As catastrophic events grow in frequency and inflict heavier losses, relying solely on post-disaster fiscal aid is no longer sufficient. Establishing a more comprehensive pre-disaster risk-sharing framework and funding guarantee mechanism has become increasingly essential.

China ranks among the countries most severely affected by natural disasters globally, facing a wide range of hazards, broad geographical exposure, high occurrence rates, and substantial losses. According to data from the Ministry of Emergency Management, direct economic losses from natural disasters over the past decade have averaged over 300 billion yuan annually. Catastrophic losses also tend to concentrate in specific regions and periods. In 2025, direct economic losses nationwide reached 241.617 billion yuan, with the exceptionally heavy rainfall in late July across northern China, Inner Mongolia, and the northeast causing losses of 76.83 billion yuan—more than 30% of the national total. Intensifying climate change is further amplifying the uncertainty of catastrophe risks. Regions historically prone to drought may now face torrential rains and flash floods, while the reach of typhoons and their residual circulations can extend far beyond traditional expectations. Cross-regional, multi-hazard, and compound disaster risks are becoming increasingly prominent.

Catastrophe Insurance Framework: Sharing Risks Between Government and Market

China's funding sources for catastrophe response consist of four main components: first, fiscal allocations for emergency relief and compensation; second, commercial insurance payouts, dominated by auto insurance but also including life and property insurance; third, government-led catastrophe insurance and catastrophe funds operating under market principles; and fourth, social donations. Among these, catastrophe insurance is the most common risk protection tool. It possesses public-good attributes while effectively dispersing risk through market-based mechanisms, enabling timely mobilization of funds for disaster prevention and relief. This makes it the core of the catastrophe risk protection system.

China's exploration of catastrophe insurance began in earthquake-prone regions such as Sichuan and Yunnan, focusing primarily on residential earthquake insurance for urban and rural homes, with an emphasis on supporting post-disaster housing reconstruction. In 2014, the national level first made systematic arrangements for catastrophe insurance, proposing a multi-tiered catastrophe risk dispersion mechanism under fiscal support, built on institutional foundations and commercial insurance platforms. Subsequently, pilot programs were launched in Shenzhen, Ningbo, Chongqing, Wenchang, and other areas with high typhoon, rainstorm, and flood risks, gradually forming regional catastrophe insurance systems with local characteristics. Major disaster events have also served as catalysts for institutional development—after the 2021 Zhengzhou torrential rains, Henan accelerated the establishment of its local catastrophe insurance system.

Since 2024, catastrophe insurance system development has accelerated. The State Council issued the "Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry," and the National Financial Regulatory Administration and other bodies released the "Notice on Expanding the Coverage of Urban and Rural Residential Catastrophe Insurance and Further Improving the Catastrophe Insurance System," which expanded insured perils from earthquakes to include typhoons, floods, torrential rains, mudslides, and landslides, while raising basic coverage limits for urban and rural households to 100,000 yuan and 40,000 yuan per household, respectively. Following this, provinces including Anhui, Hebei, Shandong, Gansu, and Ningxia have successively introduced local catastrophe insurance pilot programs or implementation plans.

China's catastrophe insurance generally follows a path of "provincial-level plan guidance, local-level detailed implementation, pilot-first, and gradual expansion," but no unified national model has yet emerged. Most regions include their primary local natural disaster risks in coverage while preserving significant room for innovation in fiscal contribution ratios, insurance liabilities, payout limits, trigger conditions, and loss assessment mechanisms. Beyond directly establishing catastrophe insurance systems, some regions choose to provide catastrophe protection through existing frameworks such as agricultural insurance or livelihood insurance. Agricultural powerhouses like Jilin, Heilongjiang, and Jiangxi have implemented weather index insurance and agricultural catastrophe insurance practices, while cities like Nanjing have incorporated natural disasters into livelihood insurance or comprehensive public safety insurance systems.

In terms of operational models, most local catastrophe insurance is coordinated and purchased through local fiscal budgets. For example, Hebei's catastrophe insurance covers over 26 million households and more than 74 million residents, with annual premiums of approximately 200 million yuan and total coverage of 2 billion yuan, funded by provincial, municipal, and county finances in a 1:1:1 ratio. Overall, China's catastrophe insurance has evolved from early-stage, single-peril, localized explorations into an institutional system characterized by central policy guidance and multiple coexisting local models. In 2025, national catastrophe insurance provided cumulative coverage of 33.71 trillion yuan to 74.89 million households. By the end of June 2026, 24 provinces had established catastrophe insurance systems or incorporated catastrophe risks into livelihood insurance frameworks.

Given that the inclusive nature of catastrophe insurance often struggles to meet differentiated protection needs of certain industries or residents, some regions have recently begun exploring a tiered protection mechanism of "fiscal coverage for basics, individual and market coverage for increments." Under this approach, fiscal funds provide inclusive protection for personal casualties, basic housing, and vulnerable groups, while residents and market entities can voluntarily purchase additional coverage for household property, enterprise assets, and agricultural production. Anhui has implemented a differentiated risk backstop plan: conventional catastrophe insurance covers agricultural infrastructure, industrial park property losses, and urban lifeline protection, while livelihood insurance addresses catastrophe risks to personal safety, residential housing, and household property, further divided into "basic package, upgraded package, and optional package." The basic package is fully funded by the government, residents can voluntarily pay 1 yuan for the upgraded package, and small and micro enterprises and rural photovoltaic companies can voluntarily purchase optional package coverage.

Catastrophe Index Insurance Enables Rapid Payouts

Innovative insurance products, particularly index insurance, are also developing rapidly. Index insurance does not base payouts on actual losses but instead uses pre-set indicators such as rainfall levels or typhoon intensity as payout triggers. When monitored data reaches the contracted threshold, claims are automatically initiated—for example, marine aquaculture insurance that triggers payouts when water temperatures exceed certain levels. Because it eliminates the need for household-by-household loss assessment, index insurance claims processing is significantly more efficient than traditional indemnity-based insurance.

Index insurance was first applied in agricultural insurance. Agricultural production is highly dependent on climatic conditions, and traditional loss assessment is labor-intensive and time-consuming, making it difficult to provide timely funds for restoring production after disasters. Since 2016, Heilongjiang, Hunan, Fujian, and Jiangxi have successively explored agricultural catastrophe index insurance, using indicators such as floods, droughts, low temperatures, and precipitation to protect against agricultural output reduction risks and support local fiscal relief needs. In recent years, index insurance has gradually been incorporated into local catastrophe insurance systems to address the need for rapid post-disaster emergency funding.

Guangdong pioneered related exploration. In 2016, Zhanjiang launched the nation's first catastrophe index insurance, triggering claims when typhoon disasters reached the contracted threshold. Subsequently, Guangdong developed a provincial catastrophe meteorological index model and catastrophe index insurance platform, performing real-time monitoring of key indicators such as typhoon wind force and automatically calculating claim data, while establishing a consortium of six institutions including PICC to jointly underwrite the coverage. During the impact of Typhoons "Huajiasa" and "Medem" on Zhanjiang in 2025, index insurance cumulative payouts reached 53 million yuan.

However, the application of catastrophe index insurance also has limitations. The most typical issue is "basis risk"—the potential deviation between trigger results and actual losses. Additionally, catastrophe index insurance relies heavily on meteorological monitoring networks, historical data accumulation, and mature catastrophe modeling support. China's catastrophe modeling industry started relatively late, and some risks still depend on models developed by international institutions. Therefore, catastrophe index insurance is better suited as a supplement. For regions where specific natural risks occur frequently and meteorological and economic loss data are more mature, index insurance can fully leverage its rapid-payout advantage. For situations requiring accurate loss verification, such as infrastructure damage or residential housing destruction, traditional indemnity-based insurance mechanisms remain necessary.

The "index rapid-payout plus indemnity compensation" model explored in Wenzhou, Zhejiang, represents a relatively reasonable arrangement. Index insurance provides emergency funds quickly, while indemnity insurance handles infrastructure loss compensation, addressing both the urgent post-disaster funding needs and the actual restoration costs respectively.

Additional Catastrophe Risk Buffer Mechanisms

Catastrophe risks are characterized by low frequency and high severity. Losses in extreme scenarios may exceed insurance payout limits, creating massive funding gaps. While continuously improving the catastrophe insurance system, it is also necessary to reserve buffer space for "low-probability, high-loss" tail risks. These supplementary mechanisms primarily include catastrophe funds established by local governments, catastrophe risk reserves specifically set aside or accumulated by insurance institutions, as well as risk dispersion tools such as reinsurance and catastrophe bonds.

Catastrophe funds are generally established by local fiscal authorities, managed under market principles, and operated with dedicated accounting, rolling accumulation, and targeted utilization. Shenzhen and Ningbo were the earliest cities approved to pilot catastrophe insurance systems and pioneered catastrophe funds. In 2014, Shenzhen constructed a three-tier protection framework of "government catastrophe relief insurance, catastrophe fund, and individual catastrophe insurance." The government catastrophe relief insurance was purchased from commercial insurers with 36 million yuan in municipal fiscal funds, providing maximum payouts of 2.5 billion yuan per disaster event and covering 15 types of disasters. When natural disaster payouts exceed the 2.5 billion yuan cap, the catastrophe fund provides supplementary coverage; the fund was initially injected with 30 million yuan by the municipal government, grows through market investment operations, and also accepts donations. Ningbo's catastrophe fund, initially funded with 5 million yuan from the government, compensates for personal injury compensation and household property loss assistance that exceed insurance company payout limits, serving as a supplementary excess coverage mechanism.

Unlike catastrophe funds, which can be flexibly used for public rescue expenditures or supplementary excess loss funding, catastrophe risk reserves are designed to enhance insurance institutions' risk-bearing capacity. Insurance companies accumulate funds in advance during low-loss years, specifically setting aside and managing reserves for catastrophe losses. Through the "surplus years subsidizing deficit years" rolling accumulation mechanism, these reserves are deployed in catastrophe years for claim payments. China has not yet issued dedicated policies for catastrophe risk reserves, but agricultural insurance has relevant practices. Referring to the Ministry of Finance's "Measures for the Management of Agricultural Insurance Catastrophe Risk Reserves," agricultural catastrophe risk reserves consist of two parts: one portion is set aside as a percentage of agricultural insurance premium income, and the other comes from insurers' excess underwriting profits, which enjoy corporate income tax pre-deduction policies.

Currently, domestic catastrophe risk reserve systems are primarily local pilots. Since 2018, Ningbo has set aside 20% annually from catastrophe insurance operating funds as catastrophe risk reserves. When annual catastrophe insurance operations incur losses, reserves can be deployed to cover shortfalls; upon contract expiration, any reserve surplus is collectively allocated to catastrophe relief expenditures. Catastrophe bonds, meanwhile, disperse risk to international markets. Typically issued by reinsurance companies as "insurance for insurance," reinsurance directly bears insurers' excess payout pressure when major disasters occur. Catastrophe bonds are primarily issued offshore, dispersing risk through international financial markets. The design mechanism works as follows: if a specified catastrophe occurs, investors bear partial principal losses; if no catastrophe occurs, investors receive high returns. In 2025, global catastrophe bond issuance exceeded US$20 billion for the first time, becoming a pillar of the global reinsurance market.

China's catastrophe bond market remains in its infancy. In October 2021, China Property and Casualty Reinsurance issued a US$30 million catastrophe bond in Hong Kong targeting mainland China typhoon risks, pioneering mainland catastrophe bond issuance in Hong Kong. In January 2025, Taiping Reinsurance issued a US$35 million catastrophe bond in Hong Kong covering mainland China earthquake and US hurricane risks—the first Asian catastrophe bond with dual-risk, dual-trigger mechanisms. These developments reflect that Hong Kong's insurance-linked securities market has the capacity to undertake cross-regional, multi-hazard catastrophe risk transfer, providing valuable references for China's exploration of diversified catastrophe risk financing channels.

Building a Financial Safety Net for Future Catastrophes

Looking at the overall situation of insurance industry participation in natural disaster loss sharing, China still lags significantly behind global averages. Data from the China Insurance Society shows that global catastrophe insurance payouts as a percentage of economic losses were 41.1%, 45.5%, and 38.6% in 2021, 2022, and 2023 respectively, while China's figures were 5.6%, 26.6%, and 7.3% for the same periods. To further improve a catastrophe insurance system driven by government, operated by market forces, and involving social participation, a multi-tiered funding guarantee system must be formed—one that interconnects policy-based and commercial insurance, reinsurance, catastrophe funds, dedicated reserves, and catastrophe bonds to provide stronger support for responding to extreme weather and natural disasters.

First, catastrophe insurance coverage should continue to expand and the system should be improved. Based on local disaster types, occurrence frequencies, potential loss scales, and fiscal affordability, catastrophe risk protection gaps should be filled promptly. Furthermore, as climate change intensifies, the types of natural disasters some regions face are also shifting. For example, areas previously prone to drought may now encounter flooding, so catastrophe insurance peril coverage should be adjusted in a timely manner to proactively address low-probability disaster events.

Second, a diversified catastrophe funding guarantee system should be improved. Regions can explore establishing catastrophe funds and agricultural insurance systems that connect with catastrophe insurance based on their own risk profiles. Given that insurers' risk exposure is expanding alongside intensifying natural disasters, it is recommended to reference the agricultural catastrophe reserve system, incorporating catastrophe risk reserves as an important component of the insurance regulatory framework. Through policy tools such as tax incentives, insurers should be guided to pre-accumulate liquidity funds for catastrophe risk response.

Third, issuing catastrophe bonds in offshore financial markets in Hong Kong and Shanghai should be explored to further disperse cross-regional risks such as typhoons. China is prone to typhoons, floods, and other natural disasters, and extreme events often occur across regions. Yet catastrophe insurance systems are typically coordinated at the provincial level, lacking defenses against cross-regional risks. It is recommended that, leveraging the opportunity of Hong Kong and Shanghai building offshore financial centers, catastrophe bonds be issued to disperse cross-regional catastrophe risks into broader capital markets, enhancing funding security under extreme disaster scenarios.