From the ground up: Tackling the secondary perils protection gap in the Asia Pacific

At a recent Swiss Re webinar, our P&C claims experts shone a spotlight on secondary perils, which are poised to create greater disruption for the Asia Pacific region.

From the impact of climate change to regional loss experience, the webinar took a deep dive into past secondary perils, and how the industry, communities and governments can better respond. 

Against the backdrop of the COVID-19 pandemic, millions of people also experienced the impact of devastating weather events. Unprecedented drought, storms and bushfires beleaguered parts of Australia and Asia was devastated by deadly floods caused by storms and monsoon rains.

Swiss Re Institute's research shows these small to mid-sized severe weather events, or secondary perils, accounted for more than 70% of insured losses from natural catastrophes in 2020. They can either occur independently, like the hailstorms and bushfires in Australia or be induced by primary perils, such as the record-breaking rainfall in eastern Japan brought about by Typhoon Hagibis in October 2019.

In Asia, precipitation-driven floods dominated secondary perils losses over the past decade. Also increasing are the damage from severe convective storms and bushfires in Australia, New Zealand and the South Pacific.

As secondary perils wreaked havoc in 2020, it is a sobering reminder that future economic losses could grow significantly when primary perils are also present. The re/insurance industry needs to act now to help the region recognise and manage their secondary-peril risks and become more resilient.

APAC societies increasingly vulnerable to secondary perils

Population growth, urbanisation and economic development in areas susceptible to weather-related risks, are the main drivers of rising losses from severe weather events.

“Asian metropolises are growing rapidly and are also densely populated. With a large concentration of assets coupled with frequent flooding, we may continue to see an increase in insured losses,” Nadeem Mokashi, Claims Expert India, Swiss Re, noted.

For Asia, the challenge is compounded by its large protection gap. As an example of this is the shortfall between the USD75 billion losses in Asia in 2020, of which insurance only covered USD12 billion.

“If we are to close the protection gap that exists across the region, then our knowledge of the link between climate change and secondary perils has also to increase,” Blake Dimitrijevic, Head P&C Business Management Asia, Swiss Re, noted. 

The protection gap can be exacerbated by both the intensity and location of weather events. “If disaster strikes at a place with high exposure and low insurance penetration, the protection gap would be considerably higher,” Lucia Bevere, Senior Catastrophe Data Analyst, Swiss Re Institute, explained. “The peril involved is also a factor, as floods tend to be relatively less insured than wind even in countries with high insurance penetration.”

The Jakarta floods of January 2020 are prime examples. Of the USD900 million economic losses incurred, only USD79 million (8.8%) were insured. “Indonesia, like many other countries in the region, remains extremely vulnerable and needs both flood mitigation measures and more insurance protection,” Valerie Khoo, Claims Expert Singapore, Swiss Re, explained. “There is an opportunity for insurers to devise coverage that better meets societies’ needs and make that more accessible through proper distribution.”

The scope and scale of climate change mean even wealthy markets with relatively robust infrastructure will grapple with greater disaster-related impacts.

“Japan is one of the most well-prepared countries when it comes to flood controls,” Da Sol Lee, Client Analyst Japan, Swiss Re, said. “But new climate patterns, more severe rainfalls and more frequent rain events are posing challenges for existing mitigating factors like riverbank level management and infrastructure that have served Japan well for many decades.”

‘It won’t happen to me’ mindset and limited knowledge exacerbate the problem

For the last five years, the protection gap in Asia has stood at more than 85%, largely due to low levels of risk awareness, concerns about insurance premium affordability, an absence of mandatory insurance requirements by governments and an underestimation of risks.

And unlike primary perils, there is a shortage of robust and efficient tools worldwide to understand and model secondary perils, making comprehensive risk assessment challenging. For example, a hurricane-induced storm surge or fire resulting from an earthquake – are not always well captured in primary peril modelling. 

This leaves a disconnect between what climate research can provide and the financially meaningful information needed for business decisions. “On a scientific research level, climate models do a great job in predicting the average temperature over a continent for the next 50-100 years,” Anwesha Bhattacharya, Natural Catastrophe Specialist at Swiss Re, noted. "But in our business, we are more interested in localised events over a shorter time frame, such as severe convective storm trends in eastern Australia over the next five years. And this is, of course, a much more complex situation. There is no immediate and certain solution to the issue, making it imperative to back up climate science with predictions and scenarios, as well as archival data, claims trends and other relevant information.”

The power of data: what claims insights can offer

Agencies, insurers and insurance associations still lack consistent historical records and granular data to judge premiums rate adequacy for specific secondary perils. Harnessing data to increase understanding of the urgency and impact of secondary perils among all stakeholders – the re/insurance industry, governments, and individuals – is key to closing the protection gap.

“The price of an insurance premium is reflective of the risk nature,” Dawn Tan, Claims Specialist Singapore, Swiss Re, explained. “To provide sustainable coverage in the long run and to ensure adequate and fair risk pricing, we need to leverage granular data to design the coverage that's suited to the needs of society at large and make that coverage more accessible through proper distribution channels.”

More can be done to record data on secondary perils and associated losses. By analysing and sharing this information, we can improve the estimation of potential damage. For example, our claims insights from the 2020 Rockhampton hailstorm tell us that unforeseen event drivers such as property age, building codes and other surprises can triple the cost of repairs – we can incorporate these factors for future risk assessment.

Damages and claim patterns also need to be monitored on a more fundamental level to detect emerging trends, such as climate conditions that resulted in a rapid succession of bushfires, hailstorms and floods in Australia.

When the industry combines these insights into modelling and pricing considerations, risk pricing accuracy improves. A wider range of insurance products can then be developed to cater to businesses and households with smaller budgets to help address protection shortfalls.

Creating a virtuous cycle

Improving awareness of the impact and urgency of secondary-peril risks will also prompt more governments and individuals to act.

Success is already evident in Australia. The insurance industry has been advocating for increased mitigation investments to reduce weather-related risk in Australia’s most vulnerable areas for more than a decade. Swiss Re was pleased to see the recent federal budget announcement of AUD600 million allocated to communities and household projects to manage the impact of natural disasters.

“The industry must respond by passing on premium savings from mitigation projects (and) offering cheaper insurance in those areas,” Sheema Khurshed, Claims Expert ANZ, Swiss Re, said. “Governments should also consider low-risk and long-term sustainability planning to reduce future risk. Everything is part of the puzzle for the Australian protection gap.”

The same applies to other countries. Increasing individual awareness of the importance and urgency of insurance protection against secondary disasters is an essential first step. Premiums become more affordable when they are shared by a larger pool of policyholders. Businesses, households and communities will also be more financially ready to weather damage to their properties and livelihoods when threatened by events like wildfires, floods and convective storms.

Meanwhile, the industry can enhance its capabilities to translate data on the frequency and impacts of these events into informed business decisions. All these efforts will create a positively reinforcing cycle that bridges the region’s secondary peril protection gap and paves the way for a more resilient future.

Spotlight on secondary perils is the first session of the 2021 keynote webinar series brought to you by Swiss Re P&C Business Management team. Please refer to the below list for future events. Contact your local claims expert to register your interest.

Webinar

Date

Time (SG)

Global Supply Chains:

A paradigm shift in the making

24 June 2021

14:00- 15.00

Becoming an analytics-driven enterprise:

What does it mean, and why it matters so much
for automotive insurers?

27 July 2021

13.30–14.45

CEO round table:

The business case for sustainability in India

Nov

TBC