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Apr 2024

Innovating insurance for a resilient future in Asia

Source: Asia Insurance Review | Mar 2024

Shaun WangJoey ZhouAmidst the escalating frequency and severity of natural disasters impacting Asian communities, traditional insurance models are increasingly being challenged, says Risk Lighthouse’s Professor Shaun Wang and Mr Joey Zhou.

Asia receives a disproportional adverse impact of climate change, with 1bn people estimated to reside in areas prone to life-threatening heatwaves. The anticipated damage resulting from riverine flooding is projected to reach $1.2tn by 2050 in Asia, comprising 75% of the global estimate of $1.6tn. Highlighting the significant gap in insurance protection, statistics reveal that out of the $50bn incurred in natural catastrophe losses in 2021 within Asia and the Pacific region, a mere $9bn was covered by insurance, resulting in an 83% protection gap. The imperative for a paradigm shift in insurance is apparent, moving beyond the conventional role of providing mere financial compensation post-disaster.
Overcoming problems
The current landscape of climate risks poses unprecedented challenges and opportunities for the insurance sector. As insurance claims continue to rise, certain global insurers are retracting coverage in high-risk zones, exacerbating the widening protection gap. Simultaneously, the insurance industry, renowned for its proficiency in risk management, is under increasing pressure from the international community to play a more proactive role in mitigating climate risks. Nevertheless, addressing climate risks effectively requires insurers and reinsurers to foster closer collaboration with both the public sector and the scientific community.
Our proposed solution advocates for insurers and reinsurers to evolve from passive financial protectors to active participants in risk reduction through the integration of mitigation measures with insurance products and investing a portion of their long-term assets in mitigation infrastructure projects. Recognising the multifaceted nature of the issue, we emphasise a collaborative, multidisciplinary approach that brings together climate scientists, engineers, academia and insurance professionals.
Why a multidisciplinary approach is crucial? Table 1.1 illustrates the roles and importance of experts from various domains.
an illustration of the roles of experts
Strengthening climate and disaster resilience is a multidisciplinary endeavour. Insurers and reinsurers need to collaborate with various partners to devise localised technical solutions and to work with the public sector to jointly develop cooperation processes for blended finance.
New methodologies
The United Nations Office for Disaster Risk Reduction (UNDRR, 2023) conducted the Midterm Review of the Sendai Framework for Disaster Risk Reduction 2015-2030, offering recommendations to expedite disaster risk reduction (DRR) financing in the Asia-Pacific region. The UNDRR suggests that governments endorse the development of analytical methodologies, such as DRR financing strategies and budget stress testing. These methodologies aim to evaluate potential fiscal losses from disasters, enabling the identification and selection of efficient DRR investments. Additionally, they facilitate a comparison of the financing costs associated with these investments against the expenses of disaster risk financing instruments. The ultimate goal is to choose the most suitable and cost-effective financial instruments and mechanisms within the context of comprehensive disaster risk assessment.
Furthermore, the midterm review encourages the insurance industry to leverage its insurance and investment products and services as incentives for disaster risk reduction among clients and community stakeholders. Achieving this objective requires enhanced collaboration between the insurance industry, the broader academic community and the public sector.
Central to this transformative approach is the allocation of an optimal portion of insurance premiums towards practical risk reduction. Diverse expertise collaborates to convert physical and fiscal activities into a comprehensive framework. To exemplify the practicality of this approach, we illustrate an example of a tool we developed – a visual guide demonstrating the economic value adding of mitigation spending on potential losses and the benefit of risk transfer.
A new approach
We advocate for a shift from conventional silo-based insurance products to collaborative and proactive risk management services such as loss mitigation measures. We stress the necessity for insurers, reinsurers and stakeholders to work in concert. This new approach highlights the proactive role of mitigation measures in reducing risk, presenting a practical methodology for disaster risk management and illustrating the pivotal role of collaboration in the evolving climate risk landscape.
 This innovative framework emerges as a beacon for a more resilient and sustainable future. It envisions insurance transforming from a reactive measure into a proactive tool for safeguarding against the unpredictable forces of nature. With an emphasis on collaboration and innovation, this approach ensures not only financial resilience but also the fortification of communities against the escalating threats of natural disasters and climate change. A 
Professor Shaun Wang is chairman and Mr Joey Zhou is a director of Risk Lighthouse International.
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