Insurers in Malaysia have sufficient capacity to meet the risk of flooding – the country’s most frequent and severe natural disaster – according to national reinsurer Malaysian Re’s latest annual report.
According to the third edition of Malaysian Insurance Highlights, Malaysia usually experiences huge flood events once every three years. From 1998 to 2021, around 14 major flood events took place in Malaysia, the costliest of which occurred from Dec. 16 to 20, 2021, with economic losses of MYR5.3 billion to MYR6.5 billion (SG$1.67 billion to SG$2.05 billion).
In the December 2021 floods, Malaysia’s insurers shouldered around MYR1.5 billion to MYR2 billion, or around 20% to 30% of losses. The bulk of these losses were in the Federal Territory of Kuala Lumpur and the State of Selangor, which host a high number of manufacturing properties.
Malaysian Re said that flood in the country remains underinsured, with fewer than 25% of residences and around 5% of vehicles insured for flood. This is a major challenge for the insurance industry, with around 5 million Malaysians living in flood-prone areas.
The report found that there is sufficient insurance and reinsurance capacity for flood risk, despite the low insurance penetration. The country’s general insurers are adequately capitalised to shoulder the risk, which predominantly concerns the rural regions.
“The cost for flood insurance is rather nominal. The cover is available as an extension to the standard fire police and costs about 0.086% of the sum-insured,” said Zainudin Ishak, president and CEO of Malaysian Re. “Still, in the personal lines, the pricing of the risk is perceived as high and is often only purchased in flood-prone regions or following recent events. Mostly homeowners are insured, as the banks arrange the cover as part of the mortgage. The lower-income segment of the population, who run a high flood exposure, rely on the government in case of a loss. In the recent flood it supported the people affected with a financial contribution of MYR1.4 billion. Currently, we are working with Bank Negara and Malaysia’s National Disaster Management Agency to develop a solution that ties together those who can afford to insure with those who cannot.”
While the government acts as an insurer of last resort for the low-income segments of the population, the report said that there is a consensus that the government’s bail-out measures have been insufficient. Large corporations and public institutions recognise the risk of flooding, while SMEs and consumers tend to underestimate it.
Supply-side shortcomings are rare in the market, the report said. Capacity only tightens in flood-prone areas that are mostly inhabited by the country’s low-income population. The report also highlighted the improvement in flood models. While these models might still lack granularity, their availability is continuously improving, with vendor models now complementing the most widely used broker and reinsurer models.