A New Approach to Weathering the Storms

災, pronounced wazawai or sai in Japanese, was picked by the public as the Kanji of Year for 2018 for a good reason. Meaning "disaster" or "misfortune", the word summarises Japan's challenging year from natural catastrophes and extreme weather conditions.

On June 18, a magnitude-6.1 earthquake hit Osaka, the second largest metropolitan area in Japan, causing widespread damage that halted essential transportation services and damaging homes and buildings. Torrential rains in early July ravaged the Chugoku and Shikoku regions in western Japan, causing critical damage in Okayama, Hiroshima and Ehime prefectures, where tens of thousands were displaced by flood waters. That was followed by extreme heatwave between late-July to August, which left over 130 people dead and more than 55,000 treated for heat exhaustion.

Already reeling from these blows, the worst hit was to come. Typhoon Jebi became the strongest typhoon to hit Japan in 25 years when it made landfall in September striking Kyoto, Kobe and Osaka – which had yet to fully recover from the June temblor. Shortly after, a magnitude-6.7 quake struck Hokkaido, triggering a secondary wave of impact when the Tomatoh-Atsuma thermal plant located near the epicentre was shut down. This triggered power outage for 2.9 million households across Hokkaido, the first large-scale blackout to hit the entire power grid of a major power company since Japan adopted the post-war 10-company power supply system.

 In late September, Typhoon Trami set records for 10-minute maximum sustained winds and caused losses exceeding USD 2.5 billion1.

2018 by the Numbers

In 2018, there were a total of 304 catastrophe events globally, of which 181 were natural catastrophes and 123 were man-made disasters. Out of the 304 catastrophe events, 104 took place in Asia, a region which sits on the "Pacific Ring of Fire" where over 90% of all quakes take place. According to the latest sigma research, total economic losses from natural catastrophes and man-made disasters globally amount to USD 165 billion, with insurance covering USD 85 billion of those losses. This marks 2018 as the fourth highest year ever in terms of global insured losses. Total economic losses in Asia amounted to USD 55 billion – insured losses in the region amounted to USD 20 billion, of which USD 17 billion came from Japan alone.

Japan's exposure to these types of natural catastrophes has given it a resilient culture and strategy to deal with such events and mitigate impact for its people. In response to these events, the government has increased its emphasis on making its citizens more resilient. The insurance industry has rallied, forming disaster response teams to assess damage, facilitate claims and support a quicker recovery.

But what Japan's 2018 highlights is the severity that frequent catastrophes have on urban societies. Investments in world-class infrastructure and high-tech warning systems have helped reduce damage and pay-outs but wave after wave of these events will put the sturdiest economies to the test, as in Japan's case.

Be Prepared for More

With climate change, we can expect that wildfires, drought, other extreme weather events such as tropical storms to occur more frequently. Population growth, rapid urbanisation, a move to coastal areas and a higher concentration of assets have a multiplier effect on losses.

For instance, Japan is experiencing more frequent occurrences of intense rainfall. Torrential rains of more than 80 millimetres an hour happened 18 times a year on average over the last decade, up from 11 times between 1976 to 1985. Such trends highlight the growing vulnerability of a metropolis like Tokyo, where 1.5 million people live below sea level near the Arakawa River2.

Swiss Re's sigma analysis of 2017 and 2018 revealed that more than half of the pay-outs were made to help manage the impact from such events. The combined economic loss total for the two years was USD 497 billion, of which USD 219 billion was insured. That means the combined natural catastrophe protection gap stands at a large figure of USD 280 billion. Natural catastrophe underinsurance remains a challenge across the world.

While the frequency of catastrophe events and severity of their impact have increased over time, more can be done to drive insurance penetration. Let's take small and medium enterprises (SMEs) in countries with well-established insurance markets, they can still have large exposure gaps.

Japan's SMEs, who make up 99% of the country's industrial and commercial base, suffered large uninsured losses from the multiple natural catastrophes in 2018. Last November, the Small and Medium Enterprise Agency set up the SMEs Resilience Study Group with the aim of fostering resilience, highlighting higher insurance penetration as one of the initiatives. The agency indicated that insurance penetration of the SMEs is 'not necessarily sufficient", quoting a survey by the Research Institute of Economy, Trade and Industry (RIETI) in 2015 which has set the take-up rate within SMEs at 47%3.

Closing the protection gap goes beyond just capacity. The global re/insurance industry has ample capacity to underwrite natural catastrophe risks. According to Swiss Re Institute estimates, total non-life re/insurance capacity stood at more than USD 2 trillion but only 11% has been utilised to cover the losses of the past two years. Having the right measures that drive insurance penetration and help mitigate the impact of climate change is getting critical.

Technology Key to Future Readiness

While insurance solutions relying on historical data has sufficed in the past, this may not be the case in a world of increased urbanisation and changing climates. Looking at Typhoon Jebi, the Japan Metrological Agency announced that the maximum instantaneous wind speed at its observation point in Osaka city was 47.4 metres per second. However, a recent Kyoto University simulation showed that Osaka city's urban landscape with multiple tall buildings contributed to the build-up of eddies of wind within the city. The maximum wind speed reached 60 to 70 metres per second, multiplying the power of its impact and damage4. The typhoon, for example, caused the tidal wave and storm surge that followed heavily impacted Kansai International Airport, halting all operations at the airport. A 2,591-tonne ship was swept towards the bridge, damaging the only land connection between the island on which the airport is located and Osaka, 7,800 people were stranded at the airport. The storm also caused power shutdowns for 2.2 million households in Osaka and several neighboring prefectures.

Japan's 2018 experience highlighted a key challenge – as insurers strived to set up response teams across multiple areas nationwide to deal with a higher frequency of catastrophes, vast manpower and resources were needed to facilitate proper damage assessment and response to claims. The industry needs new strategies that can overcome huge resource challenges, strengthening preparedness for frequent and large-scale events such as Nankai Trough Earthquake or Tokyo Inland Earthquake.

A new approach that manages risk on not only severity but also frequency driven model is needed to strengthen resilience against climate change's impact on urban societies. This includes embracing and developing technology that can enhance data collection, assessment and facilitation of claims in emergencies. Satellite imagery, drones, automation are ready technology in our rapidly digitalising world that can optimise efficiency of real-time damage assessment and claims management, while alleviating high resource demands.

There is opportunity for the insurance industry to both grow and help people to be better prepared to manage the hardships that disaster events can inflict. This includes fostering consumer awareness, developing a greater product range and targeted distribution for catastrophe covers. The availability of cover for perils of a frequent nature can incentivise customers to realise the value of insurance. Insurance solutions that focus on perils related to extreme weather, including windstorms and floods, can also be an opportunity to close the protection gap.


Related content