The four key enablers of technology and data; product innovation; research and development; and an integrated ASEAN market, can be deployed to put Asia in a strong position to address the challenges of effective assessment, management and transfer of disaster risks, said Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, who spoke at the recent 8th Institute of Catastrophe Risk Management (ICRM) Symposium held in Singapore.
He highlighted the widening protection gap for Nat CATs in Asia, leading governments to have to finance recovery costs on an ex-post basis, raising revenues, issuing debt, or relying on donations from abroad after an incident. This is unsustainable and comes at the cost of economic development, he noted.
Technology and data
Through the use of sensors, satellites, and IoT devices, more data is being captured about the causes and impact of natural catastrophes. Big Data analytics enables better quantification and pricing of risks, and helps strengthen ex-ante risk resilience measures.
For example, in remote sensing, satellites can be used to monitor rice growth patterns and anticipated crop yields in Vietnam, Philippines, India, Thailand and Cambodia to help underwriting and pricing, and also perform loss assessments in the event of a disaster, which leads to quicker release of claims to those affected.
Insurers and governments are also able to detect droughts and floods, and their potential impact on harvests early, enabling a quicker response. In the event of a disaster, the before and after images allow insurers to perform loss assessment and support quicker release of claims to the affected farmers.
Product innovation
Mr Menon also said that there are new insurance products and solutions, such as index-based and parametric insurance. Unlike traditional insurance which indemnifies actual losses, parametric insurance solutions make pay-outs based on catastrophe events hitting certain pre-defined parameters such as hurricane wind speed or earthquake magnitude.
“We are also seeing increasing use of alternative risk transfer mechanisms, such as insurance-linked securities (or ILS) in disaster risk management,” Mr Menon added.
Catastrophe bonds, the most common form of ILS, enable insurers and reinsurers to transfer some of their risks to the capital markets. He pointed out that Japan has actively tapped ILS to diversify the insurance industry’s exposure to natural perils.
Research and development
The third enabler to close the Nat CAT gap is R&D. Singapore has made good progress in fostering a natural catastrophe research ecosystem, said Mr Menon. One example is the ICRM, which has emerged as Asia’s leading research institute in catastrophe risk since its 2010 launch and has been involved in multiple projects including conducting seismic analysis for Sumatra and flood risk assessment for Jakarta.
He added that a number of other local and global initiatives aimed at building disaster risk resilience are also being undertaken in Singapore. Recently, the insurance industry, led by Lloyd’s, signed a Nat CAT Statement of Intent with MAS and UK Trade and Investment to promote the development of natural catastrophe insurance in regional markets. As part of the Statement of Intent, eight Lloyd’s Syndicates have committed US$400 million in natural catastrophe capacity in emerging markets, including Asia.
An integrated ASEAN market
The fourth enabler is improving market access. The regulator noted that ASEAN countries are working together to open up insurance market access within the community, enabling greater risk diversification beyond national boundaries. This diversification is critical to building resilience.
The majority of ASEAN member states have already committed to made a commitment to liberalise by 2025 the cross-border supply of international Maritime, Aviation and Goods-in-Transit or MAT insurance, and are aiming to substantially liberalise catastrophe reinsurance by 2019.
“In Asia, insurance protection against natural catastrophes has not kept pace with economic development. There is a significant protection gap. Over the last 20 years, Asia has accounted for almost half the world’s economic losses from natural disasters, amounting to more than US$900 billion. Yet, less than 5% of economic losses in developing Asia were insured,” he said.
He added that Asia must put in place mechanisms for the effective assessment, management, and transfer of disaster risks, and advances in technology, innovation, research, and market integration put it in a strong position to address these challenges. A