Asia’s glaring insurance gap: a risk we cannot afford to ignore
As climate change continues its relentless march, nations must build up their resilience and narrow the insurance gap
MITIGATING climate change and addressing climate risk will be among the most important challenges humanity will be focusing on, now and in years to come.
The recent United Nations’ latest IPCC Sixth Assessment Report (IP6AR) on Climate Change presented a clear and sobering message: the longer the world takes to proactively address the reality of climate change, the worse the risks will become. The report said that extreme weather events (such as heatwaves, droughts and floods) which were once considered rare, are only going to become more common.
Asia's vulnerability
Such findings are especially pertinent for the Asia-Pacific region. For example, the World Bank's 2021 Climate Risk Country Profiles have cited Vietnam, Thailand, Indonesia, and the Philippines as the countries that rank among the highest in the world for flood and typhoon risk, among other natural hazards; and each have a differing level of resilience.
Such natural catastrophes can cause considerable losses, through damage to buildings, infrastructure, assets and agriculture; these exert a huge financial toll on the affected people, companies and governments, not to mention the loss of human life.
With climate change continuing its relentless march, the frequency and severity of acute hazards in the aforementioned countries will only be exacerbated. These nations will face further duress from chronic climate-related hazards, such as heat stress - which will impact labour/agricultural productivity, mortality and morbidity, disease vectors - rising sea levels, which will feed back into stronger cyclone-induced storm surges, and reduced sustainable land use and soil quality.
To strengthen a nation's resilience against natural disasters, the insurance gap - defined as the value of assets at risk and not covered by insurance - needs to be narrowed.
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According to Munich Re’s most recent estimates, natural disasters caused overall losses of US$280 billion in 2021 globally - of which, only US$120 billion was insured. While losses within the Asia-Pacific region have remained modest, the insurance gap was still extremely high at 83 per cent. In emerging countries, the share of uninsured losses is even more striking and remains at more than 90 per cent.
Building resilience
One silver lining is that the financial sector is playing an increasingly active role in battling climate change, with insurers serving as both investors and risk-carriers. In both roles, insurers are increasingly directing their capital to businesses whose operations align with the World Climate Conference 2015 (Paris Agreement) goals to reduce emissions and mitigate climate change.
The consensus reached at COP26 last year was recognition of the increasing urgency for businesses to act against climate change and uphold their sustainability ambitions even as they make progress. Against the backdrop of the increasing likelihood of more severe and frequent disasters, governments and businesses have started to rethink urban disaster relief and build preventive extreme disaster resistance to reduce the probability of major human and property losses.
Similarly, insurers will have to re-evaluate traditional contingencies and introduce innovative solutions that can overcome climate challenges. Insurance can complement public-sector measures with detailed risk know-how and data.
One such instance of this is the knowledge that a one-size-fits-all risk mitigation/adaptation solution is unlikely to be effective. The actual impact of climate change is not going to be uniformly distributed; it will instead depend on many factors, such as the hazard itself - that is, whether it is a tropical cyclone, fluvial/pluvial/coastal flood, sea level rise, drought stress, fire-weather, heat or precipitation stress - the specific geolocation, the exposure concentration, and the specific adaptation measures taken, among others.
This is the case with sea-level rise: it will significantly impact some coastal areas more than others, depending on their elevation, vulnerability to storm surges, and the adaptation strategies implemented. And so, knowing where sea-level rise will have the most disastrous consequences means that targeted decisions, such as where to locate an industrial park to avoid storm surges, can be made in advance.
Before any society can embark on a climate-change strategy, it has to first be able to identify and assess the extent of a climate hazard in a particular location and by a particular projected point in time (for example, by 2050, or 2100).
This could be particularly complicated, as it might require state-of-the-art scientific datasets and modelling for risks far into the future. Such locational risk intelligence tools are, however, available, and we have seen growing take-up from the financial sector, including banks and asset management companies, as they seek to identify and assess their exposures and work with their customers.
Two strategies
Once the particular climate stress and the precise locations have been identified, 2 strategies can then be taken: 1) mitigate the risk; and 2) adapt to it. Both approaches require the use of insurance.
2021 showed that the use of green technologies is set to evolve and grow as Asia accelerates its energy transition, partly as governments seek to meet their global commitments under the Paris Agreement of 2015. However, increasing investments in innovative clean energy solutions - such as photovoltaic modules, photoelectric storage systems, onshore and offshore wind power, and bioenergy - are frequently hindered by access to capital.
This is because traditional and institutional investors such as banks and pension funds may not be able to assess all the various technologies and risks, and this may deter them from investing.
Risk-carriers such as Munich Re can facilitate the market entry and affordability of these clean-energy solutions, by developing complementary innovative insurance solutions to mitigate the impact on balance sheets. This includes supporting warranties against defects and performance degradation, covering the physical damage to wind-farm projects during the construction and operating phases, or covering the output and repairs of bioenergy projects.
In addition to facilitating the growth of green technologies, there are also insurance solutions that can help bear the losses resulting from climate change in the event of loss or damage to property and agriculture, for example. Many of these solutions can be bespoke and complemented with advice on risk reduction from subject-matter experts.
Other solutions, such as parametric products or structured solutions, provide transparent and straightforward coverage; yield index insurance for agribusiness, for example, allows automatic payouts if actual yields fall below an agreed percentage of the yield threshold. These products can use digital tools such as crop-yield modelling, remote sensing, data analytics and artificial intelligence. Besides agribusiness, such parametric products can also be tailor-made for other climate-related hazards such as tropical cyclones, wildfires, and floods.
These are just a few examples. When it comes to climate risk management, there is a myriad of opportunities for insurers to leverage and go beyond offering payouts.
Public-private collaboration
Expanding public-private partnerships is one other way for societies to build resilience against natural catastrophes and support economic stability. This collaboration can range from insurers providing guidance to public entities on setting capital buffers for catastrophes, to insurers or economic development banks, like the World Bank, teaming up to cover higher-than-average exposures that might otherwise be not insured.
More work needs to be done to deepen the relationships between the industry, the private organisations, and the public entities to bring about the necessary policy changes that can help develop resilient communities. Having strong public-private collaboration improves the exchange of information, allowing experts to tap into each other’s knowledge, and driving coordinated action to level out gaps in preparedness.
The potential for insurers to enact positive change is tremendous, given the large insurance gap in Asia and the growing awareness around the benefits of insurance. Beyond just mitigating the economic impact of disasters, insurers provide a much-needed service and capacity through a set of sustainable measures, solutions, research, data analytics, and partnerships with governments and NGOs (non-governmental organisations) to support communities and bolster their resilience against natural catastrophes.
The insurance industry will also continue to tap various fields of expertise to help develop and commercialise innovative technologies that address climate-change impacts, and play a part in supporting the resilience of economies and societies that are increasingly exposed to the perils of climate change.
Roland Eckl is chief executive Asia-Pacific Japan, Korea, India, South East Asia, at Munich Re
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