LONDON (Reuters) — China’s fledgling insurance and reinsurance market cannot meet the soaring costs of natural disasters, but has the data and modelling capability to offload the risk to the private market via insurance-linked securities (ILS) solutions.China is currently the third largest non-life market in Asia behind South Korea and Japan, but could soon eclipse those countries and the US in its need for natural catastrophe insurance cover by 2050, said AIR Worldwide, one of a panel of catastrophe risk modelling firms addressing an audience of ILS clients and investors in London last Wednesday.ILS are increasingly popular instruments such as catastrophe bonds that give investors an income in exchange for promising to pay some claims if a natural catastrophe occurs.Bermuda could benefit if China ventures into the ILS market. The Island has become one of the world’s major cat bond centres over the past three years, bolstered by its expertise in catastrophe reinsurance, and more than $5 billion of ILS are listed on the Bermuda Stock Exchange.The panel said earthquake insurance could be bundled up into catastrophe bond form and sold to capital market investors. Instead of an individual Chinese insurer or reinsurer selling the cat bond notes, or “sponsoring” the bond, it could be done under a government initiative.“It would most likely be a sovereign issuance,” said Eyal Shnaps, consultant at Risk Management Solutions (RMS).Governments with no reinsurance programmes have to dip into their own coffers to pay for the cost of regeneration after a natural disaster. But countries like Mexico have launched a cat bond to cover earthquake insurance risk.The bond would use a parametric trigger — an insurance industry calculation which pays out on index figures linked to the size and location of an earthquake — based on readings from recording stations from the China Earthquake Admission, said Shnaps.The Tohoku earthquake in Japan in March 2011 triggered a catastrophe bond called Muteki Ltd, which used data from Japan’s K-Net stations and the Japan Meteorological Agency.China is one of the most seismically active countries in the world, with nine major quakes greater than 8.0 magnitude since 1990, said RMS. A further 66 quakes reached a magnitude of 7.0-7.9 and 385 scored 6.0-6.9 on the Richter magnitude scale.In context, the second most costly earthquake since 1980 occurred in Northridge, California, in 1994, reaching magnitude 6.7 on the Richter scale.A strong earthquake in a densely populated city in China could cause up to $50 billion in insured losses said Milan Simic, managing director at AIR Worldwide, one of three major firms that provide disaster modelling research and software to the global insurance industry.“Standard insurance policies only cover typhoon, storms and floods as standard — if you want quake cover, you have to buy an extension policy,” he said.