Asia has become one of the world’s most rapidly developing regions, with a burgeoning population, rising asset values and large-scale urbanisation. However, the development of the region’s economy is hindered by high exposure to flood events and a broad insurance protection gap.
Asia, and in particular parts of Southern Asia is home to some of the world’s most flood prone areas, exacerbated by a growing trend of coastal migration to low-lying communities and the establishment of more factories and industrial parks in areas susceptible to flooding.
Flood risk is not particularly well covered even in mature insurance and reinsurance markets, hence in Asia it is a peril that deserves attention. The size of the gap between economic and insured losses is something that regional observers hope can be changed with the help of reinsurance, the capital markets and insurance-linked securities (ILS).
Furthermore, Asia boasts some of the lowest insurance and reinsurance penetration levels in the world, as a lack of education and risk awareness surrounding potential catastrophe exposures, coupled with a large proportion of poor, vulnerable people, ensures millions in need of protection are either unaware of possible coverage or simply can’t afford it.
The Asian Development Bank, in a blog by Arup Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department, recently highlighted the issues noted above, calling on improved efforts from the re/insurance and capital markets sector.
The risk of flooding in Asia is extremely broad and is believed to be growing. Flooding in the region can happen for various reasons, including torrential and excessive downpours/flash floods, hurricane-driven storm surge and the wider windstorm exposure related events.
Bridging the Asian protection gap (the gap between economic and insured losses post-event) and the likelihood that the region will become increasingly vulnerable to natural events, flooding included, has been a hot topic of discussion recently surrounding global and local disaster resilience efforts and studies.
In fact, a recent report by Allianz Global Corporate & Specialty (AGCS), covered at the time by Artemis, claims that by the year 2070 Asian cities will dominate (80%) the top ten cities exposed to coastal flooding and windstorm-related losses, an exposure which is currently dominated by coastal cities in the U.S.
The reasons given in the AGCS report for increased exposure and expected rising losses echo those of Chatterjee, including rising asset values, rising sea levels, coastal migration, rapid industrial development in flood prone regions and an expanding population.
Also, Chatterjee underlines that a key element of the flood risk to Asia is the impact the events can have on the region’s agricultural sector, which supports a vast array of Asian citizens that simply can’t afford to see their livestock or crops wiped out due to flooding.
But of course, this does happen, and is made far worse by the fact that very few of the poorest, most vulnerable and most at risk to flood exposure, whether to their home, business, or both, don’t have any kind of coverage against the losses they experience when flooding occurs.
As well as highlighting the growing and dangerous flood risk protection gap in Asia, Chatterjee emphasises the need, and therefore opportunity for insurers, reinsurers, capital markets and ILS participants to help close the gap.
The need for greater flood insurance and reinsurance penetration in Asia is clear, and essential if local, and the region’s wider economy are going to achieve sustainable growth, especially in years when catastrophes occur, which they undoubtedly and likely increasingly will.
But as well as the use of the knowledge, modelling capabilities, skills, expertise and capacity of the global re/insurance sector, capital markets and ILS financial structures can and should also be utilised to help narrow the flood, and wider protection gap in Asia.
“To bridge the widening flood risk protection gap, we need to develop the right disaster risk financing instruments through layered coverage, linked to severity and frequency of calamities, with insurance and capital market solutions for different risk layers,” urges Chatterjee.
An example of such a structure can be seen with the African Risk Capacity (ARC), a parametric catastrophe insurance pool that protects member countries against predefined exposures under specified terms, providing them with post-disaster event financing which is predictable and has a rapid payout mechanism due to the parametric nature of the policies.
Although ARC was initially designed to protect against drought, which impacts farmers produce in the same way flooding can in Asia, the structure and public-private partnership adopted by the venture could be replicated and used as a template to help protect against Asian flood risks.
This is just one example of how capital markets and ILS structured ventures could be adopted and developed to provide a financial backbone to the Asian people most at risk to flooding, and its overall economy.
Other structures include catastrophe bonds, which can be designed and tailored to meet the individual needs of various regions against various perils, see the Artemis Deal Directory for a list of current and past catastrophe bonds.
The structures, capacity and willingness of insurers, reinsurers, capital markets and ILS players are apparent and ready to be utilised. With industry noise continuing to note the burgeoning presence of alternative reinsurance capital stressing the sector, it would be put to good use deployed via new, innovative structures designed to bridge the widening Asia flood risk protection gap.
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