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Capital markets & reinsurance needed on Asia flood risk: Geneva Association


Insurance, reinsurance and capital market or ILS participants can and should be doing more to help bridge the escalating flood risk protection gap in Asia, home to some of the most flood prone areas on the planet which are exacerbated by rising asset values and coastal migration.

The Geneva Association (GA), a global insurance and reinsurance industry research body, has examined the rising threat of flood risks to the expanding, and developing Asian economies, calling on greater support from the traditional and alternative risk transfer or ILS markets to narrow the region’s flood risk protection gap.

The GA says; “Insurance-based innovative solutions, involving international (re)insurers and capital markets as well as local governments, should also be explored, in particular if local insurance markets are not (yet) in a position to offer adequate cover to businesses and households.

“Climate change model projections indicate that precipitation extremes in warmer climates are more likely to occur as warmer oceans create a warmer and wetter atmosphere that contains more energy. One result is that flood events in Asia will continue to increase, not least as a result of rising sea levels.”

Climate changes impact on the increased severity and frequency of any natural peril, flood included, is a running risk management and disaster resilience debate, but regardless of it being a factor or not, the general consensus from industry experts and analysts is that flood risks in Asia are expected to rise.

And this isn’t purely because of more intense or frequent flooding events, but also encompasses the reality of significant growth in emerging Asian economies, resulting in higher asset values in more concentrated zones, and a wave of urbanisation and migration to coastal towns and cities, which are extremely susceptible to flooding.

Factor in the stark realisation that Asia hosts some of the lowest insurance penetration levels around the world, it’s hardly surprising that world resilience and disaster reduction efforts have focused on Asia in recent times.

In fact, the GA study notes that research from the World Bank and the Organisation for Economic Co-operation and Development (OECD), suggest that by the end of the century, “147 to 216 million people in Asia are projected to live on land that will be below sea or regular flood levels. Indeed, by 2070, Asia is expected to account for 50% of all global assets exposed to flood risks.”

Also, notes the GA, regulatory restraints across Asian jurisdiction hinder the scope for diversification with the pooling of catastrophe risks, something that the report claims can reduce total capital requirements and therefore lower the cost of insurance, making it more affordable for the poorer Asian communities, and ultimately boosting insurance take-up levels.

Clearly something needs to change surrounding the protection of Asian businesses, economies and citizens against the thriving flood risk protection gap, an area where the capital-rich insurance, reinsurance and insurance-linked securities (ILS) landscape can flourish.

The GA highlights this notion, saying; “Given the glut of capital as a result of post-financial crisis monetary policies, a growing number of industry experts and executives suggest that capital markets-based innovative insurance solutions can and should play a larger role in tackling uninsured and underinsured risks, in particular as the new capital entering the (re)insurance market through ILS and collateralized reinsurance is believed to be a lasting phenomenon.”

The opportunity for insurance-linked securities (ILS), catastrophe bonds, insurance and reinsurance to mitigate Asia’s flood risk crisis is something we’ve discussed here on Artemis before, as the region is often at the epicentre of discussions involving the protection and mitigation of natural catastrophes.

And now the GA has continued this trend, arguing that due to the abundance of traditional and increasingly non-traditional reinsurance capacity in the space, “it should only be a matter of time before solutions tailored to Asian flood risk will be on offer – even though flood risk presents a significantly bigger modelling challenges than earthquake or typhoon risk, for instance.”

The point about flood being a harder risk to model is an interesting yet viable one, as flooding occurs in the forms of river floods, flash floods and storm surge, the latter of which is triggered by wind as opposed to rainfall, meaning regional typhoons can often result in a storm surge occurrence, which can take place far from the actual storm and often incur greater financial losses than the storm itself.

That being said, capital markets risk transfer instruments such as catastrophe bonds are capable of protecting against such risks, as seen with the MetroCat Re Ltd. (Series 2013-1) cat bond, which although protects areas of New York and not Asia, is the first and only transaction to provide cover purely against storm surge exposure.

The GA notes that currently, catastrophe bonds focused on Asia risk include just Japanese earthquake and typhoon, and Taiwan earthquake risks, although we’d hasten to add that China Re recently issued Panda Re Ltd. (Series 2015-1), a deal aimed at protecting against China earthquakes.

Furthermore, as technology and analytics in the catastrophe re/insurance space continue to be developed, enhanced flood and storm surge risk modelling platforms improve also, resulting in greater understanding of the associated risks, which in turn boosts ILS interest and acceptance of the risks.

An example of this can be seen with Karen Clarke & Co.’s high-resolution storm surge model for the U.S., although again the software focuses on an already developed region, owing to the greater availability of historical data than seen in parts of Asia.

So the capacity, skills and relevant expertise appear to be growing all the time, and now the GA is calling on the risk transfer industry to increase its efforts, develop public-private sector partnerships, as seen with the African Risk Capacity (ARC) and other index-based parametric solutions, in order to close the dangerous flood risk protection gap in Asia.

Inga Beale, Lloyd’s of London Chief Executive Officer (CEO) and co-Chair of The Geneva Association’s working group on the protection gap, said;

“The insurance and reinsurance industry can play a significant role in helping to identify, assess and mitigate flood risks. It also has an important role compensating firms and individuals for losses incurred, helping to rebuild infrastructure and communities. A precondition of this support has to be a conducive regulatory and free trade environment that enables the industry to provide insurance cover.”

Swiss Re CEO, and co-Chair of The Geneva Association’s working group on the protection gap, Michel M. Liés added;

“While the timing of any natural catastrophe is unpredictable, preparing for one can and should be a regular and ongoing activity, extending the reach of insurance is a vital part in this effort, such preparation helps individuals, businesses and governments to get back on their feet more quickly after a disaster strikes. It helps protect hard-won development gains and minimises the destructive harm of any event to economic growth. Over the past decades, the occurrence of natural catastrophes seem unfortunately on the rise, while the share of losses that are covered by insurance has been decreasing. Broadening the reach of insurance – especially across the developing world – will be a critical issue for years to come.”

The GA notes that building a layered approach to ex-ante disaster risk financing, with the help of insurance, reinsurance and the capital markets, is vital to addressing the rising threat of major inundations.

It recommends; “developing a broad array of ex ante disaster risk financing instruments based on the severity and frequency of natural calamities, including risk transfer products such as indemnity-based insurance, reinsurance and parametric insurance, along with capital market solutions such as catastrophe bonds for the high risk layer.”

For the more mature re/insurance markets in Asia the GA recommends developing flood insurance schemes, be they public, private or a partnership between the two.

The GA also recommends structuring catastrophe bonds for other perils in Asia, suggesting; “structuring catastrophe bonds and other forms of insurance with parametric triggers to protect against typhoons and earthquakes as a starting point (‘Multicat Asia-pacific’): due to a lack of models catastrophe bonds may not be feasible to protect against flood risk specifically, for the time being.”

A MultiCat Asia-Pacific cat bond would certainly be a welcome investment opportunity for the ILS investor and fund manager community, while it would be a way to bring much-needed additional capacity to bear on peak Asia-Pacific catastrophe risks.

The GA also recommends; “including parametric products, microinsurance schemes and insurance- linked securities in local regulatory frameworks.”

This is an important point. If ILS structures could be baked into local regulatory regimes, it will make their issuance in the region much simpler and more cost-effective in future. It will also educate regulators, local capital markets, local insurance and reinsurance players and governments in their usage.

They also recommend looking to establish regional catastrophe pools, which would enable the risk to be bundled and then ILS or traditional risk transfer and reinsurance structures could be used to protect against the major losses.

Finally, the GA suggests that in order to “ensure that disaster risk management initiatives reach the necessary scale and capacity” it is crucial to involve both the global reinsurance and alternative capital markets in any initiatives or development of regional schemes.

A two-way street in terms of education, capacity building and encouraging dialogue between the regional players and governments and the global reinsurance and ILS markets, will result in a much faster development of the regional ex-ante catastrophe risk financing that is required to meet the threat of the major perils in the Asia-Pacific region.

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