Nat cats, climate change and risk transfer options top agenda at Parima Tokyo

Given the scale of the climate change challenge facing companies and individuals worldwide, fears over the rising protection gap and ability of the traditional insurance sector to respond to the needs of its corporate and individual customers, it came as no surprise that natural catastrophes and climate change were hot topics at the Parima Tokyo event. Japan and the wider Asia-Pacific region, is of course, one of the most exposed parts of the world to these events and future exposures. Aon’s annual Weather, Climate and Catastrophe Report: Asia Pacific Insights report published this summer revealed that natural disasters in the Asia-Pacific region in 2022 caused a $80bn economic loss – of which only $11bn was covered by insurance. The report showed that 2022 was the fifth-costliest year on record for insurers globally, with six of the top ten events happening in Asia Pacific. Flooding remained a recurring threat, with annual losses exceeding $30bn every year since 2010. Pakistan, India, southern China and South Korea saw record rain and significant flooding in 2022. Floods in Pakistan were the costliest event for the peril, tied with seasonal flood losses in China, which were at their highest since 2016. The only two geophysical disasters that cost approximately $1bn in economic losses in 2022 were March’s Fukushima Earthquake in Japan and September’s Sichuan Earthquake in China. The report also highlighted that approximately 31,300 people lost their lives due to global natural catastrophe events in 2022, with Asia Pacific accounting for approximately 4,000 deaths. Insurance is important, of course, when it comes to coping with natural disasters and the threats posed by climate change. But loss prevention, risk management and risk mitigation are actually more important in many ways. Takahiro Shinome, vice-president and executive officer, Sompo Risk Management, tackled this critical area during his presentation at the Parima Tokyo event entitled ‘Co-existing with Natural Disasters: Understanding the BCP Spectrum’. In addition to rising volatility in the business landscape, corporations in Japan sit on top of a natural disaster hotspot. Co-existing with calamities presses businesses to adopt an all-hazards BCP (business continuity programme) and find the proper balance between risk control and risk financing, he urged delegates. Structured contingency control measures involving information gathering, information sharing and decision-making crisis management responses are critical, said Shinome. The risk management expert said that especially given the recent occurrence of disasters, the need to address wind and flood risks caused by climate change is growing rapidly. The establishment of an ‘all-hazards BCP’, which not only centres on conventional BCPs that focus on risks such as earthquakes, fire and typhoons, but also includes risks such as external factors (eg electricity shortages), is also now recommended, he said. Tomoyuki Motoyama, managing executive officer at Mitsui Sumitomo Insurance Group, explained how his group is shifting its focus to prevention and mitigation in an interesting approach. He pointed out that it is time to accept that among the many changing risks, there are many that cannot be effectively dealt with through insurance alone. Therefore, loss prevention and reduction and recovery efforts will become even more crucial in the future. Motoyama explained that, in response, Mitsui Sumitomo Insurance has started offering loss prevention and reduction support services using the latest digital technologies, called “values before and after reimbursement.” He said that natural disaster risk has increased by about eight times compared to the 1970s, and cyber risk has increased by over 40 times compared to 2013. As it is difficult to cover all types of risks with insurance, activities for risk reduction and avoidance have become more important than ever before, he said. Based on these changes, Mitsui has started to provide services that contribute to loss prevention and reduction, using the latest AI technology. These services are called ‘values before and after reimbursement’. Parima members would have been delighted to hear that, in future, the insurer is also considering adjusting insurance premium rates based on the reduced risks through the services. Motoyama said that he would be pleased if risk Parima members would consider using Mitsui’s ‘values before and after reimbursement’ in addition to traditional insurance, and also consider the option of jointly developing new loss prevention and reduction services. “We believe that this presents an opportunity to contribute to solving social issues through your risk management activities,” he said. Yusuke Kikuchi, managing director, Japan, Alternative Solution Group, Aon, agreed with Shinome that, in light of possible climate change, the entire risk and insurance management community needs to revisit risk management strategies to cope with the changes. One interesting development in recent times has been the rise of capital market solutions and reinsurance solutions directly for corporates and individuals, as well as for the traditional insurance market through tools such as insurance linked securities (ILS) as the market dynamics and risk landscape evolves. Kikuchi explained how risk managers can use ILS tools in face of the changing risk profile. He also looked at the potential offered by this new vein of capital to help mitigate the protection gap that has been on the rise in the APAC region through tools such as cat bonds. The broker said that at the same time, risk managers can use data and analytics more effectively to take control of the challenges brought about by the intensified effects of climate change. Kikuchi advised Parima risk managers to “get to know” more about global capital market money flows as well as possible risk capital that is moving into the risk and insurance management industry, and how to take advantage of those flows. He said that it is more important than ever for risk managers to investigate this potential in APAC and globally given the recent shortage of traditional coverage for natural catastrophic events. One alternative market that is sparking rising interest among risk and insurance managers in Europe and North America, and so should also gain interest among Parima members, is parametric insurance. Ikuya Shimada, head of Japan, Descartes Underwriting Japan, the Japanese arm of the specialty MGA launched back in 2019 by former AXA executive Tanguy Toffut, said that, driven by the rising frequency of natural catastrophe events, there has been a “discernible trend” towards mainstream adoption of parametric insurance in today’s marketplace. Shimada said that the rise of parametric solutions, which are triggered by independent third-party indexes and can thus offer much swifter and simpler payouts to policyholders, signifies a “critical evolution” in the insurance sector. Parametric products provide a timely and reliable means of addressing the challenges posed by an unpredictable and volatile environment, he said. While traditional insurance or alternatives such as parametric solutions are an important part of the mix, it is also critical to be properly prepared for action when events occur, pointed out Michihisa Kato, managing director, BELFOR Japan. Kato said that how quickly a company can resume business activities in the event of a flood, fire, or other disaster has become a very important question. He argued that a partnership with a disaster recovery company that has technical expertise and can respond quickly, ideally ahead of an event, can be critical for the early resumption of business activities and, ultimately, corporate survival and future success.

Nat cats, climate change and risk transfer options top agenda at Parima Tokyo

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