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Insurance protection gap exposed by climate change in Asia’s cities

Image: The damaged Songshan North Road of Zhengzhou after 2021 Henan floods. GNU Free Documentation License.

March 2022

As climate-related disasters become increasingly frequent across Asia, the region’s large insurance gap is ever-more apparent. The insurance gap, or the difference between economic losses brought about by natural disasters and the insured losses is especially acute in the Asia Pacific region, leaving it financially exposed.

Last year, insurance giant Munich Re issued a report showing that the region has an insurance gap of 83% as compared to the global average of 57%. According to the report, the region suffered economic losses of over $50 billion in 2021, of which only $9 billion were insured. For example, according to a report from Swiss Re, less than 9% of the USD 900 million economic losses incurred in the January 2020 floods in Indonesia were insured. 

The frequency and severity of climate related shocks and stresses, continue to highlight the lack of protection that citizens around Asia have. The situation is likely to become even more apparent under climate change. Annual economic losses from natural hazards in the Asia-Pacific region and are expected to reach $160 billion by 2030.

Evidence from the Munich Re report suggests that limited awareness of the benefits and value of insurance against climate-driven extreme events is one of the biggest restraining factors for the insurance market. Alongside this, affordability plays a factor, with many insurance products not designed in such a way as to be accessible to the most vulnerable citizens.

With advances in technology, data and climate modelling, new forms of insurance and disaster risk financing are becoming available that can offer affordable protection against climate-related shocks and stresses. For example, parametric insurance products can protect urban communities by paying out to policyholders when a climatic threshold is crossed (such as a drought for more than a specified number of days) or when an extreme event occurs (such as a flash flood). As pay-outs are not contingent on assessing losses, funds can be disbursed quickly, allowing communities to recover more quickly.

For municipalities, insurance that covers critical infrastructure assets against damage from climate impacts can also have wider benefits. For example, insurance can help to lower municipal credit risk, and unlock access to new investment, and encourage municipalities to invest in resilience measures which can lower premiums.

The insurance paradox

Whilst well-designed insurance products are a useful tool in providing financial protection for poor and vulnerable communities, there is a danger that they may become increasingly unaffordable if countries underinvest in adaptation and resilience building. Data from Swiss Re showed that insured losses from natural disasters rose to around $80 billion in 2020 from around $50 billion in 2019.

If the insurance gap begins to narrow substantially in climate-vulnerable areas, and climate impacts simultaneously become more frequent and severe, this could strain insurers profitability and capitalisation. They would need to secure sufficient reinsurance protection or continue to increase the cost of premiums. 

Given these competing pressures, insurers are incentivised to offer insurance alongside support for better climate risk management practices to reduce the risks of catastrophic losses. Investing in climate resilience measures that protect critical infrastructure and assets can help to keep them insurable. The ability to do this depends on undertaking evidence-based risk-assessments using good quality data. Advances in global climate data modelling and tools, such as ADB’s Spatial Data Analysis Explorer (SPADE) platform, have made such method more accessible for cities across Asia.

 

Solutions at scale 

 

Several initiatives already exist to increase the ability of insurance and disaster risk financing to contribute to climate resilience in the Asia-Pacific. For example, The Asian Development Bank’s Integrated Disaster Risk Management Fund was established in 2013 to support regional disaster risk management projects, and ASEAN’s Disaster Risk Financing and Insurance plan of action entered its second phase in 2019, promoting risk assessment, risk advisory, and capacity building in the region.

These initiatives largely focus on supporting the enabling conditions for disaster risk financing through capacity building and strengthening fiscal management and governance. However, there are relatively few programmes that operating at the necessary scale to meaningfully closing the insurance protection gap. Through its Urban Climate Change Resilience Trust Fund (UCCRTF) ADB is working to overcome this by supporting innovative approaches to climate resilience using disaster risk financing and insurance products.

For example, in Viet Nam the Disaster Risk Financing for Hue City project is piloting the implementation of a new ‘Law on Management and Use of State Property’ which mandates the procurement of insurance for public assets of high value and are at high-risk from natural disasters. The project consists of four main components: i) mapping and analyzing valuable and at-risk public assets; ii) assessing the feasibility of disaster insurance; iii) designing disaster risk financial solutions to offer insurance at effective cost and in wide scope in Hue; and iv) delivering capacity building and disseminating knowledge for decision-making officials.

The project team is now at the stage of solution design, working closely with the Insurance Supervising Authority (ISA) and the Department of Finance of Hue, to understand what type of insurance product would be fully compliant with the new law, and meet the needs of the Hue Provincial People’s Committee (PPC).

Local municipalities are well placed to understand which assets are most important for the resilience of the local economy and vulnerable populations. They also have a lot to gain from protecting themselves from the financial shock of damage to their critical infrastructure systems.

Cities are particularly exposed to climate change impacts, as they have a high concentration of valuable assets in vulnerable locations. Repeated damage to high-value public assets puts significant strain on municipal and national government finances. Insurance is a way to reduce the overall fiscal risk carried by the state and pay-outs can also allow for faster reconstruction and recover following a disaster.

Hue is one of cities under the Secondary Green Cities Development Project. In addition to this disaster risk financing project, UCCRTF supports Hue City in implementing a community-led projects to build resilience at the local level. The city is also a pilot city under the Spatial Data Analysis Explorer (SPADE) platform, a geospatial data repository led by ADB and UCCRTF. 

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