Unmitigated natural disasters

Underinvestment in insurance is leaving many Asian businesses open to severe losses from natural and man-made disasters, according to new research. There has been unprecedented economic success in the region but Asian countries and cities are among the most exposed and least resilient to catastrophes.

According to a report by UK-based risk consultant Verisk Maplecroft, the failure of many Asian governments to translate their record economic growth into improved resilience has left businesses and their investors open to a number of significant risks including economic disruption, business interruption and loss of human capital.

The research is designed to help companies identify risks to their supply chains, personnel and economic assets, by examining a range of natural hazards including tropical cyclones, floods, winter storms, earthquakes, wildfires and tsunamis, applying them to new risk indices covering 198 countries and then assessing the ability of these countries to respond to and recover from these events.

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It shows that Asian countries are the most prone to these hazards, with India, China, Bangladesh, Indonesia and the Philippines accounting for the top five countries and Japan and Pakistan taking the number seven and ten spots respectively.

Crucially though, many of these countries drop well below their Western counterparts in their ability to mitigate these events, says Verisk Maplecroft. Its Natural Hazard Vulnerability Index ranks Japan alongside the US as low risk with a score of 173, while China (128) is tagged as medium risk.

However, Bangladesh (39), Pakistan (43) and India (47) are categorised as high risk due to the poor infrastructure, weaker institutional capacity and lack of financial resources. In total, 1.4 billion people in south Asia, equivalent to 81% of the population, are acutely exposed to at least one type of natural disaster and have insufficient resources to cope with the effects.

The research identifies flooding as the biggest threat to communities and businesses in south Asia, with 113 million—or 9% of India’s population—acutely exposed to floods. The same exposure is faced by 76 million people in Bangladesh and 10 million people in Pakistan. This threat was demonstrated between November and December 2015 when the monsoon season in south India cost the country more than $3m and displaced more than 100,000 people.

It is a similar story when the research is applied at a city-wide level, with south Asian cities dominating the list of most exposed, including the major garment producer Dhaka in Bangladesh (ranked fifth most exposed) and the rapidly growing tech hubs of Kolkata (6) and Delhi (9) in India. Manila, Philippines (1), Tokyo, Japan (2), Jakarta, Indonesia (3), Dongguan, China (4) and Osaka, Japan (7) are also in the top ten.

“This data highlights the scale of the task facing governments and business in mitigating the threats to populations and workforces from natural hazards in these high risk regions,” says Dr James Allan, director of environment at Verisk Maplecroft. “With overseas investment pouring into the emerging Asian markets, companies have an increasing responsibility to understand their exposure and work with governments to build resilience.”

Dr Allan’s warning is supported by a report produced by Sigma, the research division of global reinsurer Swiss Re, which looked into the natural catastrophes and man-made disasters of 2015 and found that the most substantial losses were suffered in Asia.

In fact, 2015 saw the highest number of natural catastrophes ever recorded (198) as well as 155 man-made disasters. Although the economic losses and fatalities were down on recent annual averages, Asia was particularly hard hit by both natural and man-made disasters.

As in the previous three years, loss of life was highest in Asia, with more than 19,000 victims. This included the earthquake in Nepal, which killed 9,000, and the explosions in the Chinese port of Tianjin, the largest ever recorded man-made insured loss event in Asia.

This incident aside, the amount of insured losses is almost half the average of the past ten years, despite the highest number of natural disasters. The total cost of disaster events in the region was estimated at $38bn, of which just $7bn was insured.

Some of this is simply down to where the disasters happen, areas such as Nepal where there is little insurance coverage. But, according to Clarence Wong, chief economist at Swiss Re, it is also points to an important trend about the protection gap.

“The gap between economic losses and insured losses is growing,” says Mr Wong. “The percentage of total losses covered by insurance is low and could be explained by a number of factors—typically, the insurance is based on the value of the property and not the cost of replacement. There has also been a huge buildup of assets in Asia in the past decade and the insurance coverage has not grown to reflect this.

“Asia has always been underinsured, relative to other markets, but what is worrying is that the property and casualty market is very robust and we are in a very soft market but the protection gap is still growing.” The paradox is that every time there is disaster event, the interest in insurance goes up but so do the rates, however, says Mr Wong, because we are still in a soft market so it is important that efforts are made to close that protection gap before the market hardens.”

Tianjin explosions

In addition to the lack of coverage, there is also a lack of awareness about the complexity of certain catastrophes, says Mr Wong. This complexity was demonstrated in the August 2015 event in the Chinese port of Tianjin where two massive explosions claimed 173 victims, injured 800 and caused extensive damage to surrounding property and infrastructure.

Tianjin’s location in northeast China means that it serves as the gateway between Beijing and the Europe-Asia border. In 2013, it ranked as the third largest port in terms of cargo volume and tenth for container traffic. It also houses an industrial and petrochemical plant covering 115 square kilometres. Furthermore, it is a central logistics hub for a number of industries including healthcare, electronics and China’s automotive industry, accounting for 40% of all car imports and exports.

It was this accumulation of industry in one single place that made Tianjin the largest ever man-made insurance loss event ever recorded in Asia. It has subsequently become a case study for the wide range of insurance policies impacted by the event, the complex relationships between different policy classes and the questions over implementing risk accumulation controls in major trading hubs.

In addition, the aftermath of the explosions has left insurers with a number of challenges in terms of accessing the affected areas to assess the full extent of the damage. Consequently, the final figure for insured losses could rise further, making it the largest ever man-made insurance loss event worldwide. Swiss Re estimates that in property damage alone the figure could reach as high as $3.5bn but it is the associated losses, from supply chain interruption to liability claims, that could see this figure rise significantly.

According to Swiss Re, the Tianjin event also shows the large-loss potential that countries like China could face due to their fast-growing economies. The 2013 fire at a semi-conductor plant in China that caused $0.9bn of insured losses and the fact that for the past three consecutive years, the biggest man-made insured loss has come in an emerging market, all serve as a reminder of the importance of insurance for developing countries, says Swiss Re.

Tianjin should also serve as a reminder of the importance of enterprise-wide risk management, says Mr Wong. “A lot of companies are not taking an enterprise-wide view of risk or looking at it holistically. Nat-cat risks are becoming more complex. Tianjin showed the implications of accumulation risks and how a disaster can lead to supply chain risks, business interruption, contingent liability and other risks.”

It is not just Tianjin, says Mr Wong. “The earthquakes in New Zealand highlighted the subsequent risk of liquefaction. And in Japan, they have modelled the risk of earthquakes but not the tsunamis that come after. But Tianjin will have some impact on risk management programmes—not so much on the pricing side but in terms of risk monitoring and modelling.”

Technology will be a key factor in closing the protection gap, says Mr Wong. For example, and in relation specifically to Tianjin, it is possible to use remote sensing techniques such as interferometric synthetic aperture radar to improve the knowledge about high value, insurable assets and their proximity to natural disasters or man-made hazards—such as high value containers in busy industrial ports. Similarly, the use of drones and other unmanned aerial vehicles can be used for assessing losses after a disaster and are in fact being widely employed in Tianjin, where an exclusion zone around the affected areas has hampered the efforts of loss adjusters and claims assessors. Swiss Re also refers to the potential for social media and crowdsourcing to be used to improve location intelligence through early warnings and relief responses.

It will take time for insurers and logistics firms to fully learn and implement the lessons learned, says Mr Wong. Port authorities will also have to implement the technology, so progress has to be made on a systemic basis. But technically, using these sensors is a very easy thing that can be used pre-event to reduce risk, rather than the drones, which are used post-event to assess losses.

What remains to be seen is whether the availability of technology and its exponential rate of development will enable corporates and insurers in Asia to make significant leaps in their mitigation of natural and man-made disasters and effectively make more progress in the next five years than it took the more mature markets of the US and Europe 50 years to reach.

“The use of technology has been moving ahead very quickly in Asia and in the insurance market, but much of that focus has been on how the internet and other technology can be used to distribute products rather than to transform risk management,” says Mr Wong.

“It should be about using technology to transform the whole process. For example, telemetrics can be used to record the driving habits of users or to enable users to pay by mileage. So, gradually we are seeing technology used to influence the design of insurance products and not just the distribution but the changes are happening quite slowly in terms of insurance in markets like mainland China, where the focus is on contract wording, ambiguities and exclusions.”

Overall through, Mr Wong is optimistic that progress is being made to close the protection gap and that technology and general innovation will be an important factor in this effort. In the end though, it is the risk managers themselves that will play the most important part. “The long-term observation is that the number and severity of natural catastrophe losses are increasing. But I am happy to see that governments and insurers are taking steps to narrow that protection gap and be more innovative.

“In China, they are using parametrics to establish natural catastrophe pools; in the Philippines they are developing cat bonds. But it will need a further drive from corporates to close that gap. The use of pre-event risk monitoring and technology to close that protection gap involves a lot of stakeholders—insurers, governments—but I think the risk managers need to take ultimate responsibility for closing that protection gap.”