The rapid population growth and urbanisation in Asia are exacerbating an already significant insurance protection gap in the region. This article focuses on flooding, arguably one of Asia’s biggest emerging risk exposures. Based on a Geneva Association report, Dr Kai-Uwe Schanz from The Geneva Association and Professor Shaun Wang from Nanyang Business School, share a comprehensive perspective on how to address this major challenge.
With nearly 60% of the world’s total population, Asia is the world’s epicentre of economic growth, socio-economic change (eg urbanisation) and increasing exposure to climate change (eg rising sea levels). These dynamics are particularly pronounced in major coastal and deltaic urban agglomerations. Against this backdrop, the region’s exposure to flood risk is poised to increase rapidly over the coming decades.
According to Climate Central, by the end of the century, 147 to 216 million people are projected to live on land that will be below sea level or regular flood levels – assuming that emissions of heat-trapping gases contribute to increased levels of flood exposure and continue on their current trend. By far, the largest group of 41 to 63 million exposed people will live in China.
Grossly inadequate insurance protection
Based on a World Bank and the Organisation for Economic Co-operation and Development (OECD) study, average annual economic losses from Asian flood disasters could surge to US$500 billion or more by 2050 if no additional investments in adaptation are made, compared with average annual global flood losses of less than $30 billion over the past 10 years.
This projection also incorporates socio-economic developments, sea level rise and subsidence. Even if massive additional adaptation investments maintain flood probability at current levels, flood-induced average annual economic losses in Asia could reach about $30 billion by 2050.
One-hundred-year asset exposure levels in Guangzhou and Mumbai could climb to more than $700 billion and $500 billion, up from $39 billion and $23 billion, respectively. Current levels of insurance protection are grossly inadequate with, for example, more than 90% of a 100-year storm surge-induced economic loss in the Pearl River Delta remaining uninsured.
More difficult to insure floods
Many experts agree that floods are more difficult to insure than other natural perils. There are three different forms of flood: river floods, flash floods and storm surges. Therefore, flood risk is a multifaceted phenomenon, affected by very dynamic changes to exposure and vulnerability and subject to limits to insurability such as a lack of assessibility and mutuality, ie difficulties in building a sufficiently large risk community.
The latter can be addressed through compulsory insurance schemes (with risk-based premiums in order to minimise market distortions) or bundled multi-peril forms of insurance coverage, for example.
Insurance-based innovative solutions, involving international (re)insurers and capital markets as well as local governments, should also be explored, in particular if local insurance markets are not (yet) in a position to offer adequate cover to businesses and households.
Given the glut of global insurance capital and the rise of alternative risk transfer markets, it should only be a matter of time before solutions tailored to Asian flood risk will be on offer—even though flood risk presents significantly bigger modelling challenges than earthquake or typhoon risk, for instance.
Our research suggests the following concluding observations and recommendations:
- The current relevance of private-sector insurance and reinsurance in terms of mitigating flood risk in Asia’s high-growth markets is limited, if not marginal. Over the past 40 years, according to Swiss Re, only 5% of economic losses from all flood disasters in Emerging Asia were insured, compared with about 40% in Oceania, for example.
- In the absence of meaningful insurance cover, the cost of relief and reconstruction falls on governments, non-governmental organisations, charities and, worse, the affected households and companies. This is a particular threat to low-income countries such as Bangladesh, Myanmar and Vietnam.
- In light of rapidly growing flood-related asset exposures and their increasing share in domestic GDPs, the (re)insurance industry will have to deploy major efforts just to maintain the current level of insurance penetration, let alone play a more meaningful role in absorbing economic and societal flood losses and adding more value to local governments, businesses and households.
- Addressing the challenge requires both a multi-stakeholder and a combined ‘bottom-up/top-down’ approach. In other words: Private and public sector entities need to join forces to implement effective flood disaster risk management systems at the macro level (including adaptation measures, for new risks in particular, incentivised by insurance-based risk transfer solutions) whilst, at the same time, promoting insurance penetration in retail and commercial lines of business at the micro level.
- Specific measures by local governments could include:
a. Encourage local insurers to develop and launch specialised insurance products that offer coverage of flood risks. This is to broaden the coverage of non-life insurance in Asia, which is still highly skewed toward motor or health business. In general, any effective and sustainable disaster risk management strategy needs to include enabling the development of local insurance markets.
b. Develop a broad array of ex ante disaster risk financing instruments based on the severity and frequency of flood risks, including risk transfer products such as indemnity-based insurance, reinsurance and parametric insurance, along with capital market solutions such as catastrophe bonds for the high risk layer.
c. Explore the regional applicability of mature-market flood insurance schemes such as Flood Re in the UK or the National Flood Insurance Program in the US.
d. Develop and promote a regional platform for collecting and disseminating relevant data, as a joint public–private effort: the lack of quality historical loss data as well as data on risk exposure and asset vulnerability, in combination with the high cost of (proprietary) modelling is a major obstacle to a higher flood insurance penetration in emerging Asia. Government could, for example, encourage insurance industry supported academic efforts toward open-source modelling of flood risks.
e. Include parametric products, microinsurance schemes and insurance-linked securities in local regulatory frameworks, offer tax incentives for private insurance coverage and consider insurance as a risk management tool for government entities.
f. Consider a regional risk pool for natural calamities including flood risks, taking into account experience from existing schemes such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the Pacific Catastrophe Risk Insurance Pilot (PCRIP) and the African Risk Capacity (ARC), which were formed with technical assistance from the international development community and risk management support from international re/insurers. Admittedly, the applicability of these examples may be limited given the much larger scale of flood risk exposures in China or Southeast Asia and the respective funding and modelling requirements.
g. Involve traditional global reinsurance and alternative capital markets which, in 2016 were capitalised at $514 billion and $81 billion, respectively (according to Aon Benfield). This will be crucial to ensure that disaster risk management initiatives reach the necessary scale and capacity. A
Dr Kai-Uwe Schanz is Senior Advisor at The Geneva Association and Professor Shaun Wang is Director, Insurance Risk and Finance Research Centre at Nanyang Business School in Singapore.