Geneva Association Study Analyzes Asian Flood Risks, Insurability

July 29, 2015

The Geneva Association has released a 47 page report that details the particulars of insuring the risks from floods in Asia’s “high growth” markets.

“In Asia, the insurance protection gap is yawning particularly widely,” the study concludes. “Less than 10 percent of natural catastrophe losses in the region are covered by insurance, compared with more than 50 per cent in the U.S.

“Disaster coverage remains rudimentary even though Asia is heavily prone to natural catastrophes and accounts for the world’s biggest share of economic losses from disasters. In addition, the region exhibits the world’s fastest pace of asset and wealth accumulation, profound socio-economic changes (such as the rapid rise of megacities) and a particular exposure to climate risk, especially rising sea-levels.

“Therefore, the growing protection gap exposes businesses and individuals alike to devastating losses which ultimately could adversely impact Asia’s future economic and societal development. There is a clear need for bold and determined responses from both the public and private sectors.”

That’s the essence of the situation, but there are some solutions available. The Association’s report notes: “In light of abundantly available global insurance capacity, an accelerating pace of product innovation and a greater willingness of insurers and governments to collaborate, there is a real opportunity to effectively address the Asian flood insurance protection gap, alongside other major underinsured exposures.”

The study points out that flooding is particularly difficult to insure. Firstly there three types of floods: “river floods, flash floods and storm surges.” Secondly, exposure levels are rising as a number of urban areas continue to grow, and the effects of climate change increase flood risks.” As a result, the report said: “Flood-induced average annual economic losses in Asia could reach about $30 billion by 2050. One-hundred-year asset exposure levels in Guangzhou and Mumbai could climb to more than $700 billion and $500 billion, up from $39 billion and $ 23 billion, respectively.”

Given those predictions, “current levels of insurance protection are grossly insufficient with, for example, more than 90 per cent of a 100-year storm surge-induced economic loss in the Pearl River Delta remaining uninsured.”

One solution is to require that properties in areas deemed to be at risk from floods be properly insured. This could be accomplished through “compulsory insurance schemes (with risk-based premiums in order to minimize market distortions) or bundled multi-peril forms of insurance coverage,” the study said.

It also indicated that “insurance-based innovative solutions, involving international (re)insurers and capital markets as well as local governments,” should be explored. These would be particularly helpful “if local insurance markets are not (yet) in a position to offer adequate cover to businesses and households.

“Given the glut of global insurance capital and the rise of alternative risk transfer markets, it should only be a matter of time before solutions tailored to Asian flood risk will be on offer—even though flood risk presents significantly bigger modelling challenges than earthquake or typhoon risk, for instance.”

Growth in Asia is continuing at a fast pace, which makes finding solutions to protect the people, structures and the overall economies of the countries in the region increasingly imperative. The Association noted the “global economic weight of emerging Asia (excl. Japan, Hong Kong, Singapore, South Korea, Taiwan and Oceania) has increased rapidly since the beginning of the 21st century, from 6 per cent of the world’s GDP to 22 percent in 2013.

“In line with these economic dynamics, emerging Asia’s non-life premiums have expanded from 3 per cent of the world’s total to 10 percent (about $200 billion) in 2013. By 2025, these Asian markets are projected to account for 20 per cent of global non-life premiums.”

The flooding in Thailand in 2011 brought the reality of the situation to the world’s attention, as losses, mainly from supply chain disruptions, hit businesses around the world. The Association’s study explained that “due to the country’s outsized role in global manufacturing, the impact of the disaster was not limited to Thailand. The country’s 2011 floods actually reduced global industrial production by 2.5 percent,” hitting electronics manufacturers and auto companies particularly hard.

They also impacted the re/insurance industry, as the floods “rank among the 10 costliest disasters ever, with insured losses amounting to more than $16 billion, more than a third of economic losses—and, by any other regional standards, a remarkably high level of flood coverage as a result of the massive proportion of foreign-owned assets insured.” The floods also significantly reduced Thailand’s GDP for the year.

The varying locations, the values, the random nature of weather related events, make it very difficult, if not impossible to assess “the total value of insured assets in an exposed area,” which is “one of the fundamental principles of insurability.”

Again there are solutions that can be employed. The Study notes that “state-of-the-art flood models, more elaborate field inspections and catastrophe scenario-planning based on probabilistic flood risk assessment models and supported by modern climate research have recently eased underwriters’ concerns about assessibility.”

In addition the “technological advancements since the beginning of the 21st century have enabled breakthroughs in flood risk modelling. Google Earth™ and satellite data are examples. They have tremendously facilitated the underwriting of large risks.” Even so, “‘black swan’-type events such as the devastating Thai floods in 2011 still need to be reckoned with.

As many commentators are fond of pointing out, the situation presents both “challenges and opportunities.” How the re/insurance industry reacts to the situation, and what actions it eventually takes, may well determine how well Asia’s economies continue to prosper in the future.

Source: The Geneva Association

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