Development and Application of Typhoon Catastrophe Index Insurance Program in Guangdong Province

Abstract

Catastrophe insurance is an important financial tool to mitigate the risk of catastrophes. After the 2008 Wenchuan Earthquake, China accelerated its exploration of a catastrophe insurance system. As one of the most natural disaster-prone provinces in China, Guangdong experiences frequent rainstorms and typhoons. Severe natural disasters have not only led to significant losses to economic development and people's lives, but have placed considerable financial pressure on governments at all levels. To promote the transformation of government functions and use of catastrophe insurance as a modern financial tool to cope with major natural disasters, Guangdong has conducted pilot work since 2016 to explore and experiment with different aspects of catastrophe index insurance. This includes the design and application of insurance systems and products. The pilot work achieved remarkable results and formed the Guangdong catastrophe index insurance paradigm. However, few studies have examined the development and application of catastrophe index insurance programs in Guangdong Province. This paper describes the research and design process, data, and key methods of typhoon catastrophe index insurance in Guangdong, in accordance with the specific catastrophe index insurance practices. Furthermore, the application of the current catastrophe index insurance program from 2016 to 2023 is reviewed. Additionally, the advantages, characteristics, and shortcomings of the program are systematically analyzed, and potential directions for improvement in the future are discussed. Several notable conclusions were drawn from this study. First, the typhoon catastrophe index insurance, which is based on the circular catastrophe box and uses typhoon intensity levels as a stratification criterion for the payout structure, offers a straightforward methodology, easy recalculations, readily accessible data, and transparent results. Second, this form of insurance facilitates rapid claim settlements, incurs low operational costs, and effectively mitigates moral hazard. Third, the existing typhoon catastrophe index insurance program may encounter high basis risk and underestimate the severity of typhoon hazards, particularly in the context of climate change and the situation wherein a single typhoon impacts multiple municipalities. Finally, improvements to the current typhoon catastrophe index insurance program in Guangdong could be achieved by more deeply and comprehensively analyzing the spatial and temporal patterns of typhoon events, incorporating additional parameters with clear physical meanings, and refining the probability distributions of typhoon disaster events. The insights outlined in this paper may potentially enhance understanding among scholars and practitioners of typhoon catastrophe index insurance programs and provide guidance for extending catastrophe insurance in other typhoon-prone areas.

Keywords

• typhoon
• catastrophe insurance
• catastrophe index insurance
• insurance program
• guangdong province