Four key enablers can be deployed to help Asia close the natural catastrophe protection gap, against a backdrop where the frequency and severity of natural catastrophes hitting the region is increasing, said Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, at the Institute of Catastrophe Risk Management (ICRM) Symposium yesterday.
The enablers are: technology and data; product innovation; research and development; and an integrated ASEAN market.
Through the use of sensors, satellites, and IoT devices, more data is being captured about the causes and impact of natural catastrophes. Big data analytics enables better quantification and pricing of risks, and helps strengthen ex-ante risk resilience measures.
For example, satellites are being used to monitor rice growth patterns and anticipated yields in Vietnam, Philippines, India, Thailand and Cambodia. This builds up a knowledge profile of the area, and enables underwriting and pricing of risks, he said.
Insurers and governments are also able to detect droughts and floods, and their potential impact on harvests early, enabling a quicker response. In the event of a disaster, the before and after images allow insurers to perform loss assessment and support quicker release of claims to the affected farmers.
Mr Menon pointed out that big data analytics is at the core of Singapore’s Natural Catastrophe Data Analytics Exchange (Nat Cat DAX), which is led by ICRM, in partnership with MAS and the industry. It will aggregate a variety of data sources including economic loss and exposure data as well as drone and satellite data to create a comprehensive database of Asia Pacific natural catastrophe risk. The consortium has commenced industry data collection efforts in Taiwan and Jakarta, and is also using satellite imagery to extract information on building features.
Mr Menon said: “We are seeing new forms of insurance products and solutions, such as index-based and parametric insurance.
“Unlike traditional insurance which indemnifies actual losses, parametric insurance solutions make pay-outs based on catastrophe events hitting certain pre-defined parameters such as hurricane wind speed or earthquake magnitude.”
He noted that Asia Risk Transfer Solutions, or ARTS, a local start-up co-founded by NTU graduate Alex Chen and Professor Haresh Shah, has developed a risk analytics platform for the design, pricing and management of index based insurance products.
ARTS’ flagship crop platform in India has reduced the time taken for underwriters to calculate agriculture insurance premiums, from days to a matter of hours. ARTS’ solution is being used to provide index-based agriculture insurance products to millions of farmers across the country.
“We are also seeing increasing use of alternative risk transfer mechanisms, such as insurance-linked securities (or ILS) in disaster risk management,” Mr Menon added.
Catastrophe bonds, the most common form of ILS, enable insurers and reinsurers to transfer some of their risks to the capital markets. He pointed out that Japan has actively tapped ILS to diversify the insurance industry’s exposure to natural perils.
Research and development
Mr Menon said that Singapore has made good progress in fostering a natural catastrophe research ecosystem. One element of this is the ICRM which has emerged since its launch in 2010 as Asia’s leading research institute in catastrophe risk.
Besides leading Nat Cat DAX, ICRM has been involved in 16 core research projects - such as conducting seismic analysis for Sumatra and flood risk assessment for Jakarta.
A number of other local and global initiatives aimed at building disaster risk resilience is also being undertaken in Singapore:
Recently, the industry, led by Lloyd's, signed a Natural Catastrophe Statement of Intent with MAS and UK Trade and Investment to promote the development of natural catastrophe insurance in regional markets. As part of the SOI, eight Lloyd's Syndicates have committed US$400 million in natural catastrophe capacity in emerging markets, including Asia.
Integrated ASEAN market
ASEAN countries are working together to open up insurance market access within ASEAN, enabling greater risk diversification which is critical to building resilience. The majority of ASEAN member states have already committed to liberalise Maritime, Aviation and Goods-in-Transit or MAT insurance by 2025; and are aiming to substantially liberalise catastrophe reinsurance by 2019.
Mr Menon said that Asia must put in place mechanisms for the effective assessment, management, and transfer of disaster risks. In Asia, insurance protection against natural catastrophes has not kept pace with economic development. Over the last 20 years, Asia has accounted for almost half the world’s economic losses from natural disasters, amounting to more than US$900 billion. Yet, less than 5% of economic losses in developing Asia were insured.