Innovation needed to fight climate risk

Parametric insurance is viewed as one of the newest tools in the fight against extreme weather risk. The products do not indemnify loss but pay out a set amount when an event reaches a certain threshold, such as a magnitude 7.0 earthquake, or a set level of rainfall.

The digital insurance is said to offer certainty and speed to companies in the wake of a disaster and is viewed as a more accessible and affordable form of coverage.

Aon head of analytics Peter Cheeseman believes parametric insurance could be a useful tool for industries in high-risk zones. “Innovative Parametric or index-based covers are available and offer companies protection from extreme weather events. These custom solutions are flexible and can be based on how much risk the companies would like to retain themselves,” Cheeseman added.

Parametric insurance has emerged over the past few years to cover previously uninsurable risks. They can be claimed against quickly using mobile technology.

Cheeseman believes innovative products, such as parametric insurance, can help insurers calculate risk and widen access to insurance coverage. Yet he believes insurers and the public sector need to do more to safeguard industries in high-risk regions. 

Cheeseman said: “More innovation needs to occur around the specific types of viable protection that the industry can provide to the community moving forward. With regards to investment, natural catastrophes remain a key risk for agriculture across the Asia Pacific region, but the good news is that the insurance industry can help – if governments are prepared to increase their budgets and invest in more comprehensive insurance schemes.” 

The comments come as Aon revealed its 2018 Weather, Climate & Catastrophe Report. The overall insured loss for APAC was $21 billion, nearly 91% more than the average between 2000-2007. A total of 144 separate events caused 10 or more deaths and a $25 million insured loss/$50 million economic loss.

The top three most expensive events of last year, in terms of economic and insured loss, all happened in Japan. Typhoon Jebi caused a $13 billion loss, Typhoon Trami caused a $4.5 billion loss, and Typhoon Prapiroon resulted in $2.65 billion of damage. Overall, APAC had 50% more severe weather events (31), than the average so far this century, according to Aon.

Cheesman says the Asia-Pacific region is “one of the most disaster-prone regions in the world with a wide variety of natural hazards”. “If we look at 2018, the APAC region had its second highest aggregate insured loss year since 2000. This was largely due to several high-loss events in Japan where insurance penetration is significantly higher than many other countries across the region.”

While insurance can help risk managers in high-risk zones, Cheeseman is concerned by the scale of recent weather catastrophes to hit Australia, with costly droughts and regular severe storms exceeding AUD$1 billion in damage.

He says: “Droughts cost the local economy more than US$1 billion (AU$1.4 billion) in 2018. The drought that happened last year led to a 20 per cent fall in yield compared to 2017, putting enormous pressure on rural communities and farmers.”

Cheesman said the Australian agricultural sector would face climate-related challenges in the year ahead: “Bushfires continue to be a concern across many parts of Australia. Extreme summer temperatures and expansive drought conditions led to dozens of bushfires in parts of New South Wales and Victoria in 2018. Floods also continue to be a concern. Recent monsoonal rains and resultant flooding have caused significant property damage and livestock losses across northern Queensland.”