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Nat CAT - High protection gap highlights Asia's vulnerability to disaster risk

Source: Asia Insurance Review | Jun 2016

Total economic losses and loss of life in Asia from disaster events have increased manifold over the past decades. 
According to Swiss Re’s recent annual sigma report on natural catastrophes and man-made disasters, total losses from disaster events in Asia contributed more than 40% of global losses in 2015. Mr Rajeev Sharan and Ms Lucia Bevere of Swiss Re discuss the major losses last year and also highlight the protection gap. 
 
 
The earthquake in Nepal in April was the biggest humanitarian catastrophe of 2015 globally, claiming close to 9,000 lives. Other events causing substantial losses included Typhoon Goni in Japan and flooding in southern India.
 
   Further, the explosions at the Port of Tianjin in August were the biggest man-made disaster of the year, providing a stark reminder of the loss potential in developing economies.
 
Protection gap is very high and varies widely across countries in Asia
Asia is very vulnerable to natural catastrophe risks given high exposure to natural hazards, strong economic development and rapid population growth. Total economic losses and deaths from disaster events have been higher in Asia than in any other region of the world for three years running. 
 
   Between 2013 and 2015, total losses in Asia contributed around 43% of total global losses. However, the share of losses covered by insurance in Asia was only about 15% of the global insured losses during the same period, highlighting an ongoing protection gap. The shortfall in insurance protection varies widely across Asia and even within countries in the region. 
 
   For instance, in India, over one-third of the total losses caused by the 2015 flash floods in the city of Chennai, a major urban and industrial hub, were insured. In contrast, in Jammu & Kashmir less than 5% of the losses resulting from severe monsoon flooding in 2014 were covered (See Figure 1). 
 
Insured versus uninsured losses in Asia
 
Improvements in risk mitigation
There are recent examples of advances in preparedness for disasters. 
 
   For instance, when Cyclone Hudhud, the biggest storm of the Pacific and Indian Ocean season in 2014 made landfall in the Indian state of Andhra Pradesh, early warning signals and evacuation of up to 400,000 people ahead of the storm saved many lives. 
 
   Only one year earlier, close to 1 million people were evacuated ahead of Cyclone Phailin in the state of Odisha. As a result, both caused much fewer victims than in previous painful disasters, proof of how the Asian countries are working on converting past lessons into higher resilience.
 
Increasing urban expansion a growing risk
However, despite improvements in the area of risk mitigation, overall losses are increasing as a result of growing population and economic development. According to the data from the United Nations Population Division, close to half of the population in Asia lived in cities in 2015, up from around 32% in 1990 and 17.5% in 1950. 
 
   The increasing urban expansion, often in disaster-prone areas, has outpaced the infrastructure growth and the implementation of impact-reduction measures such as coastal defences, improved building codes, land-use zoning and planning. 
 
   Economic development in some of the high growth countries has been such that vulnerability reduction activities have not kept pace. Hence, losses are growing faster than risk reduction can be achieved.
 
Nepal earthquake and earthquake risk in the Himalayan belt
On 25 April 2015, an earthquake of magnitude Mw 7.8 struck Nepal. The epicenter was between the capital Kathmandu (home to 1.2 million people) and Pokhara, the nation’s second largest city. Destruction was widespread across large parts of central Nepal. The earthquake was only 8.2 km below the earth’s surface and caused severe damage in Kathmandu. 
 
   The city lies on a dry lakebed and the soil, of which is soft and just 650 meters deep, accentuated the destructive power of the quake. The impact went beyond Nepal with casualties and damage reported in India, China and Bangladesh also. Total losses from the earthquake were estimated to be US$6 billion, most of which were uninsured.
 
   The earthquake has highlighted the earthquake risk facing mega cities like Delhi. Though no major earthquake (magnitude > 8.0) has hit Delhi in the past, the possibility cannot be ruled out. 
 
   There is a seismic gap in the central Himalayan region. Seismic gaps are those areas where land deformation has occurred due to plate movement, but there have been no major earthquakes – yet – to release the accumulated energy. 
 
   Large parts of the Himalayan seismic gap are closer to Delhi than the epicenter of the 2015 quake was, and the risk of a large earthquake affecting Delhi and surrounding cities is high. Moreover, around 90% of Delhi’s building stock falls in the category of unreinforced masonry, which is not earthquake-resistant. Should a big quake strike, losses would be severe and mostly be shouldered by the affected populations, given low insurance penetration. 
 
It’s getting warmer
Global weather patterns deviated from climate norms in 2015, and El NiƱo was a contributing factor. 
 
   Last year was the warmest year on record, with many areas reporting extreme heat. Long stretches of extreme temperatures claimed large number of lives in India and Pakistan, and, combined with lack of rainfall, caused drought and wildfires. 
 
   On the other hand, other areas were affected by extreme rain events, such as Chennai, which was flooded after accumulated rainfall of more than 500 mm in November. This was the biggest disaster in India in 2015, causing estimated economic losses of $2.2 billion. 
 
   According to the sigma report, insured losses were around $755 million, making the floods the second costliest insurance event in India after the Mumbai floods of 2005. A large part of the losses originated from commercial lines. The event highlights the vulnerability of rapidly growing urban areas to flash floods caused by heavy rains.
 
Tianjin explosions and role of new technologies in disaster management
Asia also suffered the biggest loss from a man-made event in 2015, namely the explosions at the port of Tianjin in China. The blasts were the biggest man-made loss ever to be recorded in Asia, and one of the biggest worldwide. 
 
   Most of the losses came from the thousands of new cars parked in transit at the port. The high number of cars and uncertainties as to whether the damage inflicted would fall under marine or property insurance policies has made the Tianjin case one of the most complex the industry has ever dealt with. It also put a spotlight on risk accumulation controls in large aggregation points such as ports and other transportation hubs. 
 
   The Tianjin case put a focus on the role of current technologies, particularly aerial and digital technologies, in disaster management. Drones and satellites were used to support claims management after the explosions. The before and after comparison of pictures taken by both enabled some initial loss assessment that would not have been otherwise possible due to an exclusion zone having been imposed at the site. These technologies can significantly improve post-disaster assessment and response logistics. They can also improve risk mitigation by building a knowledge profile of an area or specific property, including proximity to natural catastrophe risks. 
 
   A recent study conducted by the United States Geological Survey found that the GPS receivers in smartphones can detect earthquakes and can be used to build crowdsourced early-warning systems for earthquakes. The sensors can also help locate victims after a catastrophe. Furthermore, the data gathered by these technologies can be used for insurance purposes: in risk modelling, underwriting, and real-time disaster tracking and loss assessment, and in the design of catastrophe insurance solutions.
 
The way forward
Disaster management is a collective responsibility and awareness is key. Disasters cannot be prevented but society can be better-prepared to deal with them. 
 
   Risk preparedness such as early warning systems and appropriate building codes and other risk mitigation measures can help reduce losses from earthquakes and extreme weather events. Innovative and affordable insurance solutions, such as parametric products, and low-cost government sponsored insurance schemes through public-private partnerships, can further reduce the financial impact of disasters and improve disaster resilience.
 
 
Mr Rajeev Sharan is Senior Economist, Economic Research & Consulting, and Ms Lucia Bevere is Senior Catastrophe Data Analyst, Economic Research & Consulting, both at Swiss Re.
 
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