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Environmental risk solutions in China

Can compulsory liability insurance reduce environmental risk?

Environmental pollution

In the past, with China's extraordinary economic growth, some man-made pollution problems appeared in the face of the nation. For example, some private chemical enterprises which only pursued profits did not care about environmental protection and caused some environmental pollution incidents that aroused social concern.

The Chinese Government is alert to this issue and over the past five years has devoted significant energy and resource to ecological conservation. The nation has become more purposeful and active in pursuing green development and there has been a clear shift away from the tendency to neglect ecological and environmental protection. Whilst more needs to be done to resolve China’s water pollution problem, efforts to conserve resources have seen some encouraging progress, for example: the intensity of energy and resource consumption has reduced; major ecological conservation and restoration projects mean forest coverage has increased; and ecological and environmental governance has been significantly strengthened. China has become an important participant and contributor in the global endeavour for ‘ecological civilization’ that ensures harmony between humans and nature.

Case study by Mr Xiaoxuan (Sherwin) Li, FIA

Mr LiEnvironmental risk analysis is a frontier topic in the field of green finance, which is also the core issue of the G20 Green Finance Study Group (GFSG). The quantitative analysis of environmental risk and its pricing strategy are very important problems in the process of building an effective and sustainable green financial system.

The China Society for Finance and Banking is a member of the G20 Green Finance Study Group and it is promoting a ‘greening’ of the financial system by financing for sustainable growth and development. The Insurance Society of China is also focusing on the promotion of sustainable development and green insurance. At the beginning of 2017, these two organisations came together to undertake a quantitative analysis of environmental risk for the finance and insurance industry in China. In the project, the quantitative analysis of environmental risk for the insurance industry was led by the appointed actuary of China Re, Mr.Xiaoxuan (Sherwin) Li, FIA, and his actuarial team.

The project’s initial findings are that the externality of environmental risk is being borne by society, rather than the industries which cause and reap the financial rewards from behaviours that increase environmental risk. In other words the companies that are causing environmental pollution though their businesses practices are profiting because they do not have to internalise these costs themselves – instead the Chinese Government is having to raise revenue to clean up the environment in China. 

In the project, actuaries involved are using actuarial methodologies and catastrophe modelling methodologies to evaluate environmental risk. The ultimate aim is that this will lead to businesses having to internalise the cost of any environmental pollution caused by their operations. The models used by actuaries means they are able to measure an entity’s environmental risk and place a cost on that risk, depending on the potential probabilities and severities of environmental risk caused by the entity. This cost would then be recouped from entities via an insurance premium based on its behaviour related to taking environmental risk. This mechanism ensures that the costs of environmental pollution fall on the entity causing / benefitting from the pollution, rather than the society.

In June 2017, the Ministry of Environmental Protection of China and China Insurance Regulatory Commission released the exposure draft of the administrative measures for compulsory liability insurance of environmental pollution. With this mechanism, China hopes that its society and economy will continue on the path towards healthy and sustainable development.

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Events calendar

  • Finance in the Public Interest Series

    16 March 2021 - 23 March 2021

    Spaces available

    There is widening debate that many of our social, financial and regulatory institutions need to be rethought so that we can create more sustainable futures, particularly in light of the Covid-19 pandemic, the policy/macro-economic response to the pandemic and how it affects consumers, as well as the impending climate crisis. This multi-day series of three keynote webinars, individually presented by leading economist John Kay, Sir Paul Collier, Professor of Economics and Public Policy at the Blavatnik School of Government, Ashok Gupta, Chair at Mercer Ltd, and Nico Aspinall, Chief Investment Officer at B&CE, will open up discussion on these essential topics. The series will culminate in a panel session with Chief Economist of the Bank of England, Andy Haldane.

  • The price is righter

    16 March 2021

    Spaces available

    This webinar provides an overview of the state of the UK protection market, and how different insurers are using different levels of sophistication to price (such as using customer demand models). It considers how insurers have implemented these sophisticated pricing techniques, and the practical challenges they have faced.

  • Spaces available

    This discussion will revolve around the latest industry developments including and introduction to Part VII transfers and Schemes of Arrangement (process, parties involved and recent events), insights and lessons from recent with-profits transactions and restructurings (including Equitable Life and Pru-Rothesay), how firms can apply these learnings to future arrangements, and the outlook for future with-profits transactions and restructurings (including the impacts of Covid-19 and Brexit)

     

  • Spaces available

    What is stewardship and how has the landscape changed under the 2020 UK Stewardship Code? How does effective stewardship create long term value for beneficiaries and what roles do asset owners and asset managers play in active stewardship. This webinar will offer answers to these questions in a practical approach to stewardship reporting.

  • Spaces available

    Mis-estimation risk is a key element of demographic risk, and past work has focused on mis-estimation risk on a run-off basis.  However, this does not meet the requirements of regulatory regimes like Solvency II, which demands that capital requirements are set through the prism of a finite horizon like one year.  This paper presents a value-at-risk approach to mis-estimation risk suitable for Solvency II work.