Property Risks in China

The importance of property risks management in China.

Why it is important to manage your property risks in China

Property risks can be defined as un-foreseen disruptions of daily operations that have an impact on physical assets owned and the financial capability of a company.

Natural disasters occur almost every year. However, their impact cannot be anticipated. For example, there are typhoons in China every year, but their routes change from year to year, hitting some regions more harshly than others.

To assess the potential of damage, insurers rely on the concept of “recurrence”. How often might a category 5 typhoon of occur in Zhejiang province?

With global warming, such calculations lose their accuracy, as we have seen an increase in frequency of wind events with major impacts in terms of damage.

Why are natural disasters considered a major risk? Because they are absolutely out of control in terms of impact.

What should we do? We should make sure physical assets are well-protected, and have the right insurance program in place in case of a worst-case scenario.

Property insurance is the way to do this. It covers buildings, equipment, machinery and inventory (raw materials, semi, finished products, etc.).

Along with property insurance, business interruption insurance should be taken out too.

Physical damages may have an impact on the production flow of the company, hindering its ability to generate sufficient enough cash flow to cover operating costs.

When is property insurance in China necessary?

Apart from risks such as fire and water damage, which occur almost everywhere in the world, there are some risks occurring more frequently in China. We can consider six major property risks in China in terms of occurrence. Four are natural disasters, and two can be categorized as man-made disasters.

1. Typhoons in the southern and eastern parts of China

The southern and eastern regions of China are subject to typhoons that bring heavy rain, flooding factories and warehouses 40 to 50 cm high with water. Apart from damage to equipment and inventory, there are cleanup costs associated with this, which may take a few weeks or months to do, impacting production. Sales might be affected, thereby causing a loss of turnover that can be covered by business interruption.

According to the 2016 China statistical yearbook, typhoons led to an economic loss of over 76 billion RMB in China.

2. Earthquakes in southwest China

The Southwest of China is prone to earthquakes.

Some buildings are not earthquake-resistant, which can cause severe property damage and even heavy loss of life.

Some industries, such as the mechanical precision industry, are highly impacted by earthquakes. The tremors following a strong earthquake may displace equipment that will lose their precision capability, requiring re-testing and re-calibration to meet technical specifications. For sophisticated imported equipment, the repair may even require bringing in specialized technicians from abroad. All this takes time, which impacts the production process and slows down turnover.

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Image source: The Guardian, Dan Chung, rescue workers in earthquake rubble in Sichuan province, 2008

For hazardous industries manufacturing critical equipment, such as the nuclear industry, these incidents must be reported to the authorities, who may request further inspection before production can resume, which further delays the repair process, further impacting production and turnover.

According to the 2019 China statistical yearbook, from 2000 to 2018, there was an average of 13 earthquakes a year in China. The economic loss triggered by earthquakes reached 859 billion RMB in 2008, the year a magnitude 8 earthquake occurred in Sichuan province.

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Data source: National Bureau of Statistics, the annual number of earthquakes in China

3. Heavy snow and freezing temperatures in the north

In China’s northern provinces, snow is also a source of damage. Snow piling up on the top of roofs may cause roof collapse, damaging equipment and inventory inside.

Additionally, frost can also create damage, especially during the New Year when companies stop their operations. When the temperature drops far below zero, water left inside pipes may freeze, causing the pipes to burst. The water will leak throughout the building, causing water damage.

4. Tornadoes in the Northern plains, the middle-lower Yangtze Plain, and the Pearl River Delta plain

Tornadoes are not uncommon in China. Usually tornados are associated with thunderstorms, China experiences on average about 8 tornadoes a year, which can demolish entire buildings and cause severe inventory damage.

In 2016, a tornado ripped through Jiangsu province, destroying 3,200 homes and several warehouses. Because of the high population density of China, a tornado starting in a rural location may hit towns of millions of people or industrial parks full of factories and businesses.

5. Warehouse fires

Fires in reefer warehouses are quite common in China. They are often caused by short circuits due to lack of proper maintenance of the equipment supplying electricity. Usually, the electrical wires run within the insulation panels used to keep low temperatures. When these wires overheat, the panels may catch fire, which can easily get out of control. This series of events has resulted in entire factories and warehouses burnt down. Under these circumstances, both the cost of property damage and a loss of income may be incurred.

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Source: Sohu, Peak’s warehouse fire in Quanzhou

6.  Power outages

Poor maintenance of the electrical network may disrupt power, especially in summer when the consumption of electricity reaches its peak due to the extensive use of air conditioning.

Following a power outage, the temperature in a cold warehouse may rise, defrosting goods that should be kept frozen. This is especially an issue with food products.

How to protect your business against natural and man-made disasters: Property insurance will largely compensate unexpected expenses. Property insurance covers almost all physical property, including machinery, equipment, buildings, and should be combined with business interruption insurance to cover financial loss following these disasters.

Types of coverage

There are two types of coverage in order to manage your property risks in China:

The first is “All Risks” coverage, which covers all damage caused by any accident except those listed as exclusions in the general wording of the policy.

The second type is “Named Perils” coverage, which lists the specific perils covered, such as fire, floods or explosions. explosions, etc.

Usually, the scope of coverage for an All Risks policy is wider than Named Perils.

Another difference is that, in case of a claim, the burden of the proof is reversed. Under All Risks insurance policies, the insurer has to prove the cause of the accident is excluded. Under Named Perils insurance policies, the insured has to prove the loss is caused by a peril listed in the policy. It’s always more difficult to prove an exclusion applies than prove the loss is caused by a peril listed in the policy.

Another key issue is to make sure the value of the property covered is properly assessed. The basis of the valuation can be the reinstatement value or market value.

In any case, the sum insured must correspond to the actual value of property on risk. Otherwise, the rule of averages shall apply. This rule states that if the sum insured is lower than the actual value of the property covered, the insurer shall apply a discount of the amount of the claim. For example, if the sum insured is RMB 10,000,000 and the actual value of the property RMB 20,000,000, in case of a claim with an amount of RMB 1,000,000, the insurer would pay RMB 500,000. Therefore, 50% of RMB 1,000,000 as the sum insured represents 50% of the value of a property.

Protect your business in China today

Every business in China will face risks and their own unique challenges – including natural disasters that vary from region to region, but also according to the nature of their equipment and inventory.

 For a tailor-made insurance solution for your investment in China, contact us

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Read more about this topic by browsing our report on natural disaster risk mitigation in China, written in cooperation with daxue consulting: