Following the unprecedented damage Typhoon Mangkhut has caused across Hong Kong and southern China, Insurance Business spoke with Dylan Bryant, head of North Asia at Swiss Re Corporate Solutions, on how Asia’s insurance industries and business sectors can recover from Mangkhut and prepare for the next strong typhoon.
Bryant explained that the impact of natural catastrophes is intensifying from a number of factors, making it imperative to narrow the protection gap.
“In Asia-Pacific and Oceania/Australia, total economic losses from natural disasters and man-made catastrophes were US$34.5 billion from last year alone, with insured losses totalling US$7.1 billion,” Bryant said. “This resulted in a significant catastrophe protection gap of 79% at US$27.4 billion in Asia-Pacific and Oceania/Australia in 2017.”
He added that while super-typhoons such as Hato in 2017 and Mangkhut this year have given the impression that such catastrophes are becoming more frequent, that is actually not the case.
“If we look at historic data from Swiss Re’s CatNet tool then there are on average 1.4 typhoon warning signal 8’s in Hong Kong per year,” he said. “Last year, however, there were five recorded T8 signal warnings, which were the same as reported in 1999. There will always be fluctuations in the number of typhoons each year but there are no clear patterns to why there is one occurrence in one year and then five in another.
“What we can say is that there seems to be a correlation between the severity of typhoons along with rising air and sea temperatures. In addition, with cities now becoming mega-cities partly as a result of urbanisation, these natural catastrophe events are causing increased damage and losses for communities and businesses.”
Bryant believes that existing property and business interruption insurance products leave gaps in coverage and can result in substantial economic losses remaining uninsured. While the total extent of Mangkhut’s damage has yet to be fully ascertained, he cited Swiss Re’s estimate of a T8 warning signal on Hong Kong’s GDP, which is HK$4.29 billion (US$627 million) per day.
“As claims start to be reported, the final figure will vary by industry, but we can expect total claims to eventually edge on the higher side as well, taking into account the strength of Typhoon Mangkhut and also the number of days businesses have taken to recover normal operations,” he said.
As losses mount with each passing typhoon, the insurance industry is adapting, with parametric insurance becoming more common. One such product is Insur8, a parametric insurance product that pays out whenever a T8 signal or above is issued by the Hong Kong observatory.
“We see innovative parametric or index based risk solutions such as Insur8 developed in Hong Kong for typhoons as one way to bridge such protection gaps, acting as a complement to traditional insurance products,” Bryant said. “This is particularly the case when clients are faced with nat cat events such as typhoons causing wide area damage and non-damage business interruption losses, which can be challenging to quantify.”
He added that insurance products, which are traditionally focused on physical asset protection, need to adapt to meet the needs of today’s service economy which is dominated by intangible assets.
To complement insurance, Bryant stressed the importance of business continuity planning in ensuring resilience from disasters such as typhoons.
“From a risk management and insurance perspective, the widespread nature of natural catastrophes can create challenges even with a sound business continuity plan (BCP) in place” he said. “However, from our experience many organisations do not have a documented BCP plan, sometimes preferring a disaster recovery plan that is focused on ensuring computer systems remain operational. The benefit of a solid, up-to-date BCP is proven to result in organisations being able to recover more quickly and effectively from a business critical event – be that a fire, typhoon, earthquake, or strike, for example.”
According to Bryant, the most important elements of a BCP plan are the risk assessment and identification, the business impact, and the resolutions and risk mitigation guidance. This will need to involve multiple departments and also requires working with insurance brokers and insurers. Furthermore, the BCP should be reviewed and updated yearly.
Having a good BCP and risk management approach will be taken into account when underwriters assess and price a business’s risks.
“In the case of parametric insurance solutions such as Insur8, pre-agreed thresholds that trigger a claims pay-out are usually set in a way that aligns to a client’s own business continuity plan and risk tolerance,” he explained. “For example, a client may know that with the risk mitigation measures currently in place, their business can sustain the effects of a typhoon lower than a T8 storm signal. Above that however, they would require alternative risk transfer solutions. The probability of these threshold levels will naturally be reflected in the premiums charged. Going through these various scenarios is key to purchasing the right insurance cover for your business.”