Risk finance, such as reinsurance & catastrophe bonds, key to Asia’s disaster resilience

A report published last week by the Asian Development Bank (ADB) discusses the need for robust natural disaster risk financing solutions to be employed in the Asia-Pacific region to strengthen its disaster resilience. The report says that natural disaster losses have risen more quickly than Asia-Pacific’s economy has expanded. At the same time insurance penetration has not been rising quickly enough and combined this leaves the region with a growing uninsured disaster loss bill.

The report from the ADB discusses how risk financing is an important piece of the solution required in Asia-Pacific nations and how risk financing instruments are key to building the regions resilience against disaster.

“Asia’s economic gain is being eroded by disasters, often hitting the poorest hardest,” commented Bindu Lohani, ADB’s Vice President for Knowledge Management and Sustainable Development. “As the global region most vulnerable to climate change, we no longer have a choice but to focus on disaster risk management.”

By making a significant investment in disaster risk financing the region can reverse this erosion of Asia’s economic resources. The report recommends that regional governments look into and find ways to begin using and offering disaster risk financing instruments such as disaster risk insurance, reinsurance, calamity funds, tax credits, and catastrophe bonds to strengthen the regions disaster resilience.

A variety of gaps and obstacles need to be overcome to stem the trend of rising disaster losses, according to the report, such as inadequate risk data, weak and misaligned incentives, poor legislative and regulatory frameworks and enforcement, disjointed government, limited funding, and power disparities.

The report looks at solutions to these obstacles, with particular focus on the lack of insurance penetration in the region, and goes on to discuss the various risk financing instruments and how they can be used to build disaster resilience. With less than 5% of disaster losses in developing regions of Asia-Pacific covered by insurance, compared to 40% in developed countries, the ADB sees the creation of sufficient reinsurance and capital markets risk finance support critical to enable the region to reduce its disaster toll.

The ADB calls for national and sub-national governments to create and implement comprehensive disaster risk financing strategies, making use of the tools available and the capital markets for backing where appropriate. Given the lack of capital available to finance disasters internally, many Asian countries may prefer to look to instruments such as catastrophe bonds in order to receive true transfer of their risks to those prepared to bear them.

You can access the full report from the ADB here.