How innovation can build natural catastrophe resilience across the region

Economic losses from natural catastrophes reached $270 billion in 2021, according to data compiled by the Swiss Re Institute. Unfortunately, only $119 billion of those losses were insured, a huge protection gap that severely hinders the ability of communities and businesses to recover from catastrophic events.

While most of the focus tends to fall on large-scale, primary perils such as tropical cyclones and earthquakes, the fact is secondary perils such as floods and wildfires accounted for more than 70% of last year’s insured losses globally.

Generally speaking, the risks and impacts of such secondary perils are often not fully monitored nor modelled and related losses may be underreported, and therefore not accurately reflected in future projections. 

We believe this needs to change, and that insurers can help address a critical vulnerability in two main ways: by increasing the focus on secondary perils, and developing tailored solutions designed specifically to shield businesses from highly unpredictable natural catastrophe events.

This is an urgent task especially in the Asia Pacific region, where flood is emerging as a particularly devastating peril. In fact, there were over 20 severe floods in Asia last year alone, more than any other region.

It will come as no surprise to anyone who recalls the supply chain disruptions caused by the 2011 Thailand floods or those in Malaysia late last year, that the economic losses from flood events averaged almost $30 billion annually over the past 10 years.

Yet the flood insurance gap in APAC remains among the world’s highest. In 2021 insurance covered just 11% of economic losses due to flooding, compared to 32% in Europe and 36% in North America.

Why Asia is uniquely susceptible

Asia is urbanising faster than any region after Sub-Saharan Africa, and is also experiencing faster economic growth than any other region in the world. When a catastrophe hits a fast-growing urban area, the economic damage is much greater, and has a compounding effect.

These areas often have insufficient infrastructure to protect against disasters, because construction of features like dams, levees and seawalls can’t keep up with the rapid pace of development. 

Climate change is exacerbating the situation as warmer temperatures create conditions for a longer storm season, with storms that are both more frequent and severe.

This raises the likelihood of both direct storm damage, and losses from connected secondary perils like tropical cyclone-induced flooding. In Asia the impact of climate change could be massive, potentially causing a loss of 26.5% of GDP by 2050.

Emerging Asia will be especially hard hit because of both its exposure to tropical cyclones and floods, but also because in many countries, climate mitigation infrastructure is still in its infancy.

But the effects of any disruption are likely to be felt globally given the concentration of production in the region, and the critical role APAC businesses play in supply networks worldwide. 

All this points to the need to make addressing APAC’s natural catastrophe protection gap a priority. Given their economic toll, one significant step would be to consider reclassifying floods, generally considered a secondary or “smaller-scale” peril, as a primary peril and give it the same importance as tropical cyclones and earthquakes.

But most important will be to extend natural catastrophe coverage in the region, be it by traditional insurance or more innovative solutions. 

Typhoon Rai: Resilience in action

The Philippines provides an example of the destructive potential of- tropical cyclones but also how innovative approaches to insurance help businesses absorb losses, ensure continuity and get on the fast track to recovery.

The country experiences an average of 20 typhoons each year, and some cause catastrophic damage. Typhoon Rai, which struck the Philippines in December 2021, was one such storm, leading to the loss of over 400 lives and financial losses of nearly USD 1 billion.

Intense winds and flooding linked to the storm threatened countless livelihoods and businesses, in particular on the islands of Cebu and Mindano, which were among the hardest hit. 

One of our clients, a large utility company with an extensive network of transmission and distribution (T&D) lines in the region has a significant exposure to such typhoons.

They are exposed on one hand because of the vulnerability of “poles and wires” to strong winds, but also because T&D lines are a standard exclusion in most traditional insurance policies.

When a typhoon damages its T&D lines the insured can face significant financial losses from physical damage and business interruption, as well as clean-up costs and costs to upgrade their asset base. Furthermore, damaged lines cause service outages that directly impact the operations and livelihoods of their customers.

Swift access to liquidity is therefore essential to getting any affected parts of its network up and running again. 

Cat in a Box solution

Our solution for this client was a specialised cover based on parametric insurance, in which payouts are triggered based on specific, measurable conditions such as a typhoon with a minimum sustained wind speed.

The transparency and formulaic approach of parametric solutions paved the way to provide cover for an otherwise uninsurable risk, and also ensured very quick claims settlement and quick access to liquidity for the insured. 

Our Cat in a Box solution proved the right fit for this utility company’s specific needs. It takes its name from the ‘Cat’ in catastrophe and the ‘Box’ being a defined geographical area. When the ‘Cat’ reaches a specific threshold and passes through the ‘Box,’ the payout is triggered.

In this case, the Cat in a Box solution was triggered when Typhoon Rai reached sustained winds of nearly 190 km per hour and entered parts of Cebu and Mindanao, where most of the utility company’s assets are concentrated.

Despite the widespread disruption caused by the typhoon, the seamless claims process enabled by this solution made it possible for the insured to collect the calculated claim amount just over one month after Rai first made landfall - and only 12 days after the reporting agency published wind speed data for the storm.

The firm credited this process with allowing it to focus its attention and resources to the restoration of power, a critical part of recovery efforts and the return to normalcy for its customers. 

This example demonstrates how innovation isa crucial ingredient to mitigating rising natural catastrophe risks. It also shows how insurers can work closely with corporates to create solutions that are flexible, affordable, and closely connected to a business’s unique circumstances and uniquely local risk factors.

Risks from natural catastrophes may be rising, but advances in data analytics and reporting combined with a creative mindset ensure that more and more of these risks can and will be insured.

We hope rising awareness of the threat posed by natural catastrophes generally, and particularly secondary perils, will encourage insurers and businesses in APAC to join us in finding new ways to address the protection gap, and preserve the region’s dynamism.

Andre Martin is head of Innovative Risk Solutions APAC at Swiss Re Corporate Solutions