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Jan 2022

Exploring the Nat CAT insurance gap in ASEAN

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Source: Asia Insurance Review | Dec 2021

Malaysian Re launched the fifth edition of its annual regional thought leadership publication, ASEAN Insurance Pulse in late October, focusing on Nat CAT and their impact on the ASEAN economy and insurance markets.
By Ahmad Zaki
Focusing on flood risk in particular, the report explored trends driving the financial risk management of Nat CAT and flooding in the region. In this context, the report also highlighted the increasing importance of environmental, social and governance (ESG) principles in underwriting and asset management of insurers.
Zainudin IshakOf those trends, Malaysian Re president and CEO Zainudin Ishak zoomed in on the protection gap as the issue that needed the swiftest action. “We may start with the finding that for the period of 1989-2019, total economic losses from natural disasters are assessed at $137bn, with flood risks contributing 45% to the economic losses.”
According to the report, flooding alone has caused annual economic damages of over $60m annually in Malaysia, and has had negative impacts on agriculture, especially, by decreasing the sectoral GDP by 0.22% for every 1% increase of flooded areas in the longer-term. In ASEAN, agriculture – paddy farmers in particular – are severely affected by heavy rainfalls. However, agricultural or crop insurance is still a rarity in the ASEAN markets.
“What is staggering is that 90% of total economic losses caused by natural disasters in ASEAN is not covered by insurance. The industry should take immediate action to close this substantial protection gap. Multilateral cooperation in the areas of risk-modelling and mapping as well as joint efforts to establish financial risk-transfer solutions could help to overcome existing challenges in this area,” he said.
At the same time, Mr Ishak is not certain that mandatory disaster insurance would bridge the protection gap.
“A blanket mandatory insurance may not be the best solution in a democratic society, and affordability would also be a challenge for low-income groups residing in the high-risk areas. Governments may take a more active role in protecting the lower income groups through premium subsidies and public private partnerships,” he said.
He also noted that flood-prone areas can be effectively insured through a pool facility as it allows insurers to cede a portion of their risks and benefit from the economies of scale and a more diversified pool. There is also the option of obtaining government to co-participate and ceding the risks to international reinsurers with large capital bases.
Re-examining flood risk
When assessing flood risk, the main concern is related to triggering factors. There is no single source that causes a flood; it can arise from multiple drivers, such as heavy rain, a dam break, a storm surge and inadequate water management practices. Natural disaster risk assessments are carried out to identify the source and extent of potential damages, and the proposed mitigation and protection measures.
“From a reinsurer’s perspective, it is important to move away from a simple risk paradigm and instead focus on impact,” he said. “If exposure and vulnerability are adequately incorporated into models, these models can then be used to inform public and private sector decision makers so that they are able to develop disaster risk management strategies, issue detailed early warnings and, over a longer timescale, incorporate the information into decisions on land use planning, building approvals and infrastructure development.”
As indicated, flooding is a particularly dangerous threat to the agriculture sector, and a large part of global sustainability efforts focus on improving food security. But just like every other industry, the sector can expand and mitigate risks with greater access to capital, Mr Ishak said.
“Agricultural insurance can be used as a guarantee for the farmers to apply for credit facilities to grow their business. In addition, in the event of catastrophes, the farmers would be able to rebound faster from the insurance payment and be able to resume production and thus minimise food supply disruptions,” he said.
Promoting sustainability
ESG is a relatively new concept to the ASEAN region, although the practice is already quite advanced in some markets. Regulators’ approaches should be tailored according to the level of ESG readiness in the markets.
“Less advanced markets could benefit more from encouragement and raising awareness while for advanced markets, incorporating ESG into laws and regulatory measures would make sense especially in those areas that preserve environment and promote renewable energy as part of the underwriting, asset management and operations,” said Mr Ishak.
The ASEAN Insurance Pulse 2021 was launched in conjunction with the 4th ASEAN Insurance Summit, which was held virtually in Singapore. A 

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