse gas emitter in the world and also suffers from devastating climate catastrophes. Increasingly, policymakers in China have come to realize that government alone cannot adequately prevent or defray climate-related disaster risks. This book contends that a better way to manage catastrophe risk in China is through private insurance rather than directly through the Chinese government. In addition, private insurance could function as a substitute for, or complement to, government regulation of catastrophe risks by causing policyholders to take greater precautions to reduce climate change risks.
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Qihao He

Due to climate change and an increasing concentration of the world’s population in vulnerable areas, how to manage catastrophe risk efficiently and cover disaster losses fairly is still a universal dilemma. China’s mechanism for managing catastrophic disaster risk is in many ways unique. It emphasizes government responsibilities and works well in many respects, especially in disaster emergency relief. Nonetheless, China’s mechanism, which has the vestige of a centrally planned economy, needs reform. Chapter 1 proposes a catastrophe insurance market-enhancing framework that marries the merits of both the market and government to manage catastrophe risks. There are three pillars of the framework: (i) sustaining a strong and capable government; (ii) government enhancement of the market, neither supplanting nor retarding it; and (iii) legalizing the relationship between government and market to prevent government from undermining well-functioning market operations. A catastrophe insurance market-enhancing framework may provide insights for developing catastrophe insurance in China and other transitional nations. This chapter makes two contributions. First, it analyses China’s mechanism for managing catastrophic disaster risks, and China’s approach, which emphasizes government responsibilities, will shed light on solving how to manage catastrophe risk efficiently and cover disaster losses fairly. Second, it starts a broader discussion about government stimulation of developing catastrophe insurance and this framework can stimulate attention to solve the universal dilemma.

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Qihao He

Global climate change has caused many weather-related catastrophes in the world, and the losses have been increasing dramatically during past years. Various legal and business mechanisms and tools can be used to manage catastrophe risks and cover catastrophe losses, such as insurance, government subsidies, and risk securitization. In theory, private insurance can be an efficient financial instrument to cover disasters. In practice, private insurance plays an important role in developed countries such as the United States. Chapter 2 further addresses the question: taking into account China’s transition economy and specific socialism system, the role of private insurance to cover disasters and how it distributes catastrophe risks sustainably. Furthermore, it is proposed that mandatory multi-year insurance may be a possible solution.

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Qihao He

Climate change is one of the most fundamental challenges of our time. The extraordinary growth of greenhouse gas (GHG) emissions in China represents the single greatest obstacle to global climate change efforts in the coming decades. Meanwhile, China suffers from the adverse consequences of climate change. It has been recognized that two factors may increase climate change risks: (a) the increase in GHG emissions, which will increase the frequency and intensity of climate hazards; and (b) the increase of value-at-risk, such as the increased concentration of the world’s population and property in vulnerable areas. Therefore, mitigation of climate change risk involves not only human intervention to reduce GHG emissions but also prevention of potential losses caused by climate hazards. Among many solutions to risk mitigation, insurance has received increased attention due to its expertise in risk management and regulatory function in influencing policyholders’ behavior. Chapter 3 examines the ability of two types of insurance—liability insurance and catastrophe insurance—to regulate and thus help mitigate climate change risks, and considers the potential lessons for China

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Qihao He

Under the influence of climate-related extremes, the world is exposed to more and more catastrophe risks. Increasingly it is held that the government alone may not be able to adequately prevent disaster risks; a combination of public and private regulation is therefore warranted. Regulation via insurance may help to realize the goal of disaster risk reduction and to mitigate the corresponding losses. Chapter 4 identifies five regulatory tools—risk-based pricing, contract design, loss prevention services, claim management, and refusal to insure—that can be used by catastrophe insurers with the aim of disaster risk reduction. The chapter then explores how these tools are used in practice by insurers in five countries: the United Kingdom, the United States, France, Japan, and Turkey. Regulation through catastrophe insurance could have a positive effect on disaster risk reduction; however, the possibilities of regulating by insurance are in many countries de facto limited as a result of state intervention. Finally, the chapter discusses the possibility and feasibility of regulation by catastrophe insurance in China, where it is not yet utilized.

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Qihao He

Reinsurance can be understood as simply insurers’ insurance. Insurers have an increasing demand for more financial capacity when underwriting catastrophic risks. With respect to catastrophic risks, the role of reinsurance takes several forms. Reinsurance can take a significant portion of the insured losses from primary insurers, diversify catastrophe risks globally, supply underwriting assistance, and regulate insurers’ behavior to promote risk mitigation. In many respects, reinsurance expands to help solve catastrophic risk management issues through serving as an enforcer of compliance with government regulations and reinsurance contracts. However, regulation by reinsurance could be qualified as problematic, due to catastrophe reinsurance underwriting cycles that may lead to reinsurance unavailability. Government-sponsored reinsurance, which marries the merits of both government and private reinsurance, has gained increasing attention in the law and economics literature. Theoretically speaking, in the government-sponsored reinsurance program, private reinsurance could still conduct its business and play its role as regulation when underwriting primary insurers’ risk; meanwhile, the government does not provide reinsurance service for primary insurers but mainly supports reinsurers through capital credit and thus avoids insufficient reinsurance supply during hard markets.

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Qihao He

Climate change represents one of the epic issues of our time and it is likely to cause catastrophic damages. How to efficiently manage climate change catastrophe risk is a universal challenge. Private insurance generally produces optimal outcomes in which consumers maximize utility and insurers maximize profits, but it faces market failure in both supply and demand of catastrophe exposures. Insurance-linked securities (ILS) is an effective tool to increase insurers’ supply of catastrophe insurance by enhancing insurers’ capability, although its market is still in infancy. It implies that private market merits with insurance-linked securities will enhance and accomplish the goal of increasing catastrophe coverage. Chapter 6 provides an overview of securitization of catastrophe risk and analyses the supply and demand dynamics of financial innovations in the market for catastrophe insurance risk transfer. Further, it describes the international experience from which China could learn and the domestic obstacles that China should conquer.

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Qihao He

In China, the government has traditionally played the central role in catastrophe disaster aid, relief, and compensation. Nonetheless, the government’s Whole-Nation System needs reform and a shift to an insurance-based model because (a) the current system is not financially sustainable; and (b) a private insurance system would do a better job than government regulation alone in mitigating climate change risks. To accomplish this shift, the Whole-Nation System (regulation by government) should be combined with catastrophe insurance (regulation by insurance) to capitalize on the strengths of the private market and public government oversight. Under such a proposed hybrid system, the government should support private sector efforts to make catastrophe insurance the key vehicle for the financing and loss mitigation of climate change risks.

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Justin D. Macinante

Chapter 1 establishes the context for the book by explaining where it sits in the universe of climate change research and writing. This chapter introduces the purpose of the book as being to propose the design and operation of a market, as a mechanism for implementing greenhouse gas mitigation policy. Its aim is to elaborate a specific operational design for an inter-jurisdictional carbon market, where currently no such market exists. The objective, theory and themes are outlined and there is an initial outline of some fundamental concepts and definitions.

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Justin D. Macinante

This chapter provides a short background, including scientific origins and the intergovernmental responses leading to the UN Framework Convention on Climate Change and the Kyoto Protocol. The policies and measures put in place are briefly considered, as is implementation, particularly through international emissions trading. Reasons are outlined as to why international emissions trading (IET) can be seen to have failed to achieve its promise.