Natural catastrophes are on the increase around the world and the Asia-Pacific region is no exception in facing increased climate risk. Capacity for nat cat exposures is constrained globally but insurers believe that despite the increase in nat cats, weather-related risks remain insurable in Asia-Pacific. Tony Dowding reports
The Asia-Pacific region has seen higher natural peril losses than the long-term average in recent years, as with much of the rest of the world. In particular, losses have been driven by secondary perils such as hail, flood, storm and bushfire.
There were 64 large natural catastrophe events in 2021 in the Asia-Pacific region, where insured losses were more than $10bn and secondary perils, including the secondary effects of primary perils, accounted for 59% of the insured losses, according to Andre Martin, head of innovative risk solutions Asia-Pacific, Swiss Re Corporate Solutions.
He says the Asia-Pacific region is exposed to almost every natural peril, pointing out that many countries in Asia-Pacific sit on the ‘Pacific Ring of Fire’ and therefore experience some of the world’s most extreme earthquakes and volcanic activity. According to the United States Geological Survey, four of the five largest earthquakes globally occurred off the coasts of Sumatra and Japan in the last 20 years.
Martin explains that nearly one third of the world’s total tropical cyclone activity happens in Asia-Pacific and the west pacific is also known for producing some of the most intense cyclones worldwide. In many parts of the Asia-Pacific region, secondary perils, which include hail, flood, storm and bushfire, are the risks of highest concern and occur most frequently, causing severe damage and loss of life, he says.
Paul Hough, technical director – Asia, McLarens, says incidences of natural catastrophe have been increasing within Asia-Pacific both in terms of numbers and incidence. “In the past year we have seen significant flooding events in Malaysia and more recently in Korea, Pakistan and other territories. Traditional flood protection measures have not been able to cope, resulting in a significant increase in both insured and uninsured losses,” he says.
Andy White, chief underwriting officer, QBE Asia, points out that Australia has long been known as “the land of droughts and flooding rains” but has seen unusually frequent and severe floods and bushfires during the last five years. Earlier in 2022, floods caused losses of more than A$5bn across southeast Queensland and parts of northern New South Wales, making it the costliest flood event in the country’s history.
Indeed, Martin says that generally speaking in Asia, due to the presence of heavily urbanised areas around large river systems and the significant influence from monsoon season, flood represents the costliest natural hazard, both for insured and economic losses.
Protection gap in Asia-Pacific
Martin explains that Asia-Pacific is especially exposed to climate risk and has a much lower insurance penetration than Europe or North America. In 2021, only 16% of all economic losses in Asia were insured, resulting in a $51bn protection gap.
“In particular for floods, there seems to be a large protection gap globally – and this is also reflected in Asia. In 2021, flood-related insured losses in Asia were $3bn, or 11% of economic losses. In Europe and North America, the shares of economic losses covered by insurance were 32% and 36%, respectively,” he says.
McLarens’ Hough says the protection gap “is, in the main, because of economic circumstances and the penetration of insurance within these typical markets”, adding: “In many areas, commercial businesses that have loans will be required by their lenders to have insurance. However, where lenders are not involved there is less appetite for insurance in developing nations.”
Martin notes that ongoing natural catastrophe loss activity in recent years and the hard market cycle in general have put some constraints on available nat cat capacity globally. “We also have seen an adjustment in nat cat pricing to ensure that insurers and reinsurers are able to continue to offer insurance products on a sustainable basis,” he says.
He adds: “While we see a trend of increasing frequency and severity of weather events, in particular of secondary peril events like flood, the full extent of the impact of climate change is complex. Overall, we believe weather-related risks remain insurable, but the time to act is now.”
QBE’s White says a number of reinsurers, globally and locally, have recently noted a reduction in their ability and willingness to insure property against natural catastrophes, or have significantly increased the cost of doing so.
“These pressures do vary around the world and some markets are experiencing these pressures more than others. Closer to home, there are some markets that are seeing a contraction of available reinsurance capacity, requiring insurance companies to retain more risk themselves and increasing the cost of this coverage,” he says.
But White adds that there are a number of things customers can do to maximise the chances of capacity being available, including collating complete and robust information on their assets, ensuring strong risk management practices and a long-term relationship with their insurer.
Managing the nat cat risk
Indeed, there is much that risk and insurance managers and their companies can do to reduce the impact of nat cats. Swiss Re Corporate Solutions’ Martin says continued investments in mitigation, proper planning and resilience measures are key, although he acknowledges that while there has been good progress, risk mitigation measures have ultimately not kept pace with the rise in value accumulation (human and physical capital).
He says the first step is to quantify the exposure – and not only the potential impact from a company’s physical assets but also potential pure financial impacts caused by nat cat events, such as supply chain disruptions from a key supplier or loss of attraction of a tourist destination.
“The extent and severity of the Covid-19 pandemic have certainly made corporate risk managers become more risk alert. Many companies have been taken by surprise and are now going through their risk registers to see if there are no other exposures that they might have missed or underestimated,” says Martin.
McLarens’ Hough says: “We have seen over the years that countries have taken time to increase protections from natural catastrophes by using better and more advanced building codes to prevent losses from earthquake, tsunami and typhoon. Similarly, there have been sea and river defences built to guard against flood/water effects, including improving drainage systems to reduce the effects of flooding.”
He adds: “In the more extreme cases we have seen governments taking drastic measures, such as the Indonesian government moving the capital city, which in part is driven by the land sinking in Jakarta, thereby increasing the risk of flooding. This measure will also move the capital to an area less susceptible to earthquakes. The challenge is whether these measures are keeping up with the increased intensity of nat cats across the region. The ‘one in a 100 years’-type of event is occurring more regularly and the insurance community will need to consider whether more effective loss prevention measures can be developed.”
QBE’s White points to a number of steps that businesses can take to mitigate the impact of nat cat events. For example, when deciding where to locate a business, the level of natural catastrophe risk should be a consideration – locating a business on the banks of a river may expose it to flood risk, for example.
With the risk of wildfire, combustible material should be kept away from the property, including clearing gutters of dried leaves. And to reduce the loss of contents if a flood event occurs, key equipment should be elevated and kept out of basements. “Historically, a lot of damage has been caused to electronic equipment that was kept in basements and then inundated when a flood occurs,” says White.
Other considerations highlighted by White include having clear, robust and tested disaster recovery procedures with, if possible, processes spread across multiple locations so that if one location is unavailable, the others can take over and business can keep running. Also, supply chain continuity is another key consideration, he says, pointing to the aftermath of the Thailand floods of 2011. “It’s important as far as possible to avoid any critical single-point dependencies on individual suppliers or suppliers from one geographic location,” he says.
Catastrophe modelling has improved considerably over the years, but there are still some issues, especially in relation to flood risk. A recent Swiss Re sigma report, Natural catastrophes in 2021: the floodgates are open, states: “The insurance industry continues to approach flood risk stemming from tropical cyclones as an optional consideration in modelling. Exposure data often exclude flood-specific information, and tropical cyclone models often do not account for the inland flooding resulting from a storm’s heavy rainfall. On this basis, we estimate industry models may understate the full loss impact of cyclone risk in Asia-Pacific, for instance, by 20%–25%. This is an understatement that can and should be rectified.”
Alternative solutions: parametric covers
Martin says Swiss Re Corporate Solutions is seeing an increasing number of risk managers turning to the alternative risk transfer markets to find solutions to fill the gaps of their current insurance programmes. “Parametric or index-based solutions have become increasingly popular and have proven to be quite powerful instruments for both governments and corporations across industries, to fill gaps in traditional insurance programmes and transfer some of the climate-related exposures not covered by conventional insurance,” he says.
He explains that these parametric solutions can provide cover for traditionally uninsurable perils or asset classes, like too many rainy days delaying a construction project, with the formulaic loss payout allowing for a very transparent, quick and hassle-free claims settlement.
The most popular applications for parametric insurance are currently still for nat cat perils such as earthquake, typhoon and flood/drought, although Martin says they are also seeing an increasing interest in requests for protection against adverse or inclement weather like too many hot days or excessive rainfall.
Martin notes that recent advances in data analytics and reporting have allowed the insurance sector to come up with new indices and better structures that allow a closer match of the payout with the actual economic impact in case an event occurs, thereby reducing the basis risk.
Some of these have been enabled by strong partnerships, he says. “In Japan for example, we have partnered with a leading seismograph manufacturer to provide parametric earthquake insurance using site-specific data from compact seismographs, providing corporates with faster and more accurate seismic intensity data, which will result in a quicker claims payout,” he says.
QBE’s White says parametric covers have some advantages, including potentially quicker payment of claims as validation of loss is simplified, and can also therefore be a valuable tool for policies with low values and premiums such as the microinsurance products offered to clients with low incomes in several parts of the world.
But he says a key disadvantage is that they may not match the actual cost of damage caused by a natural catastrophe, so may be insufficient to reinstate a home or business. He adds that there are also some regulatory and tax challenges with their operation as an alternative to (re)insurance, which differ by country.