Franck Baron, PARIMA chairman and group general manager, risk management and insurance, International SOS, talks about the risks on his radar in Asia


SR: How has the risk landscape in Asia evolved over the past five years?

Some of the themes that have emerged include super- spreader risks and the greater interconnection of risks. Increased instability can’t be washed away but should be taken care of through prevention, proactive risk management and risk financing. Risk is on the c-suite agenda, but are we as risk managers?

We also face a density risk. Growing concentrations of activities take place in a small number of world epicentres: the global financial system is effectively rooted in New York and London, global electrical manufacturing concentrated in certain regions of China and Hong Kong, Thailand produces 40% of the world’s hard drive disks etc. When Tropical Storm Nock-ten hit Thailand in 2011 it affected car and computer manufacturers all over the world. Profit-driven outsourcing had led many firms to the same cost-efficient location.

SR: What are some of the risks that you are concerned about?

1. The lack of loss prevention and health and safety focus.

We witness a wide range of attitudes and knowledge about health and safety, fire safety, risk engineering and loss prevention, with some owners and managers being highly motivated to make positive changes. Others still see any change as a threat to their status, livelihood or profit line. The motivation ranges from those who feel a moral obligation to make changes (duty of care), to those who are doing it because of external legal, social or financial pressures.

2. The transmission of diseases. Although one generally thinks of globalisation as a process involving a multiplicity of locations, and thus a geographical diversification of risk, in practice it has also resulted in a concentration of risk and instability. By allowing these nexuses to arise, the world is literally putting all of its eggs in one basket and leaving itself vulnerable to highly disruptive hazards.

Globalisation, population growth, and urbanisation have facilitated the transmission of infectious diseases. The complexity of global travel and global integration means that any ‘patient zero’ is now but a few degrees of separation from formerly isolated communities.

According to medical experts, more than 30 new disease-causing organisms have appeared in just the past two decades. These have included such deadly pathogens as Ebola, Hepatitis C and HIV.

In addition, diseases such as cholera, malaria and the plague, once believed eradicated, have returned with even greater virulence.

By 2025, the fraction of the world’s population living in cities is expected to rise to 70%.

This is important everywhere, but especially in overcrowded or unhygienic conditions, where people live close to animals and where water is easily contaminated. Many ‘bio- geographic barriers’ have been removed. Continual introduction of pathogens to new regions is inevitable in our globally connected planet. In the 21st Century, no disease can remain a solely local or national problem.

3. Global warming, or, more neutrally, climate change facts include long time series for global average temperature, global carbon dioxide concentrations, and sea level rise. Considerable uncertainty exists in many forward-looking estimates but also highlight the long timescales over which they are expected to emerge.

This impacts both risk management and insurance. The insurance industry serves the broader economy by bearing unwanted volatility. The greater the volatility the greater the value that insurance can add to the global economy. Let’s not forget that 183 million Asians are threatened by inundation due to rising of sea levels.

SR: What are some of the unique risks affecting Asia’s megacities now and into the future?

The majority of global urban assets are not adequately protected and insured and yet cities are more at risk than they should be. As economic growth creates more assets which require protection, the insurance industry can move to the next level by successfully demonstrating the value of insurance to businesses, governments and society at large.

SR: 2011 was a year of major catastrophe losses from the region. As insured values increase, presumably such events will become more common. What are the challenges from a natural catastrophe perspective?

One area where insurance plays a crucial role is in mitigating the impact of business interruption, which was well demonstrated during 2011.

But a recent report by the Asian Development Bank tells us that only 7.6% of Asia’s economic losses were insured last year, compared with 67% in the US. With low insurance penetration rates, the burden to cover the cost of catastrophes falls on governments and taxpayers.

Insurance take the risks of natural catastrophes off the balance sheets of businesses and the taxpayer. It is an area where insurers can add very clear value to society. Society must strengthen the resilience of urban areas through both physical and financial precautionary measures.

The nat cat exposure in Asia is, first of all, a great opportunity to raise the need for better risk management, loss prevention and insurance. This being said, a lot still needs to be done, including a more risk management-minded dialogue with local authorities to treat catastrophe exposures as critical ones.

SR: As the economy in Asia continues to grow and develop, how do you see risk challenges and insurance demands altering?

The challenges are two-fold: (a) ensuring that the proper risk picture is provided to the final decision makers: as we witness still too much of compliance-driven ERM which does not provide enough emphasis on entrepreneurial risks/opportunities and the operational risk exposures (b) developing a more professional insurance sourcing and structuring to cope with the real risk exposures and provide organisations with a reliable financial protection

Disasters have heightened an urgency to strengthen risk management across the region. In the past decade, the region has been blighted by several deadly and economically damaging catastrophes: the Indian Ocean Tsunami (2004), Cyclone Nargis (2008), the Tohoku Earthquake (2011), the Thai Floods (2011) and Supertyphoon Haiyan (2013).

Asian cities are the most heavily exposed to natural catastrophes, both in terms of the number of people potentially affected and economic impact. The Tokyo-Yokohama region is the top ranked urban area in terms of population exposed (see table, right). Many cities exposed in Asia and particularly southeast Asia are in countries where there is no developed insurance market.

Increasingly, the distinction between natural and man-made disasters is being blurred. Not only the causes, but also the implications, of virtually all disasters are the results of human action, as the differential impacts of hurricanes in Haiti and its neighbour the Dominican Republic (which shares the same island) attest. This should continue to encourage Asian corporates to rethink and improve their risk management functions.

Asia requires more insurance (given its low penetration in a few countries) and more understanding of its related professionalism and expertise. There is also a need for more relevant products such as cyber, business interruption and executive protection. This is a very key ambition and mission of PARIMA.