Perspectives

New tools and pressures to manage flood risk for the private and public sector

Addressing impacts of floods is critical to economic sustainability in the Asia Pacific region

Addressing economic and societal impacts of floods is critical to economic sustainability in the Asia Pacific region.

Globally, flood is one of the most significant natural catastrophe perils. In 2017, floods accounted for nearly half of the natural catastrophe events and 65 percent of natural catastrophe deaths in the world – two thirds of the deaths occurring in Asia.  Over USD 500 billion of GDP is exposed to flood risk every year in the Asia Pacific region.  The United Nations predicts that economic losses from natural disasters and weather catastrophes will reach USD 160 billion per year by 2030 with only 8 percent of losses likely to be covered by insurance.

In addition to all the individual tragedies, the impacts of catastrophic events are manifold, ranging from destroyed infrastructure and damaged physical assets, to costs related to immediate disaster response and relief measures. In addition, there are losses to residential homeowners, rural communities, property damage and business interruption losses to corporation. In Asia Pacific, currently the lion share of the economic losses are absorbed by the public sector as governments not only need to rebuild public infrastructure but in many instances tend to provide financial assistance to affected population groups

The Asia region is particularly prone to flooding because of a combination of three factors: hydrology, population density and higher asset concentration, and mitigation. Much of Asia, especially southern Asia, is subject to extreme seasonal rainfall from monsoons and typhoons. Secondly, Asian cities are much denser than their European counterparts, with increasingly concentrated urban areas built around rivers and in coastal areas.  According to the Lloyd’s City Risk Index, which examines flood risk as a percentage of gross domestic product, nine of the top 10 cities at risk are located in Asia. Finally, investment in flood mitigation measures has not accelerated at the same pace as population and asset growth.

This threat is expected to grow over the coming decades. Climate change projections from the Intergovernmental Panel on Climate Change (IPCC) point to greater extremes in both the intensity of rainfall events and droughts in Asia. In addition, changes in sea levels will threaten densely populated coastal areas.

The combination of population and economic growth and flood hazard will force societal changes to cope with the rising risk. An integrated approach to disaster risk management is key, which comprises both, on the one hand more investments in resilient disaster risk reduction and mitigation measures, and on the other hand the implementation of sound risk financing strategies in order to be better prepared against the financial consequences once events have occurred.

 

Economic losses from natural disasters and weather catastrophes will reach USD 160 billion per year by 2030

A significant investment in adaptive measures such as flood defenses is required over the next 20-30 years in order to maintain even the current level of flood risk. Nations will need to take active measures such as improvements to storm drains and physical defenses, and more passive approaches around improving urban planning, halting wetland encroachment and implementing better building standards

Given tight state budgets and competing priorities for funding, governments also should consider more risk transfer to the private sector, including insurance. Absent insurance cover, event recovery is dependent on government outlays that may not materialize quickly and are often limited in scale. Insurance protection allows for rapid payouts and more complete coverage significantly shortening recovery time and reducing the longer-term financial burden for individuals and governments.

There are number of well-known issues why flood insurance penetration across the APAC is still relatively low, and one of the underlying key issues influencing the insurance coverage gap is a lack of understanding of flood risk. Globally, flood is the most significant under-modeled peril and this is particularly true for the Asia-Pacific region. However, new data products, such as flood hazard maps, have become more readily available in the past few years, from both private- and public-sector sources and have helped the insurance industry estimate flood hazard. This data, along with other data types, such as probabilistic event sets and defense information, improve loss calculation frameworks, allowing insurers and reinsurers to quantify the financial risk. With this knowledge, the insurance industry can make informed business decisions and work with the public sector to close the protection gap in ways that are practical and affordable for the region. Of course, to be successful, this needs to come along with new insurance product development and new approaches to distribution and building financial literacy.

However, progress in bringing the value-add of insurance to those exposed to risk has been limited.  Dynamics in the Asia Pacific region point to the necessity for expanded public-private partnership and innovation by the insurance industry to address the issue. For example, the insurance industry should implement better strategies that aim towards increasing insurance penetration among exposed urban and rural population. In parallel, the sector can provide customized solutions directly to the public sector, thereby allowing governments on sovereign, state and municipality levels to better shield their state budgets against the financial consequences of natural disasters.

Recent functional risk transfer mechanisms are using data, analytics and modeling to spur change in the landscape around flood, droughts and other perils. Analytics and tools facilitate risk transfer such as insurance-linked securities that, coupled with available (re)insurer capacity, can provide abundant risk capital to benefit communities. Some governments in the region, including the Philippines and the Pacific Islands have already started to transfer natural catastrophe risk to the (re)insurance and capital markets.

Greater and improved insurance offerings can play a significant role in narrowing the gap to help ensure sustainable economic development in one of the most dynamics regions of the world.