Rewards outweigh the risks in insurance

Diversifying risk is a necessity for China as the country becomes more industrialized and urbanized, says John Nelson, chairman of insurance market at Lloyd's of London.

Nelson says that China will become increasingly exposed to specialist risks, such as business interruption, cyber security, energy and property as its economy matures. Institutions, such as Lloyd's of London, which have rich international experience in risk management, are in a good position to help China through the maze.

"China is very important to Lloyd's. Historically most of our business comes from developed markets, but significant growth is also coming from the emerging markets, led by China," Nelson says.

According to Nelson, insurance penetration is still low in China and cites the devastating earthquake in Sichuan province in April as an example. Only 1 percent of the estimated economic losses of around $27 billion, fell in the insured category, he says.

As the Chinese government often funds the relief for big disasters, such as earthquakes, China may have the resources to meet such sudden economic shocks. But, in the long term, it is more sustainable to diversify risks with the help of international insurance carriers, Nelson says.

"At the moment everything is self-insured by the government and paid for by the people. But if you look at developed economies worldwide, they've all gone for the risk transfer model. China is also on its way down that road," he says.

Nelsons says one such example is the floods in Thailand, which can create significant economic losses when they occur. But with Thailand's economy maturing, many foreign insurance companies have entered the Thai market with reinsurance solutions to mitigate risks.

"The risk is thus dissipated away from the host economy. Since the losses are insured, great economic benefits can also be expected," he says.

Home to the world's largest insurers, Lloyd's insurance market started operations in a coffee house in London where ship owners met to make insurance deals 300 years ago.

Despite its long history, Lloyd's entry into China has been fairly recent. It established a representative office in Beijing in 2000 and an underwriting office in Shanghai in 2007.

Nelson says Lloyd's entry into Shanghai "was very much noticed", explaining that the group effectively facilitated the entry of several other international insurance companies that did not have the resources to set up subsidiaries in China themselves.

Because Lloyd's is an insurance market, Western companies that are already syndicates of Lloyd's can enter the Chinese market without applying for licenses separately. Instead, they work and are regulated under the Lloyd's umbrella, which is in turn regulated by the China Insurance Regulatory Commission.

Currently Lloyd's Shanghai has nine syndicates, which are Ace, Arch, Brit, Catlin, Kiln, Navigators, Sportscover, Starr and Travelers. Together they underwrite around $300 million, an amount that has tripled over the past five years.