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NAT CATS - A decade of Asian Nat CATs: Wisdom from experience

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Source: Asia Insurance Review | Jul 2015

A decade ago, a subduction quake measuring 9.3 on the Richter scale hit the north-western tip of Sumatra, triggering a tsunami which left Asia – most significantly Indonesia, Sri Lanka, India and Thailand – reeling from heavy economic losses and fatalities. 
   Barely 10 years since the Indian Ocean Earthquake, another magnitude 9.0 earthquake struck off the Pacific coast of Japan, along with another devastating tsunami in 2011.
   Mr Manuel Bauer, Allianz SE Board Member responsible for Insurance Growth Markets said: “Statistically speaking, a tsunami like the one that devastated north-east Japan will only hit that area once every 1,000 years. However, viewed on a global scale, severe tsunamis should be expected more or less every 30 years.”
No reprieve anytime soon
But if the past 10 years were anything to go by, Nat CATs in Asia have not let up (see “10 most significant Nat CATs in the last decade”). Rather, disaster risk is on the rise as properties continue to be at the mercy of natural forces, urban migration continues to contribute to the formation of megacities, and the region’s economic losses continually hovers around 45% of annual global losses.
   Looking back, Dr Wang He, Executive Director and Executive Vice President at PICC Property & Casualty Company, said the Asian insurance industry needs to “re-think catastrophe insurance” and its “operationalisation”. He added: “The crux is to reinforce social responsibility and continuously innovate, and simultaneously strengthen governments’ and the societies’ awareness.”
   Have Asia and the industry at large learnt from experience? How have we progressed in extending protection in the region? What else can we do to bridge the protection gap? In this spread, industry players take stock of their progress and efforts in the last decade.
  By Dawn Sit
10 Most Significant Nat CATs in the last decade (2004-2014)
Reflecting on the past – Crucial lessons
Did scientists grow complacent?
Taking into consideration principal events to hit the region over the last 12 years, what stood out was the fact that at least half of the “great catastrophes” struck with “almost no expectation” that they could occur. 
   RMS’ Chief Research Officer Dr Robert Muir-Wood said this “highlights significant blind spots in the science and its application in understanding hazards and risks”. In anticipating the Indian Ocean and Japan tsunamis of 2004 and 2011, he said “the science was completely missing”. 
   For the Thai floods, both the government and the industry had missed a spot and neglected to cater for proper flood defences in the country, whilst the particular track of Typhoon Haiyan “should have been better anticipated and forecasted”. 
   “This level of surprise highlights gaps in science, and too great an assumption that the catastrophes of the future will simply be repeats of past events,” he said.
   Mr Tom Larsen, Chief Product Architect, CoreLogic EQECAT noted that despite the sudden and severe impacts from the past events, the risks “were hiding in plain sight”. He said: “We collectively have a bias to focus on our own intuition to assess risk, and this intuition typically extends over our lifetimes. At the time of their respective occurrences, some had characterised the Christchurch Earthquake and the Thailand floods as cold-spot losses: regions that are too remote to cause significant losses beyond single-digit billions.”
   He added, however, that the recognition that many of the regions in Asia are sufficiently advanced to produce very large losses is dispelling the concept of cold-spot regions, and the increased attention on these regions will hopefully reduce the potential for adverse surprises in the future.
More modelling needed
Mr Amitabha Ray, Head of Property Treaty Underwriting for Southeast Asia & India at Swiss Re admitted there are “still significant exposures and perils that are not modelled or well modelled”. He noted areas like the Pearl River Delta and other top industrial concentrations in Asia are flood hotspots that can lead to similar loss levels seen in Thailand, or 
   “Volcanic eruptions and typhoons in various parts of Asia, liquefaction effects from earthquakes, or even losses due to social perils like civil unrest are areas where modelling needs to be strengthened. Sub-exposures like contingent business interruption (CBI) accumulations also need to be better quantified to understand their impact to loss contribution in respect of an event,” he said. 
   Data quality and portfolios need to be better managed, said Mr George Attard, Head of Aon Benfield Analytics, Asia Pacific. A better understanding of CAT risk, including insight into the underlying peril and vulnerability allows the development of appropriate risk mitigation strategies, disaster planning and preparedness, and more importantly, sustainable financial protection via insurance coverage on assets at risk. 
   Whilst CAT models should not be used in isolation, improved data quality for use in CAT modelling will lead to improved underwriting capability and profitability, which are traditional drivers within insurance; a greater confidence in reinsurance limit setting; a more refined portfolio optimisation; and better post CAT event analyses and reviews, he added.
Prepare for uncertainties, expect the unexpected
While unmodelled sub-perils such as liquefaction, fire following an earthquake, tsunami, or rain following a cyclone have always been “factored in using some type of loading”, the insurance industry must nevertheless “wise up to inherent uncertainties, as highlighted from the unexpected scale of impact from liquefaction post-Canterbury quakes”, said Dr Suzanne Corona, Head of Natural Perils, ACR Capital Holdings.
   Likewise, Toa Re President & Chief Executive Tomoatsu Noguchi emphasised the need to “expect the unexpected”. The 2011 Thai floods, he said, were most notable for Japanese insurers which focused mainly on “per risk accumulation” and had paid “almost no attention to potential accumulation across the huge flood plains”. 
   “The disaster events of 2011 highlighted the importance of understanding non-modelled perils, and more glaringly, the limitations of existing catastrophe models,” added Mr Attard.
Early warning and engagement make all the difference
One thing that the authorities got right was the implementation of early warning systems which seem to have functioned better, and which have allowed early evacuation in the face of approaching weather catastrophes, noted Dr Till Böhmer, CEO – Southeast Asia, Munich Re. 
   “Despite its classification as a Category 4 storm, the number of fatalities from Cyclone Hudhud were kept to a low level, thanks to warnings from the Indian weather service.”
   Early warnings, however, must still be complemented with adequate resources and timely engagement with policyholders after the occurrence of an event – in other words, Plan B. 
   Local operations are usually set up for efficient management of normal activities, but not standby resources, hence dispatching resources and assistance to the right avenue in the aftermath of an event is paramount, said Mr Stuart Spencer, Zurich’s CEO for General Insurance, Asia Pacific.
   “During the early stages of an event, there is generally a lot of confusion about what to do and often, policies are ignored whilst insureds struggle to obtain some control over the situation. It is therefore vital that insurers engage with brokers and insureds very early, especially where there may be some significant and abnormal issues where policy response is not clear.”
   Early interaction also assists in educating customers as to the actual process involved, and enables discussion on grey areas, so awareness is brought to the fore, he added.
Remedies thus far – Evaluations and next steps
Whilst there is no doubt that the industry has taken positive steps in helping Asia become more Nat CAT-resilient over the decade, it is to be noted that the protection gap in the region still stands at 90% – and only 10% of the total cost of disaster events were covered by insurance, according to Swiss Re’s sigma report No.2/2015.
Increasing penetration is an ongoing effort
Insurance penetration in the region leaves more to be desired – this cannot be emphasised enough, said Mr Noguchi. Following the Tohoku Earthquake, the Japanese insurance industry established an “Earthquake Insurance Central Command,” and the market rallied together to undertake various initiatives which included strengthening customer support and ensuring prompt insurance payouts by streamlining loss confirmation procedures and survey of earthquake insurance. 
   “These measures were generally well received by the public, and together with continued advertising efforts, we have seen increasing penetration of earthquake insurance over the last couple of years.”
Region must substantively push for PPPs
Dr Wang shared similar sentiments. Going a step further, he said that the respective insurance markets in Asia should seek to learn from the experiences of one another, and seek to explore public-private partnerships (PPPs) further. 
   “The region should substantively push for an Asian catastrophe platform that would include information-sharing, technical exchanges and construction funding as soon as possible.”
   Mr Spencer said: “While insurance equals risk transference, it comes at a cost. The higher the risk, the higher the cost, and thus a tradeoff exists between the risk of loss and the affordability. In lower socio-economic areas, the burden of that cost often outweighs the risk of loss, even in high-risk areas.”
   And whilst the private sector is the most equipped and experienced to manage event responses, it will only respond to those that have the cover. A greater and more encompassing response to a significant event will only be achievable where the public sector works with the private, without actually hampering efforts, he added.
National and inter-organisational initiatives in the pipeline
To this point, Dr Böhmer noted “great willingness in the sector to do more”, but that it would “take concerted actions”. He named Munich Re’s involvement in founding the six-member Australian business Roundtable for Disaster Resilience, which released a White Paper in 2013 detailing a more sustainable and comprehensive approach to managing Nat CATs “that could ultimately save lives, reduce damage, protect vital infrastructure, and free taxpayer money”. 
   He added that there are currently several initiatives being deliberated in some countries in the region to develop solutions on a national scale. “Innovative disaster risk financing mechanisms need to be developed to ensure faster economic recovery from catastrophes which can help close the insurance gap effectively.”
Concerted effort to constantly update models
The Tohoku, Christchurch and Thailand disasters four years back, Mr Attard said, brought the issue of non-modelled perils and territories in Asia to the fore and initially triggered Aon Benfield’s CAT model development centre of excellence, Impact Forecasting, to develop a probabilistic Thailand flood model in 2012. 
   Taking it a step further, the team has also developed a range of probabilistic and Realistic Disaster Scenario models for various perils to further bridge the coverage gap in the region and offer an immediate solution as a stepping stone for more in-depth probabilistic models to come, as part of the firm’s ongoing strategy. 
   “Generally, model coverage is improving and many vendor models are being updated.”
Protectionist stance is a step backwards
Meanwhile, Dr Corona cautioned against governments taking on a protectionist stance “to retain business, and therefore more risk within their countries”. Citing recent regulations introduced in China and Indonesia as examples, she said “the move to retain domestic risk is almost a step backwards”. 
   “Portfolio geographical diversification is a golden rule for a (re)insurer to increase resilience in the face of disasters. Consequently, as local companies’ domestic exposure increases, they would naturally seek to grow their international books in order to balance and diversify their portfolios.” 
   However, as most of these companies are unable to enter international markets due to various limitations, such as ratings or capital size, the Asia Catastrophe Pool (a risk initiative managed by Asia Capital Reinsurance Malaysia) is thus an alternative mechanism allowing these companies to access a balanced portfolio of catastrophe risk, she added.
“What keeps us awake is not our catastrophe exposure in the region, but the high level of underinsurance in the region, which is something the industry should look into. The non-life insurance penetration rate is in the range of 0.4% to 1.8% between the various major markets in Southeast Asia. Given the current limited insurance penetration in this region, we can envisage room for a higher penetration rate in future, especially in view of the ongoing economic growth coupled with increasing insurance awareness amongst businesses and more noticeable government interest in insurance-related issues in recent years. It is important for the industry to increase the protection level within the supply chains in emerging economies.”
Dr Till Böhmer
CEO – Southeast Asia, 
Munich Re
Inability to predict future events
“PICC is one of the largest P&C insurers in Asia. With regard to our Nat CAT exposure in China, as a company, we are most concerned about risk “variations” that have not been accounted for that would potentially lead to a failure in our risk modelling. As insurance practitioners, we are most worried about being helpless in the event of a mega-disaster resulting in large-scale fatalities and economic losses – in spite of the fact that we are society’s risk managers.”
Dr Wang He
Executive Director & Executive Vice President, 
PICC Property & Casualty Company
“The inability to predict: No matter how prepared you try to be, you can never predict what the next significant event will be, when and where it will be, what the issues will be, or just how big it will be. Actuarial forecasts, no matter how sophisticated, cannot and can never be a crystal ball. The only thing we seem to be able to say for certain is that the events are becoming more frequent and most costly. So it’s not if, but when.”
Mr Stuart Spencer
CEO – General Insurance, Asia Pacific, 
Zurich Insurance Group
Unexpected growth
“Unexpected growth is a concern for reinsurers. A reinsurer typically uses projected growth as a basis to fix terms and conditions. A large gap is similar to using false mortality tables in life insurance, and property insurers would thus observe systematic bias in their results. Therefore, whilst an unimaginably severe mega-catastrophe is always looming, we should still pay attention to the accumulation of daily systematic losses that could creep up and erode the sustainability of a portfolio.” 
Dr Suzanne Corona
Head of Natural Perils, 
ACR Capital Holdings 
Unmodelled perils and gaps in exposure estimates
“Nat CAT exposures and providing coverage for them is a reinsurer’s core business, hence they are not worries as long as they are soundly underwritten and an unbiased view of risk is taken. What can be worrying are gaps in estimating the modelled exposures due to rapid underlying growth or inaccurate data, and large components of unmodelled and poorly-modelled losses. If the actual loss activity versus the modelled losses have a high deviation, more often than not, it should be obviously worrying for any risk-taker (and risk-transferer). In such a case, the strategy of diversifying exposures by underwriting based on geography alone will not be sufficient to sustain a portfolio in the longer term.”
Mr Amitabha Ray
Head of Property Treaty Underwriting, Southeast Asia & India,
Swiss Re
“Our biggest concern over Nat CAT exposure in Asia is non-modelled perils, particularly floods in fast-developing areas where commercial and industrial risks are concentrating – in other words, the next hot spots after Thailand. Toa Re has been trying to collect more detailed information – eg geocoding, postal codes – which is essential in analysing flood risks as specific locations are crucial to differentiate the degree of susceptibility to flooding.”
Mr Tomoatsu Noguchi
President & Chief Executive,
Toa Re


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