The United Nations forecasts that economic losses from natural disasters and weather catastrophes in Asia-Pacific will reach a stunning $160 billion per-year by 2030, underscoring the size of the protection gap and the need for greater risk capital support as just 8% of those losses are covered by insurance currently.
At a time when insurance, reinsurance and ILS capital is at record levels, particularly the capital markets component deployed through insurance-linked securities (ILS) such as catastrophe bonds and collateralized reinsurance, the ability of the private market to take on more of the Asia-Pacific regions disaster risk has never been greater.
The UN Economic and Social Commission for Asia and the Pacific (ESCAP) highlighted the growing financial toll from natural disasters and weather catastrophes at a recent meeting that discussed disaster risk financing solutions at UN headquarters in New York.
“The time for establishing solutions to these complex emerging challenges is now,” commented Shamshad Akhtar, the Executive Secretary of ESCAP.
Under insurance is a significant issue in the region, with the economic toll having amounted to almost $1.3 trillion in disaster losses over the last 50 years.
That is an enormous figure and with economic losses from disaster expected to reach $160 billion annually by 2030 the opportunity for the insurance, reinsurance and capital markets to put risk transfer structures to work in helping to minimise the impact to countries in the region is very clear.
Currently the toll from natural disasters and severe weather is absorbed by governments, business and taxpayers, resulting in a hit to economic growth that is felt across the region.
“Business as usual is unsustainable […] policy makers and financial strategists in both the public and private sectors have to work together,” Akhtar urged.
During the speech, Akhtar highlighted the importance of insurance and reinsurance innovation in helping to narrow the clear protection gap in Asia-Pacific.
She discussed opportunities offered by financial innovations including catastrophe risk modelling, parametric insurance, as well as highlighting the need for a mix of traditional and global financial reinsurance, and concessional insurance.
Global financial reinsurance could well point to the insurance-linked securities (ILS) market, a marketplace that was devised in the 1990’s as a way to mobilise the depth of capacity and liquidity of funding that the global capital markets can provide.
Catastrophe bonds have an important role to play in narrowing the enormous gap between economic and insured losses in the Asia Pacific region.
With just 8% of economic losses currently covered by insurance and reinsurance, as the economic loss figure escalates towards this $160 billion that could mean as much as much as $147 billion (the remaining 92%) could go uncovered, if the protection gap is not narrowed over the intervening years.
That would be criminal, given the ability of the re/insurance and ILS market to create solutions to address catastrophe and weather risks.
With the appetite of the capital markets to absorb these risks at an all-time high, the capital in the reinsurance market also abundant and the innovative technologies that can be used to structure risk transfer being enhanced all the time, it seems like the market would be failing if this gap is not narrowed significantly before 2030.
Of course, it is not just down to re/insurers, ILS funds and their investors, this needs a concerted effort by government, private industry and capital providers, as the potential uninsured cost of disasters is now getting so large no party can solve this alone.
That’s not to mention the cultural challenge of increasing insurance penetration across this region.
However, with the risk capital pot seemingly overflowing these days, the capacity exists right now to put in place sovereign level risk transfer pools to at least begin to narrow the gap.
It is only be having high level risk transfer layers, sitting above local markets, that the local insurance penetration can be increased and local markets function efficiently, without the threat of the next major loss event draining away the supportive risk capacity they require.
The ILS market has the tools and the capital to help address these issues, in a market-wide response along with governments.
Akhtar explained the importance of this response, “The provision of a regional platform for building capacity as well as mutual trust among countries is the key to successful sovereign risk pooling [and] ESCAP, whose primary mandate is regional cooperation, is well suited for this role.”
At the same event, Mami Mizutori, Head of the UN Office for Disaster Risk Reduction (UNISDR), highlighted the importance of both disaster risk financing and resources to reduce disaster risk, saying, “At present, we need both […] Let’s face it: when natural hazards hit, without these mechanisms, we cannot cope with the aftermath.”
For this is a complex and enormous problem that threatens the very development of the Asia Pacific region and could hold back economies, if not adequately addressed.
It seems an opportune time for the ILS specialists of the world to make themselves and their toolkit known to the decision-makers that will influence the eventual response and hopefully solution to this growing protection gap.