More than $20 billion dollars worth of destruction was the result of the most damaging earthquake in China since 1950, unearthing the realization that the nation’s insurance industry is years behind those of the world’s biggest economies.

One official from the China Insurance Regulatory Commission, who refused to be named, stated that only 5% of the cost of the overwhelming mass of damage in Sichuan Province was covered by insurance.

When compared to the U.S., and their handling of Hurricane Katrina, the most costly storm in their history, which was insured by companies and the federal government, resulting in around 50% of the $120 billion damages being covered, there is something quite obviously wrong in China.

“The earthquake underscores how much room insurers have to penetrate into rural China,” said Zhang Ling, who oversees $1.1 billion for ICBC Credit Suisse Asset Management Co. from Beijing and holds Ping An Insurance (Group) Co. shares. “There’ll be much more momentum and government support to do that after this year’s natural disasters.”

Even the nations largest insurers China life insurance Co. and Ping An have no managed to expand across China. According to statistics found by KPMG international, out of a nation of 1.3 billion people, only 4% have insurance. Again worrying in comparison to America, where 77% have some form of life insurance policy.

The earthquake, with a magnitude of 7.9, has effected around half of the 20 million people living in Sichuan, obliterating their homes and buildings, leaving 30, 000 people still under rubble, and with a death toll of around 20, 000.

“If a disaster like this happened in Europe or the U.S., the claims situation would be very different,” said Michael Spranger, a Hong Kong-based earthquake analyst at Munich Re, the world’s No. 2 reinsurer, after Swiss Re. “Natural disaster coverage rates are very low across Asia, in the single digits.”

The chief economist for Swiss Re Asia in Hong Kong, Clarence Wong has stated that the Niigata earthquake, which hit central Japan last July, resulted in a cost of $3 billion, 10% of which being the insured losses.

The earthquake in China happened 4 months after the country’s most powerful snowstorms in 50 years, so damaging that 1 million citizens had to evacuate.

This means that insurers will be becoming far more competitive when it comes to finding sales in rural areas, with their wages endangered by the years 26% decline in China’s benchmark CSI 300 Index threatens earnings growth.

The company China Life has had an overall profit fall of 61% in the first quarter, with Ping An’s yield rising at its slowest since opening.

“The earthquake is not expected to have a material impact on the balance sheets” of Chinese insurers, wrote Hong Kong- based Fitch Ratings analysts Stanley Tsai and Jeffrey Liew in a May 15 report. “That said, the losses arising from the tragic event, coupled with the poor performance of the A-share market in the first few months of 2008, will put pressure on the insurers’ earnings for the year.”

It is now clear that getting its rural and natural disaster insurance better is a prime concern for the Chinese Government. The industry regulator official in Beijing believes that China may be planning to set up a natural disaster insurance system, which would be paid for by the government as well as involving the private-sector.

Zurich based Swiss Re have announced that the insurance penetration in China, a measurement of premiums as a percentage of gross domestic product, turned out to be around 2.9% last year, coming 49th in the world ranking

“Earthquake insurance penetration is generally very low, and for residential covers practically non-existent,” says Peter Zimmerli, a vice president in Swiss Re Asia’s property and casualty group.