Asia’s growth economies face highest financial risk from natural disasters

by Artemis on August 15, 2012

The economies of countries such as Bangladesh, Philippines, Myanmar, India and Viet Nam are among the most exposed economically to the impacts of natural disasters and weather or climate catastrophes, according to the second Natural Hazards Risk Atlas published by risk analysis and mapping firm Maplecroft.

These five Asian countries are among the most exposed financially, countries which the greatest proportion of their economic output exposed to natural hazards, due to the high exposure of their cities and trading hubs to events such as flooding, earthquakes and tropical cyclones. In addition to the geographic exposure which puts them at high risk, these countries also demonstrate poor capability to recover from a significant event exposing investments in those countries to risk of supply chain and market disruptions. This could lead to sizable business interruption costs, in addition to material damage to essential infrastructure. Maplecroft’s research also showed that it could exacerbate other risks like societal unrest, food security, corruption and rule of law even leading to increased political risk.

“High exposure to natural hazards in these countries are compounded by a lack of resilience to combat the effects of a disaster should one emerge,” explains Maplecroft’s Head of Maps and Indices Helen Hodge. “Given the exposure of key financial and manufacturing centres, the occurrence of a major event would be very likely to have significant impacts on the total economic output of these countries, as well as foreign business.”

The Natural Hazards Risk Atlas allows companies to assess and compare natural hazards risks across 197 countries and builds on research undertaken by Maplecroft with UN OCHA. It includes 29 risk indices and interactive maps that measure physical exposure to 12 different natural hazards, in addition to calculating overall economic exposure and socio-economic resilience to large events.

In absolute terms, the highest economic exposure to natural disasters and weather catastrophes actually sits with countries such as Japan, U.S., China, Mexico and Taiwan, but the more developed a nation is the better its ability to cope with natural hazards and recover from their impacts. China clearly poses a mix of risks due to the nature of the country being partially highly developed and partially developing.

Bangladesh, the Philippines, the Dominican Republic, Myanmar, India, Viet Nam, Honduras, Laos and Haiti are the ten countries most at risk in Maplecroft’s Natural Hazards Relative Economic Exposure Index. High financial exposure combined with weak resilience means that large natural disasters in these countries will have the largest impact. For the Asian countries in this top ten the risks to the rest of the world are also great, due to supply chain impacts to companies who invest and operate in these regions of the world.

“As the global influence of emerging economies increases; the importance of their inherent natural hazard exposure will have wider and deeper global implications,” continues Helen Hodge.  “The test for emerging and developing economies is to build a stronger capacity to meet the challenge of hazard prone environments. Failure to do so will risk their ambitious economic growth when the inevitable natural hazards strike.”

Maplecroft CEO Alyson Warhurst added “this presents an exciting opportunity for business to contribute to reducing risk and thus to enhance their own security in the future economic growth environment. As the middle classes grow in these emerging economies the appetite for insurance will also grow, incentivising stronger disaster preparedness.”

The comprehensive report which becomes available today provides good insight into the at risk countries of the world. The fact that Maplecroft has singled out these Asia nations as particularly at risk will come as no surprise, however for the re/insurance sector they currently are growing markets. As insurance penetration grows in countries such as Bangladesh, Philippines, Myanmar, India and Viet Nam, the reinsurance industry will be required to participate in underwriting those risks to a greater degree. Within perhaps as little as 15 years there will be a significant, and growing, reinsurance exposure in countries such as Viet Nam and the Philippines. We suspect that we will begin to see risk transfer instruments such as parametric triggers and perhaps catastrophe bonds utilised in these regions of the world once data availability and confidence in structuring transactions in these nations grows in the market.

As insurance and reinsurance penetration and therefore exposure in Asia grows, it stands to reason that the re/insurance markets alone will not have sufficient capacity to provide the risk transfer necessary for these economies, leaving the capital markets as one likely provider of reinsurance capacity. This suggests that adjustments to the typical structure of instruments such as cat bonds may be required in order to make investors feel comfortable taking on risk in the region. We suspect that this will be achieved through changes to contract language and structure and trigger innovation, perhaps even the use of automated systems to provide triggers for smaller parametric covers or cat bonds. However the risk transfer market responds to the growing economic exposure to disaster, it will be fascinating to watch as, the sector is going to be forced to innovate in ways it has not done so thus far.

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