The China Syndrome

To say that economists and political analysts have something of an obsession with the PRC is probably an understatement; while Beidaihe-watching is the new Kremlinology; although probably equally as futile.

The simple fact is that China does matter in the world; and, while its economic dominance may not yet quite reach the level of the Imperial Middle Kingdom, the decisions that its political leaders make can have a very broad reach; they know that; and quietly revel in it.

However, the fact of its economic weight carries with it significant risks, as well as opportunities, including for the western (re)insurance industries anxious to penetrate a growing and underserved market, because the norms and expectations that apply in more established markets often do not apply in the PRC: the rule of law, whether in a commercial or personal sense, being an obvious example. Everything is subordinate to the (perceived or actual) will of the Chinese Communist Party and its paranoia about maintaining control in the face of “instability”, to the extent that being a P&C (re)insurer can be a rather hazardous occupation, as those who had exposure to the so-called Tianjin Port explosions would vouch.

There is a basic problem of opacity and a willingness on the part of “the authorities” to suppress facts or information that could prove critical in determining the extent of one’s true exposure and the validity of a claim. Of course, as in other areas of “natCAT” cover, it may be tempting to book premia and perhaps weaken terms or definitions to gain the business; and there is no doubt that the Chinese market does and will offer many significant opportunities on the basis of need and size alone.

However, we suspect that the Tianjin Port disaster revealed levels of exposure and inter-connectedness that were unexpected, as well as risks that were simply not foreseen, because they were concealed or mis-represented, which will make the clarity and scope of wordings particularly relevant, as well as questions of uberrimae fidei. Questions are also likely to arise of influence on the loss-adjusting process, and the relationship of affected parties to local and national power-bases.

Given that Awbury does not underwrite any “natCAT” business, but is focused on its E-CAT, economic and financial catastrophe risk franchise, why should we care what happens in cases such as Tainjin? Simple- while so-called Emerging Markets such as the PRC are causing significant angst to investors, and apprehension to (re)insurers, it would be remarkably foolish to ignore their growing scale and complexity, and the fact that they increasingly face the same issues as the Developed Markets in terms of risk and capital management. This will lead to opportunities for those who research and study the market’s characteristics carefully, and are patient in terms of risk selection.

We believe that opportunities will present themselves; and we are ever-vigilant in terms of identifying them. Our reach is broad as well as deep, so give us a call.

The Awbury Team

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