As disasters become even more costly due to climate change and the growing global population, building resilience must be a priority of policymakers and the insurance industry.
That’s according to Victor Kuk (pictured), Swiss Re’s head of P&C reinsurance for Southeast Asia, India, Korea, Hong Kong and Taiwan, who points out that the world economy is less resilient than it was in 2007. He cited a recent Swiss Re Institute report, which also estimated that Asia accounted for 41% of the US$222 billion global natural catastrophe protection gap in 2018. In emerging Asia, the gap was almost 358% of the region’s property premiums.
While Asia has shown some signs of improvement recently, it is still not enough.
“This goes to show that there simply isn’t enough insurance to deal with natural catastrophes that affect us,” Kuk told Insurance Business. “In fact, in Asia, less than half of economic losses from natural catastrophes and man-made disasters are insured. This means the rest has to be covered out-of-pocket by governments and individuals.”
However, Kuk said that there is more than enough capacity in the insurance market to absorb these risks, and he enumerated three areas the industry should focus on.
Closing the protection gap
Even in the developed markets of Asia, the nat cat protection gap remains huge at 80%, higher than the global gap of 76%, Kuk said. The figure is even bigger in emerging Asia, where 96% of all natural catastrophes are not protected.
“One of the biggest challenges that the insurance industry faces is the ability to accurately quantify and combat climate change,” he said. “We do not fully understand all the threats of climate change and global warming, as well as its associated risks such as heat waves, floods and droughts. This poses a big challenge for us – if we are unable to fully understand climate change, we will not be able to mitigate it and close the nat cat protection gap.”
Another factor he took note of is the rapid urbanisation in Asia, where more people migrate to cities, concentrating the nat cat risk and damage dealt to the economy.
The key to closing the protection gap, he said, is overcoming barriers to insurance penetration. The industry can use a combination of the following methods to achieve this: innovate products and practices, develop new distribution channels, promote microinsurance, explore behavioural economics and choice architecture, and improve public-private partnerships and the role of governments and public institutions.
Cooperation between public and private sectors
Kuk emphasised the need to strengthen cooperation between re/insurers and the public sector. He said that public-private-partnerships can help countries become stronger financially, as well as to prepare and bounce back from the effects of extreme weather events.
“Swiss Re believes that re/insurers and governments need to partner to share risk and develop innovative and holistic solutions,” said Kuk. “In fact, we have a public sector solutions team dedicated to helping government at all levels to strengthen their resilience strategies.”
He mentioned that in January, Swiss Re launched its first county-level natural catastrophe index insurance product in China. It provides the government of Mao County with comprehensive parametric insurance protection against losses from nat cat events like earthquakes, landslides, heavy rainfall and public safety accidents.
The global reinsurer also worked with the World Bank to issue two tranches of catastrophe-linked bonds to provide the Philippines with financial protection of up to US$75 million for losses from earthquakes and US$150 million against losses from tropical cyclones for three years.
Kuk added that Swiss Re is now the lead reinsurer and advisor to the Indonesian government on its US$770 million risk financing initiative, which helps protect critical assets crucial to disaster recovery and mitigation. The initiative, he said, is the first in Southeast Asia and is especially significant because Indonesia sits on the Pacific Ring of Fire, a large active quake belt responsible for 23 of the world’s 25 largest quakes.
“While insurance can’t solve all the problems in the world, we can help play a key role in closing the protection gap, which in turn helps build economic and societal resilience,” Kuk said. “Insurance can strengthen the overall resilience of an economy, and this is backed by our research. Closing the insurance protection gap can therefore contribute to strengthening resilience, from individuals to households to society.”
