Nature’s wrath pushes insurers to reshape risk adaptability

Experts shared the reality of cost-efficiency whilst minimising the protection gap.

The extremity of natural calamities experienced by Asia Pacific (APAC) this year has washed away the viability of insurance protection, leaving the gap wider than it is. But while uninsured losses are at the mercy of circumstances and economic headwinds, insurance experts point out that the situation is not hopeless.

“The extreme weather records broken across the year highlight the continuing need to strengthen resilience by adopting effective adaptation strategies and improving disaster management and warning systems,” Aon’s Weather, Climate and Catastrophe Report: Asia Pacific 2022 Insights stated.

The year 2023 began with a series of natural disasters, ranging from earthquakes, rainstorms, hurricanes and drought. Last year, the region alone saw US$80b worth of losses from nature’s fury, where 86% were uninsured, as cited by consulting firm Aon.

Globally, initial economic loss driven by natural causes amounted to US$77b for the first three months of 2023. Only 29% of the total losses were insured by public and private entities, reinsurance broker Gallagher Re said in a separate report.

About 7% of the total economic losses were natural catastrophes that hit Asia. This was also equivalent to US$5.39b of the world’s total.

Steve Bowen, Chief Science Officer of Gallagher Re, told Insurance Asia that the region cradles various rates of insurance take-up along three major markets: residential, commercial, and automobile.

“Many countries are still in the process of expanding their insurance frameworks on the residential side in particular, which means that while we continue to see improvements in regional take-up rates, a lot of natural hazard damage costs remain uninsured,” Bowen said.

For the first semester of 2023, preliminary estimates reached US$138b in total direct economic losses from extreme calamities. Out of this, only US$52b was covered by private or public insurance entities, leaving a substantial protection gap of US$86b (63%).

Notable areas were China, with economic losses totalling US$5.3b, of which 55% of the first half’s total was from flooding alone.
Early spring saw severe drought in Yunnan, China; Southern Taiwan endured its worst drought in 30 years; and El Niño-related dry weather is sweeping through in Southeast Asia.

The main financial costs from a calamity usually arises from property damage and business interruption, as well as indirect impacts, according to Christopher Au, director of Climate and Resilience Hub for Asia Pacific at Willis Towers Watson (WTW). 

In a separate interview, Au said: “It isn’t necessarily cost-efficient for a company to purchase insurance against all possible losses. Risk reduction is an important step, and some form of risk retention is typically required. Only risk which cannot be treated is transferred, so in this sense, there will always be a protection gap.”

Aon’s report cited weather volatility as the main challenge in APAC as a result of climate change’s growing impacts, resulting in extreme temperatures, rainfall, floods, droughts, fires, cyclones, and storms. So, closing this gap requires a collaborative approach involving insurers, governments, public policy, and risk-taking capital sources.

The alarming 86% protection gap in 2022 underscores not only the vulnerability of communities in the region, but also the potential for innovative solutions.

“This points to a growing challenge for the insurance industry to meet the rising costs of climate change-linked disasters,” Richard Vargo, group head of Products, Propositions and Transformation of Singlife told Insurance Asia.

Weathering key issues

“The key will be further building insurance product availability,” said Bowen of Gallagher Re.

“Offerings, such as parametric insurance, are proven to be effective in helping lower the region’s large protection gap.”

Bowen said the rise of public-private partnerships has been a very beneficial step forward in establishing more financial stability and protection as disaster costs continue to rise.

Grasping IBM’s Insurance Process and Service Models, he said catastrophe modelling is a comprehensive approach that combines the modelling of catastrophic event impacts on exposures and their connection to insurance and reinsurance business operations.

This method employs computer-assisted calculations to estimate potential losses resulting from catastrophic events, such as hurricanes or earthquakes.

Catastrophe modelling is particularly valuable for assessing risks in specific locations, hence, the adoption of parametric insurance products. Further, the model sits at the intersection of actuarial science, engineering, meteorology, and seismology. It emphasises the integration of Big Data analytics into existing business workflows.

While the International Association of Actuaries (IAA) predominantly offers reinsurance processes and services from a cedent’s perspective, catastrophe modelling introduces similar processes that benefit both cedents and reinsurers.

Singlife’s Vargo echoed this sentiment, stating that financial services and insurance providers are uniquely poised to offer comprehensive assessments of the probability and consequences of disaster events, spanning various magnitudes.

Through the creation of sophisticated models and data-driven instruments designed to delve deeper into the intricacies of climate-related risks, insurers have the capacity to assist governments and businesses in proactively addressing these challenges.

“Whether it be crafting underwriting solutions for potential climate hazards, analysing damages and claims patterns to anticipate natural disaster trends, or sending risk signals that promote behavioural changes in the industry – we are here to make a real difference,” Vargo said.

Echoing Bowen’s partnership sentiment, Vargo said insurers are joining hands with reinsurers. “This practice helps insurers reduce their exposure to large-scale disasters, diversify their portfolios, stabilise their earnings, and optimise their capital efficiency”.

He added that reinsurers also bring technical expertise and market knowledge to the table, offering innovative solutions tailored to the specific needs of insurers.

In Singapore, public and private entities primarily rely on property insurance to cover losses caused by natural disasters. However, in other parts of Southeast Asia, there are several factors contributing to low insured losses.

These include a lack of awareness and understanding of insurance coverage among affected individuals or businesses, insufficient insurance infrastructure, and the potential for natural disasters to exceed policy coverage limits, resulting in what insurers refer to as a “protection gap.”

Au of WTW said that despite the cost-efficiency and potential for stimulating entrepreneurship that pre-arranged finance through insurance offers, there are significant barriers to wider adoption.

These barriers stem from both functional and behavioural factors. Many companies perceive insurance as a cost that eats into profitability, rather than viewing it as a valuable service that is essential, regardless of whether claims are made.

These concerns about getting value for money can become even more pronounced after several years without a payout.

“Insurance market pricing also puts pressure on companies. The market is currently in a higher pricing cycle, which is driven by the recent global insurance performance in terms of volume of claims, as well as wider macroeconomic concerns,” Au said.

Forecast

There is a growing emphasis on risk mitigation measures for safeguarding vital assets, with insurers increasingly supporting and advocating for risk engineering. This trend is bound to continue, highlighting the insurance industry’s unique role in assessing and pricing risks while offering risk management recommendations, Au expressed.

“Recent data strongly indicate 2023 is set to be the hottest year on record. The impact of El Nino is one of the big outstanding questions. New levels of heat have been recorded across Asia, both in land and in marine ecosystems,” Au said.

“Typhoons Saola and Haikui have already caused significant damage, whilst other parts of Asia are suffering from drought and continued extreme heat. Wildfire and associated haze are of particular concern too,” Au added.

For Singlife’s Vargo, climate change demands urgent attention, with insurers necessary to be wary of its risks and opportunities. 

“Adopting a proactive approach to risk management allows insurers to safeguard policyholders from losses and ensure the accessibility of insurance products in the long term, ultimately reducing the overall cost of insurance. As insurers, we must remain vigilant in addressing these challenges,” Vargo said.

On the other hand, Bowen foretells the creeping uncertainty nature’s wrath could bring.

“It has already been a highly impactful year for natural perils across APAC and the rest of the world. With the continued influence of a strengthening El Niño, we will likely keep recording more unusual behaviour of the jet stream and broader weather patterns that influence the intensity of heavy rainfall or drought conditions, the intensity and trajectory of tropical cyclones, and the prospect of further temperature extremes,” Bowen said.

“The fingerprints of climate change will only further act to enhance the El Niño conditions and subsequent events, too. Awareness and preparation always need to be top of mind.” Bowen added.