Navigating uncertain perils in the APAC risk landscape
The APAC region is no stranger to the devastating impact of natural catastrophes and extreme weather. Year after year, it experiences significant economic losses due to these events, says Canopius’ Mr Yann Marmonier.
Recent developments have shed light on the gravity of these challenges, and how seriously the industry is taking them. Lloyd’s, for instance, launched a systemic risk scenario estimating a colossal $5tn in losses over five years due to extreme weather events leading to food and water shocks.
This underscores the importance of understanding the impacts of climate change on our industry, which are linked to changes (and in some cases increases) in severe and disruptive weather events, and how they could lead to global food and water shortages.
The complexity of climate risk
Risk related to the climate is far from straightforward. Much of the recent natural catastrophe losses in the APAC region can be attributed to the intricacies of climate variability (on the timescale of months to a few years) and weather patterns (on the timescale of hours to weeks). One of the primary influencers is the El Niño-Southern Oscillation (ENSO), a cyclical phenomenon that alternates between El Niño and La Niña phases, and measured based on sea surface temperatures in the tropical Pacific Ocean.
El Niño typically brings drier conditions to most of the APAC region, while La Niña leads to wetter weather, often causing above-normal rainfall, which can lead to floods. The ENSO phase can also affect typhoon activity, in terms of activity, intensity and tracks. ENSO is not the only mode of climate variability affecting the region. Other large-scale processes like the Indian Ocean Dipole (IOD), can also interact with the impacts of ENSO, and can affect rainfall patterns such as those associated with monsoons. Understanding these phenomena is critical for predicting both weather and climate, enabling the (re)insurance industry to anticipate and prepare for financial losses in any given season.
What we are seeing
Earlier this year, a rare triple-dip La Niña ended, and El Niño conditions were expected to strengthen. After experiencing three La Niña phases in a row, in July, the World Meteorological Organization (WMO) declared the onset of El Niño conditions for the first time in seven years.
El Niño cycles typically occur between two to seven years and last between nine to 12 months. The expected impacts of El Niño include increased rainfall in parts of southern South America, the southern US, the Horn of Africa and central Asia.
At the same time, it can also cause severe droughts over Australia, Indonesia, parts of southern Asia, Central America and northern South America.
The last time we saw a strong El Niño was in 2016, when the world experienced its hottest year on record. Some experts have also expressed concern that this El Niño cycle could be a particularly strong one. In fact, the WMO recently released analysis using global data from European Union’s Copernicus Climate Change Service that September was easily the warmest on record, and 2023 is on a likely trajectory to become the warmest year ever recorded. The next few years could potentially be hotter still, if El Niño persists and intensifies.
The agriculture sector
One industry that bears the brunt of extreme weather is agriculture. The sector’s vulnerability is heightened by the chaotic nature of weather patterns, with periods of droughts and heavy rainfall often resulting in substantial losses. Impacts are difficult to predict, partly due to difference in spatial scales between climate and weather patterns and individual farms across a region. Extreme weather impacts can be very localised in nature such as hail damage, while climate variability can affect the underlying conditions such as drought, soil moisture or even length of growing.
To understand the impact of extreme events, we must also consider advancements in farming methods and soil science. Modern practices, such as planting cover crops between seasons to provide seasonal green cover with benefits such as improving soil moisture holding capacity, nutrient cycling and weed suppression, will mitigate some risk and affect the overall risk profile of farms that implement them.
To improve the accuracy risk predictions and assessments, (re)insurers can simulate various scenarios, stresstesting the impact of weather factors and agricultural science on crop yields. They can then overlay insurance policies onto these simulated scenarios to gauge the results.
Risk assessments using historical data can be made more complex as technology and practices change over time. To overcome this, time-series methods like exponential smoothing can be employed to assign more weight to newer weather and crop yield records, ensuring that the most recent data informs risk assessment for the present day.
Leveraging technology is another crucial aspect. Mobile applications, in particular, are scalable and can reduce distribution costs in serving a large network of small farms. This can make insurance more accessible and reduce the protection gap, which is very important in areas vulnerable to the impacts of climate change.
Embracing new green technologies
The urgency to combat climate change has driven the adoption of new, green technologies in many sectors. However, these technologies bring their own complex risks. The maritime industry, for instance, has come under scrutiny for the carbon emissions of vessels, and is turning to solutions like battery-powered electric vessels and ammonia-powered vessels. These alternative energy sources offer significant carbon emissions reductions in the long term. However, they may introduce or increase other risks, such as fire, explosion, thermal runaway, and ammonia gas containment breach.
As the world shifts toward sustainable energy sources, the (re)insurance industry must be prepared to provide comprehensive risk assessment and management, and insurance coverage tailored to these emerging technologies.
At Canopius, we are working closely with organisations such as the Maritime and Port Authority of Singapore to develop prototype electric vessels and with Fortescue Future Industries for ammonia-powered vessels, ensuring safety and containment measures are in place to mitigate the risks associated with these innovative technologies.
These projects may also have farreaching implications for sustainability in the maritime sector, setting a precedent for more eco-friendly shipping practices. Their long-term impact is poised to make a significant contribution to reducing the carbon footprint of maritime operations, with potential savings of up to 190kg of CO2 per hour being suggested for the electric vessels, thereby contributing to its net-zero pathway.
The role of (re)insurance
The (re)insurance industry plays a critical role in providing financial security, promoting resilience, and supporting business as it faces more extreme climate and new ways of managing natural catastrophe related risks. By embracing innovation and adapting to changing circumstances, (re)insurers can navigate the perils of the APAC region, contributing to the region’s economic stability and growth.
At the sa me time, accurately modelling increasingly loss-driving perils, like floods and bushfires, and low frequency events remains a significant challenge.
(Re)insurance companies must invest in technical capabilities, resources and research that will help them understand these perils better to mitigate the associated risks and move beyond their reliance on historical data. This especially important in the context of a changing climate where the past does not necessarily represent the future (or even present day in some cases).
And in the ever-changing and challenging landscape of managing catastrophe risks in the APAC region, it is essential for (re)insurers to maintain a healthy portfolio. A well-diversified portfolio remains a cornerstone of risk management, enabling (re)insurers to spread their exposure across various regions and perils. By doing so, they not only enhance their capacity to absorb losses from catastrophic events but also ensure their own financial sustainability and continued growth.
This diversity acts as a buffer, helping (re)insurers ‘weather the storm when losses occur, whether they be climate-related or stemming from other unforeseen perils.
Mr Yann Marmonier is chief underwriting officer – APAC with Canopius.