The globe is being battered by an increasing number of natural catastrophes which are forcing risk managers to rethink strategy. Andre Martin, head of innovative risk solutions, Swiss Re Corporate Solutions tells StrategicRISK why you shouldn’t let natural perils disrupt your business.
When it comes to Asia Pacific, it is not hard to observe that the frequency and severity of natural catastrophes impacting the region is increasing. According to UN data, the number of natural disasters in the Asia Pacific has increased from an annual average of 44 disasters in the 1970s to 146 in the 2000s. From Typhoon Mangkhut that swept through the Philippines and Hong Kong, this years’ floods, heatwaves, to the recent typhoons Jebi and Trami devastating parts of Japan, the region is faced with more extreme weather events. On top of this, the earthquake and tsunami that left Palu in Indonesia devastated is still very fresh in our memories. According to this year’s sigma report, during 2017 alone economic losses from disaster events in Asia were an estimated USD 31 billion, of which only USD 5 billion were covered by insurance.
Another observation from the 2018 sigma report is that while globally, the number of nat cat events have reduced since 2005, the global total economic losses from these events has effectively doubled from USD 166 billion in 2016 to USD 330 billion in 2017 and the protection gap between insured and uninsured losses continues to widen.
Asia features in top 20 most costly insurance losses
Many mega cities in Asia, defined as having more than 10 million inhabitants and hosting important commercial, manufacturing and logistics hubs, are located in the Philippines, China, Japan, India, Indonesia and Bangladesh which are all highly exposed to natural perils.
For example, Cyclone Debbie in Australia, Typhoon Hato which ripped through China, Vietnam and Hong Kong, and Typhoon Lan (Paolo) which affected both Philippines and Japan all feature in the top 20 most costly insurance losses of 2017. The earthquake in Palu, Indonesia, brought down hotels, shopping malls and countless houses, while tsunami waves as high as six metres scoured its beach front shortly afterwards.
With Mother Nature becoming increasingly unpredictable, awareness and media attention around the increasing risks relating to climate change are at an all-time high. Particularly in areas regularly hit by natural catastrophes, consideration should be given to the economic consequences of the natural disasters and how the business as a whole will be affected directly and indirectly when choosing an appropriate insurance program.
Conventional business interruption insurance policies, while covering revenue losses arising as a result of damage to physical assets, typically do not provide sufficient cover in the event of wide area damage and the wider economic losses as a consequence of the event itself. Loss of attraction, supply chain disruption or airspace closures are just some causes that are not covered by traditional Business Interruption insurance. We see companies today beginning to review their insurance cover through a new lens – looking for ways to fill in gaps and complement their existing insurance programs. With the potential of natural catastrophes to cause wide area damage leading to high non-damage business interruption (NDBI) losses, parametric insurance is a logical solution
Case study: Airlines and airports
In recent times, airlines and airports have been impacted by very disruptive natural catastrophes. Volcano eruptions, harsh winters, and widespread flooding have caused major financial impact to both and added stress to passengers. The common denominator of these events was that business suffered although no physical damage was caused to the insured assets. The consequences of such events include reduced revenue, a stranded aircraft (often in the wrong places) and reputational damage, while operators still have to cover the fixed operational costs.
A large international airport was looking for protection against a range of specified nat cat and man-made events worldwide that would cause loss of revenue, and which would provide an easy pay-out calculation against clear and tangible triggers. In this case atmospheric, meteorological and seismic conditions were included. The solution was a “7-excess 7-days cover”. Following a disruptive incident and resulting closure of airspace or the airport, the cover is triggered on the seventh day of closure, where the airport would receive pay-outs for the next seven days with an option to extend cover for an extra seven days.
The protection helped stabilise earnings and provides quick cash relief. Compared to debt, the insurance solution is more cost-effective and includes no payback on a loan, as well as no covenants. If publicly communicated, the cover also provides transparency on risk mitigation to analysts and investors.
Case study: Luxury goods brand in Japan and non-damage BI
When natural disasters unfold, retailers often are concerned about supply chain shocks. However, one of the underlying storylines of the devastating 2011 Tohoku earthquake was that one sector of the global retail industry took a significant hit from a demand shock – the luxury good sector. Japan is famously one of the world’s greatest markets for luxury items, representing 11% of global luxury sales*. What we saw post Tohoku was that with Nat Cat events such as earthquakes, while not all parts of the country may be equally affected physically, such events will almost certainly dampen the consumer mood which has an impact on spending.
A luxury goods company in Tokyo had concerns about a significant drop in shop business (and thus revenue) in the aftermath of a major earthquake. The company’s traditional property damage policy provides BI cover resulting directly from any physical damage to their stores.. However, such traditional policies do not indemnify for the “non-damage” impact on revenue like loss of attraction or general consumer sentiment
The parametric solution that this company took up was a multi-year insurance policy that pays out pre-agreed amounts based on the level of an earthquake shake intensity index. The index-based solution worked well for this company as it is simple, transparent and allows a prompt claims payout. It also offers protection against the earnings volatility resulting from a natural disaster even if there is no physical damage to the stores.
This illustrates another case where parametric insurance can effectively complement traditional Business Interruption policies and fill the protection gap of businesses
Making a difference
Parametric insurance solutions can provide cover and convenience that conventional insurance products do not offer. These index-based solutions insure the probability of a pre-defined event occurring and will payout an agreed fixed amount when such pre-defined conditions are met (for instance, the magnitude of an earthquake or wind speeds in the event of wind storm).
It’s transparent and payments are made promptly, normally within a few weeks. This provides claims certainty and quick access to liquidity for the insured. That can make all the difference when businesses are trying to operate as normal in the event of natural catastrophe.