Nat Cat Protection Gap in Asia

Sufficient Nat Cat cover?

The number of natural catastrophe events and the size of the associated economic losses during the period of 2011-2020 is the greatest among the past few decades since 1970. Even though the insurance market around the world is getting more mature with higher insurance penetrates particularly over the developed countries, globally according to Swiss Re Sigma, there is still 64% protection gap (the difference between economic losses and insured losses) for the natural catastrophe events that took place in the past decade. The 2020 Ecological Threat Register stated that the Asia-Pacific region, experienced the largest number of natural disasters for the past 30 years and that the frequency could further increase in the coming 20 years. While there are approximately 70% uninsured losses for natural catastrophic events in United States and Western Europe for the past 20 years, the protection gap in Asia averages a worrying of 92%.

Despite being the world's third largest commercial insurance market in premium terms, it may be a surprise to learn that Japan still has 74% (or USD260billion) of its natural catastrophe losses uninsured over the past 10 years. Interest in purchasing higher limit, or different products such as business interruption, contingent business interruption, derivatives, parametric, cat bond etc remain relatively low. Japan may be more developed covering natural catastrophe events compared to most Asian countries, but when it comes to sufficiency of coverage, we are still behind US and Western Europe.

Earthquake covers and Typhoon & Flood covers are equally important?

Excluding Tohoku Earthquake in 2011 and Kumamoto Earthquake in 2016, the largest catastrophic events of the past decade in Japan were Typhoon Jebi (Typhoon no.21) in 2018 and Typhoon Hagibis (Reiwa 1 East Japan/ Typhoon no.9) in 2019, which resulted in significant economic losses totally USD 17billion and USD 13billion respectively. Typhoon Jebi was once identified as the most destructive typhoon that hit Japan in 25 years, yet a similar Typhoon Hagibis came just one year after. Although the protection gap of Typhoon Jebi and Hagibis are at relatively low 20% and 38% respectively, Typhoon Prapiroon (Typhoon no.7) in 2018 recorded a gap of 73%. The big difference is in part down to the longer duration of damage caused by heavy rain and flooding after the typhoon, as well as the lower insurance penetration in Kyushu area versus Kando and Kansai area. The risks brought by these secondary peril (e.g. rain and storm surge after typhoon or tsunami after earthquake) should not be underestimated, even though the reporting focus is always on the primary event, Swiss Re Institute mentioned.

The costliest natural catastrophic loss across whole of Asia in 2020 is the Wuhan floods in Southern China, total losses reached USD17billion, but only 2% is being insured. The flood was caused by heavy rains in June, total of 443 rivers have been flooded, 33 of which reached the highest levels in record, as reported by CNN. The total loss from this flooding event is closed to that of Typhoon Jebi in Japan. We shall remind ourselves flooding event of similar size could also happen in Japan in the future and that more considerations be given to the impacts brought by non-earthquake catastrophe events, especially when global warming will likely increase both the frequency and severity of typhoons and flood events.

Fully understand the policy coverage?

There are several reasons why protection gap exists. Some of them includes clients' and customers' buying behavior, risk management approach and affordability, as well as access to insurance market capacity and availability of products. Loss Adjusters and Claims Managers also commonly address that one of the possible hidden reasons could be the insufficient understanding of policy coverages.

In 2011, besides the Tohoku Earthquake, another painful catastrophe event took placed in Asia – the Thai Flood. Swiss Re Sigma stated the total damage was around USD 55 billion with only around USD 18 billion being covered. Lots of farmlands and manufacturing factories were affected. Seven major Industrial Estates were inundated by 10 Feet of water (approximately one storey height or higher). As a result, there were difficulties accessing these sites for not only the company owners, staffs, customers but also loss adjusters. The settlement of the insurance claims took more than one year on average. International supply chain disruptions were made as major portion of the total losses. Although most the economic activities recovered within 12 months, the reconstruction from the event took years, according to the World Bank statements. With globalization, many Japanese automobile and food companies have their suppliers or factories in Thailand. How much of their losses as a result of supply chain issues were indemnified? Was there adequate coverage for Business Interruption and extended clauses? Comparable situation would be Typhoon Jebi in Kansai International Airport when extreme conditions of storm surge and high tidal flooding were experienced. Logistics were totally halted. Companies that were not located in Osaka, would also have suffered the impact from their suppliers or branches.

Similar to Japan, Hong Kong and Macau face strong typhoons every year with an average of 5.9 typhoon warnings a year for the past 40 years. In 2018, Typhoon Mangkhut hit Macau badly. Having learnt the lesson in previous year when Typhoon Hato brought huge damage in Hong Kong, the Macau government forced all the casinos in the city to shutdown for 33 hours for people safety. People had to refrain to go to the casino either for work or for entertainment. The Union Gaming Securities Asia estimated that the shutdown led to a USD 185million loss in revenue. The losses from water damage, shortage of electricity and landscaping damage were covered under normal property damage policies, however, the loss of revenue from the government's shutdown order was not being indemnified. Japan has no casinos, nor its government has the legal power to enforce shutdown to companies, but what if there is a severe nature disaster happened, and your company can help to save lives for others while stopping the business for running? Under Covid, we have experienced similar situation with the Emergency Declaration, it is not difficult to imagine if we have to act similarly when severe nature disaster comes.

To close the protection gap

In-house risk management department is not common in Japan. To understand best the risk exposures of your business nature, whether your coverage is sufficient, how exposures affect your particular company, please feel free to contact our Sales team or Underwriting team in Swiss Re Corporate Solutions, Japan Branch. We have innovative risk transfer products and solutions, such as parametric BCE for earthquake, Cat-Pro for Flood, Typhoon, and other cat perils, to suit your needs.

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