Efforts continue in Asia to promote disaster risk re/insurance

Asian governments continue to make efforts to promote and encourage the launch of new natural disaster and weather or climate insurance and reinsurance schemes, while trying to increase uptake of existing ones.

The level of insurance penetration remains woefully low in many countries in the Asia Pacific region, which we’re painfully reminded of with tragic events such as the recent earthquake in Nepal and cyclone Pam’s devastating strike on Vanuatu in March.

These events have devastated economies, resulted in significant loss of lives, damaged property and infrastructure to such a degree that recovery will be slow and costly, but insurance and reinsurance markets currently play little role in financing the recovery.

In Nepal estimates now suggest an impact of as much as 20% of the countries GDP, or perhaps even higher when the final damage toll is counted. With deaths of well over 5,000 recorded it’s no surprise the GDP impact is so high.

However the insurance industry impact is insignificant by comparison, with estimates suggesting it won’t rise above $200m. That’s a woefully low figure for damage from exactly the kind of risks that insurance, reinsurance and in the future catastrophe bonds and insurance-linked securities (ILS) should be providing risk transfer for.

But efforts continue to ramp up to get more insurance coverage penetrating into Asia Pacific countries and a number of initiatives are underway to try to ensure that the gap between economic and insured losses is narrowed, as everyone would like to see.

In the Philippines in recent days, it has come to light that plans to enforce a mandatory disaster insurance cover for homeowners and small to medium enterprises are well underway. The proposed ‘calamity insurance’, as it is being called, is designed to cover losses from typhoon, flooding from typhoon’s (so likely storm surge as well), earthquakes and fires.

This mandatory insurance product has been designed with the assistance of the World Bank’s International Finance Corporation (IFC). Being a World Bank backed product this initiative will be backed by a risk pool and transfer of the risks to the international reinsurance markets, in order to support the risk capital needs.

This initiative has already been approved by Insurance Commissioner Emmanuel Dooc, but needs to pass the treasury next. Dooc said that he hoped to see the initiative fully approved by the end of the year.

It’s currently pending with the Treasury, but I expect that it will soon be forwarded to the Secretary of Finance. Hopefully this will take place soon and one feature of this is that we will only be requiring an executive order to fast-track the launch of this disaster insurance pool,” said Dooc.

The Philippines has also been stressing the importance of microinsurance again, as a way to get disaster and weather protection to the poorest areas.

Separately the Asian Development Bank again underscored the need for Asia Pacific countries to invest in disaster risk financing recently, at a meeting.

“Disaster can strike anywhere at any time in any part of the world… We all know that climate change is intensifying the risk for hundreds and millions of people, particularly in small, developing countries with vast coast areas,” ADB risk financing specialist Arup Chatterjee said.

“An earthquake in one country shakes up financial markets in another… Tropical cyclones in one region can cause economic turbulence in another. And therefore, disaster risk financing offers that toolbox of armaments or instruments, whatever you like to call, to defend against the adverse impact of climate change,” he continued.

As the economic toll from natural disasters and weather catastrophes in Asia Pacific grows it is vital to embed risk transfer and disaster risk financing in the system, to encourage insurance penetration growth and to narrow the gap from economic to insured losses.

The Asia-Pacific Economic Cooperation (APEC) heard from the World Bank at a meeting this week that a disaster risk financing pool for the region could be established. This would likely take a similar form to the pool in the Caribbean (CCRIF) of the Pacific islands catastrophe pool facility.

The APEC members were told by World Bank disaster risk financing specialist Richard Poulter that while disaster risk insurance could be costly for a single country, across the 21 members and the region a risk pool could make accessing the insurance and reinsurance markets much cheaper.

In other regional news, China is making progress on implementation of an earthquake insurance system and product, as part of the countries mission to bring disaster insurance to all. Regulations are being worked on and a disaster insurance fund is also planned, to enable pooling of regional disaster risks.

Again, the use of risk pooling will assist with access to the reinsurance and capital markets, for the ultimate transfer of the disaster risks to capacity that can bear it.

The first draft of earthquake insurance regulations for China have been completed and sent to industry and regulators for feedback. The regulations suggest that two policy options will exist, a main property cover and an add-on for contents.

Discussions also continue in India with respect to leveraging greater amounts of reinsurance and potentially catastrophe bonds for earthquake risks within the country. This has been an ongoing discussion for a number of years now, but the hope is that eventually it will bear fruit and help the country to become better protected.

Additionally, global reinsurers continue to work with governments in the region on pilot risk transfer and financing projects, while the UN and World Bank continue to seek to get global corporates to take responsibility for the disaster risk exposure of their corporate assets and their employees as well.

All of these efforts do promise to help to increase insurance penetration in the region, bring new risks and premiums to the global reinsurance and ILS markets, and ultimately, most importantly, help the world’s most exposed nations become better able to recover when the worst happens.