High school students in Chongzhou, Sichuan province, participate in an earthquake drill. [Provided to chinadaily.com.cn]

Product seen as step in adopting market-driven approach to compensate for disaster losses

China on Friday launched the sale of the country's first earthquake insurance policy, seen by the industry as a step forward in adopting a market-driven approach to compensate for losses following natural disasters.

Homeowners can buy insurance policies with a maximum payout of 1 million yuan ($150,000) to cover loss and damage to residential property caused by earthquakes with a magnitude of 4.7 and above, according to the China Insurance Regulatory Commission.

The earthquake insurance policy is part of China's effort to establish a catastrophe insurance system aimed at using a market-driven mechanism to support disaster relief work and to reduce the fiscal burden of the government for loss compensation.

The earthquake insurance policy will be sold by Chinese insurers on a nationwide basis. The premium rates will vary depending on factors such as the location and construction of property, as well as the probability of earthquake, according to the insurance regulator.

Policyholders in rural areas will get a minimum compensation of 20,000 yuan while urban policyholders will receive 50,000 yuan, according to the regulator.

Guo Hong, an official from the Insurance Association of China, told a news conference that the policymakers will also seek to expand coverage of catastrophe insurance beyond earthquakes to other major natural disasters in the future.

The average premium rate of the earthquake insurance is 0.04 percent, meaning that policyholders will pay roughly 400 yuan per year to receive a maximum compensation of 1 million yuan for damage to their homes, Hong said.

Jiang Caishi, vice-president of Chinese insurer PICC Property & Casualty Co, said the purpose of the product is not to replace everything the policyholders lost but to provide additional help for them to respond to natural disasters.

Jiang said that insurers have conducted assessments of their risk tolerance and they are not aiming for short-term profit, but are focusing on long-term capital accumulation.

CIRC official He Hao said the earthquake insurance will not be a mandatory policy initially and it is aimed at stimulating market participation to diversify loss and risk following devastating earthquakes.

The insurance regulator is also pushing nationwide legislation on the catastrophe insurance system and it is expected to compete the legal work by next year, He said.