Riding the Storms in Asia

One hundred and four. That was the number of catastrophic events that hit Asia last year, accounting for around a third of all natural catastrophes worldwide. We sit in a region that bears the brunt of more natural disasters than anywhere else in the world.

Between 2014 and 2017, Asia was hit by 55 earthquakes, 217 storms and cyclones, as well as 236 cases of severe flooding, impacting 650 million people and resulting in the deaths of at least 33,000 people1. China, Hong Kong, Macau, Japan, South Korea, Philippines, Taiwan and Vietnam brace for extreme weather every year with the Northwest Pacific Ocean being the most active basin on the planet accounting for one-third of all tropical cyclone activity. A large swath of Asia also sits on the "Pacific Ring of Fire", where more than 90% of all quakes in history have originated from.

We believe that the confluence of urbanisation, migration to coastlines and cities that is unprecedented in human history, climate change, and weather phenomena such as El Nino and La Nina will result in more physical damage and loss of lives across Asia.

One example was Typhoon Mangkhut, which cut a path through the Philippines, Hong Kong, Macau and Guangdong, China last year. It made landfall in the Philippines as a super-typhoon, caused hundreds of deaths and left the country's agricultural belt in tatters. Mangkhut carried on towards Hong Kong and was the most intense typhoon since records began in 1946. The images and videos from Hong Kong as Mangkhut hit were telling. Construction tower cranes were toppled, boarded up windows shattered, and wave breakers gave way along the city's coastline. More than 1,000 people sought refuge in emergency shelters, 200 were injured and 889 international flights were delayed. In Macau, the storm knocked out power in 21,000 homes before heading towards Guangdong, where 2.45 million people evacuated and businesses in the capital city Guangzhou were shut down for the first time since 1978. Mangkhut caused billions in losses. We expect extreme weather events and tropical storms to occur more frequently. According to estimates from the World Meteorological Organisation, 2018 was expected to be the fourth warmest year ever. Global warming is causing sea levels to rise and changing precipitation patterns where there is increased rainfall in some regions and extreme drought in others.  

Urbanising but Under-Protected

Asia is urbanising at breath-taking speed – the UN estimates that well over half of the region's 4.5 billion population will live in cities by 2026 and Asia will be home to 60% of the world's megacities2. Higher frequency of catastrophe events striking areas with a dense population and high concentration of economic assets can cause a multiplier effect.

According to Swiss Re Institute's insights in the latest sigma report, global economic losses arising from natural catastrophes and man-made disasters amounted to USD 165 billion. Insurance only covered USD85 billion of that, leaving a staggering 50% to be borne by people and governments. In Asia, that figure is less than half – only USD 20 billion (36%) of USD 55 billion in losses were insured.

Mangkhut's impact on densely populated Guangdong and Hong Kong clearly illustrates the growing catastrophe protection gap in cities. Both cities suffered heavy damage with insured losses in Hong Kong amounting to USD 370 million3, while Guangdong's was around USD 2 billion4. More than 70% of the claims in Hong Kong were incurred by property damages, a 500% surge in claims cases in comparison to Typhoon Hato in 2017. Macau learned a valuable lesson from 2017's Typhoon Hato, with the early closure of all casino businesses in the territory. In contrast, Macau reported USD 192 million5 in total damage, a fraction of the USD 1.56 billion6 from Hato.

The irony is there is more than enough capacity in the insurance market to absorb this risk. According to the sigma analysis, total capacity in the non-life re/insurance market was more than USD 2 trillion at the end of 2018. For 2017 and 2018 together, the total economic loss from natural disaster events was USD 497 billion, of which USD 219 billion was insured. The combined natural catastrophe protection gap for the past two years was at USD 280 billion. In other words, only 11% of all capacity has been used to cover the losses of the past two years.

Bridging the Gap

2018 was a year characterised by many small to medium-sized catastrophes. More than 60% of the USD 76 billion in insurance pay-outs for natural catastrophes were made to mitigate the fallout from torrential rain, storm surges and floods, the secondary wave of damage, if you will. With rapid urbanisation and associated growth in areas exposed to extreme weather events, we expect mounting losses.

By understanding consumers' tendencies to develop a positive bias towards more frequently occurring events, a new approach to drive insurance penetration and close the protection gap can be developed. While convincing an individual to purchase protection for a rare catastrophic event is challenging, products and solutions related to extreme weather – including windstorms and floods – is an opportunity.

For example, parametric covers pegged to extreme weather triggers, can provide a first crucial step to incentivise customers to realise the value of insurance. China's Mao County has worked with Swiss Re and Groupama AVIC to introduce a parametric solution resulting in pay-outs upon satisfying pre-agreed conditions, should they be hit by floods, quakes, landslides or even heavy rainfall.

Underinsurance remains a challenge, and there is plenty more risk-absorbing capacity to go around. For more effective use of this capital, re/insurers should actively include high-frequency perils in their claims monitoring, risk assessment, pricing and management activities. They should also focus on fostering consumer risk awareness and developing product availability and targeted distribution. With increased demand for tailored re/insurance programmes, robust methods and tools to assess frequency risks will be critical in developing new products that insure our changing world effectively.