Flood risks across the Asia-Pacific region are receiving an increased focus, as reinsurance and ILS markets look to find new opportunities to put capacity to work. Analysis and developments in risk models clearly show the need for more capacity to target this peril.
Following the unprecedented floods that devastated Thailand for several months in 2011, taking the lives of over 800 people, reinsurance broker and risk specialist Guy Carpenter (GC), has produced a new report focused on the potential of flooding across Asia-Pacific. The new GC report, titled ‘Flood Risk in Asia – A Detailed Study,’ identifies key Asian regions that are vulnerable to flooding similar to that of Thailand, while offering ideas for greater prevention and protection systems.
Michael Owen, Head of GC Analytics, Asia Pacific, commented on the study; “Our intent in publishing this report is to identify the flood potential in Asia so the insurance industry can be better prepared when the next flood occurs. Our findings show that the potential areas at risk are in no way limited to the ones considered. And more importantly, with economic growth and increased wealth of various countries in the region, historic events that did not cause much damage could potentially be catastrophic if they were to happen again.”
The report explains that over a 20-year period (1990-2010) in China, Thailand, Indonesia, Malaysia and Vietnam, urbanization has increased by more than 50% as communities spread from rural regions.
A significant issue being that the areas many communities move to are particularly prone to floods, emphasizing Owen’s point that low-cost historic events have the potential to become increasingly damaging and high-cost to the Asian economy.
The vulnerability of Asia-Pacific regions to flooding is expected to rise considering the ever-increasing frequency and severity of climate change risks, where flooding is often at the forefront. In a region that is largely underinsured, or uninsured, the opportunity for providing catastrophe risk transfer capacity is ripe and, so to is the opportunity for some of that protection to be via insurance-linked securities (ILS), collateralized reinsurance and catastrophe bonds.
Figures from the World Bank estimates the insured losses of the 2011 Thai floods at roughly $15 billion, with an economic cost estimate of around $45 billion, making it the world’s fifth costliest disaster.
At that magnitude of loss event the need for reinsurance protection is clear, as is the opportunity for alternative capital, ILS and catastrophe bonds to play a role in the future, as models improve and risk transfer needs grow.
Advancements in risk models targeting Asian flood risks are coming thick and fast as well. The latest is an announcement from Aon Benfield’s Impact Forecasting unit which has developed new realistic disaster scenario (RDS) models to estimate the cost of floods in China and Vietnam.
Aon Benfield says that events such as in Thailand have brought the issue of non-modelled perils and territories in Asia to the fore and initially triggered Impact Forecasting’s development of the probabilistic Thailand flood model in 2012. The team has now developed a range of RDS models for various perils to further bridge the coverage gap and offer an immediate solution as a stepping stone for more in-depth probabilistic models to come as part of the firm’s ongoing strategy.
Impact Forecasting has considered the peak exposure zones in emerging economies with growing insurance penetration and where flood hazard will drive the probable maximum loss (PML). As part of this process, models have been developed for:
- China: The Pearl River Delta in Guangdong province, one of the most densely urbanised regions in the world and a key economic hub, and the Lower Yangtze River including Shanghai.
- Vietnam: Ho Chi Minh City in the South on the River Saigon and Hanoi Province in the North by the Red River.
Adityam Krovvidi, Head of Impact Forecasting for Asia Pacific, said; “Data is at the heart of these models. We’ve gone the extra mile to gather the most comprehensive data on flood hazard and defences through field surveys, liaison with government departments and investment in high quality data – for example digital terrain data at a 5m x 5m resolution in Vietnam. These RDS models are part of a much bigger plan that already includes numerous RDS across a wide range of perils such as earthquake, flood, volcano and riot. While we are in the process of expanding our probabilistic model coverage for the region, the realistic disaster scenarios offer a breadth of Asian coverage.”
Malcolm Steingold, CEO of Aon Benfield, Asia Pacific, commented; “Speed of development is critical. These models are vital to help insurers and reinsurers take advantage of the additional capacity in the market and help transfer flood risks. Notably, this can also provide new opportunities for government schemes to explore how they can further support their people in times of catastrophic events.”