Navigating natural catastrophes and man-made risks

 

Vol 47: Issue 3 | October 2024

In short:

• The Asia Pacific has experienced numerous natural disasters, and they are becoming more common and more extreme because of climate change.
• Some insurance events have led to changes in legislation or to insurance policies to expand or limit exposure.
• Increasingly, insurers will have to work with governments, regulators, councils and communities to manage foreseeable risk, such as flood and bushfire.

For insurance industry veteran Professor Allan Manning, the landmark Cyclone Tracy disaster in 1974 will always go down as a significant catalyst for change in the way insurers help customers to get their lives back on track.

The founder of LMI Group says the Darwin tragedy, which flattened the city, highlighted the need for a rethink by insurers.

“If I go back to Cyclone Tracy, a lot of insurers at the time did cash settlements, but what we found is that a lot of people just drank the money or spent it on other things,” he says. “By the time builders came along, people didn’t have any money left for repairs.”

Manning says positives emerged from Cyclone Tracy, however. Stronger building codes ensued, heralding the start of better national building standards. For insurers, the event started the momentum for embracing science and risk modelling to better manage their exposure to natural catastrophes.

Heavy price to pay

In an era of rising threats from climate change, terrorism and cyber attacks, the insurance industry faces challenges on multiple fronts.

Swiss Re recently reported that global insured losses from natural catastrophes alone hit US$60 billion in the first half of 2024, with severe thunderstorms accounting for two-thirds of that figure.

Trent Thomson, CEO Australia & New Zealand for Swiss Re, says Australasian events such as the 2011 Christchurch earthquake, the 2019-20 Black Summer bushfires and the 2022 floods in Queensland and northern New South Wales underscore the multi-pronged threat.

Likewise, international events including the 2011 Tōhoku earthquake and tsunami (triggering insurers to embed secondary perils such as tsunamis in catastrophe modelling for better risk assessment) and the 2004 Indian Ocean earthquake and tsunami (highlighting the vulnerability of coastal regions) have informed the insurance industry’s response to disasters.

“These large and sometimes extreme events almost always present the industry with unexpected impacts and typically force a reappraisal of risk views,” says Thomson.

For example, the Christchurch earthquake surprised reinsurers and insurers with the extent of secondary loss drivers, such as liquefaction and landslide risks, as well as complexities in claim settlements.

Thomson adds that the industry continues to work to “close the protection gap” via insights from catastrophe modelling and greater understanding of secondary perils. “However, excluding Australia and New Zealand, data quality continues to be a challenge that the industry in the Asia Pacific needs to address,” he says.

Meanwhile, high rates of under-insurance throughout Asia were the catalyst for the 2019 launch of the Southeast Asia Disaster Risk Insurance Facility (SEADRIF).

The initiative was established by ASEAN+3 countries as a regional platform to strengthen financial resilience to climate shocks and disasters for member countries, which currently include Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, Japan and Vietnam — distributing rapid payouts to governments in the aftermath of a loss event.

Aon’s 2024 Climate and Catastrophe Insight report reveals economic losses in the Asia-Pacific region reached US$65 billion in 2023, driven primarily by floods in China and drought in India. Of this figure, only US$6 billion was covered by insurance — proving that SEADRIF is a much-needed solution.

In August 2023, for example, the SEADRIF Insurance Company (which provides disaster risk financing and insurance products to participating countries) made two payouts to the Laos Government totalling US$1.5 million to support flood relief efforts.

At the time, Yoshihiro Kawai, board chair of the SEADRIF Insurance Company, said: “The SEADRIF Insurance Company collaborated with the Government of the Lao PDR in offering the first insurance policy that provides protection against flood risks and other shocks. Within an hour of receiving the notice of loss forms, the board convened and approved the claims. Payouts have been expedited to contribute to a timely response and recovery efforts.”

Noting the increase in frequency and intensity of extreme weather events due to climate change, Kawai added: “We are committed to stand with the Government of the Lao PDR and other member countries in strengthening the financial resilience against disaster risks in the ASEAN region, through the use of innovative financial products.”

Risky business

APAC has undoubtedly borne the brunt of many catastrophes (see breakouts). Natural disasters aside, the COVID-19 pandemic, terrorist attacks such as 9/11 in 2001 and the Bali bombings in 2002, and a growing number of cyber attacks in recent years (including the Latitude Financial, Medibank and Optus data breaches in Australia) are all facts of business for insurers.

Such events have forced them to constantly refine their risk-assessment models and incorporate advanced technology and data analytics to better predict and price risk.

Peter Cheesman, head of Analytics at Aon, says that over the years, insurers have had to quickly learn from and react to new and ever-greater threats, amongst them Hurricane Andrew, which struck Florida in 1992. The storm prompted insurers to start managing coastal exposure and led to the introduction of hurricane deductibles in insurance policies.

Hurricane Andrew also resulted in the bankruptcy of 11 insurance companies and significantly depleted the surpluses held by more than 30 others. “The resulting impact after this was that insurers began using more reinsurance capital from around the world to spread risk and enhance financial resilience,” says Cheesman.

The event also spurred the birth and rapid evolution of sophisticated catastrophe modelling.

“I believe, more than any other event, Hurricane Andrew reshaped the insurance landscape, emphasising preparedness and risk management for unprecedented natural disasters,” he says.

Co-ordination and communication improve

Manning acknowledges clear improvements in the way insurers now prepare for and respond to catastrophes. In the 1970s, ’80s and early ’90s, he says “we seemed to have to reinvent the wheel after every disaster: we didn’t sit down as an industry and do lessons learned.”

Today, in Australia there tends to be better co-ordination and communication between governments, councils, property developers and insurers to reduce the chance of such errors. Nevertheless, Manning says there is still room for insurers to agree on industry-wide, standardised reporting platforms and processes after disasters.

Insurance Council of New Zealand (ICNZ) chief executive Kris Faafoi says insurers’ responses to the Auckland Anniversary Weekend and Cyclone Gabrielle weather events in early 2023 show that gains are being made.

“Insurers have made significant progress in getting claims settled into the high 90 per cent range some 16 months after two of New Zealand’s most costly natural disasters and provide certainty to those affected to get on with their lives,” he says.\

“There is a clear moral and business case for insurers to keep improving the way they support customers affected by natural disasters and catastrophes, especially as the impact of climate change intensifies. Reassuringly, there are many ethical organisations and people in the industry who are striving to make a difference.”

Faafoi says New Zealand’s vulnerability to climate-related hazards — such as rising sea levels, coastal erosion and extreme weather events — requires a clear and co-ordinated approach, with government best placed to lead.

“By taking a proactive approach, adaptation measures cannot only reduce these risks but also contribute to the economy’s security and community resilience and avoid the higher costs associated with future climate-related disasters,” he says.

On the radar

Amid fears that the frequency and impact of extreme weather events in Australia are adversely affecting the insurability of homes and the value of properties, Commonwealth Bank’s 2024 Climate Report highlights the growing complexity of insurance affordability.

It cites data from the Actuaries Institute showing that average insurance premiums rose by 28 per cent in the year to 31 March 2023, with 12 per cent of households “experiencing extreme home insurance affordability stress”.

Providing an insight into the risk outlook from climate change for banks, insurers and customers, the Commonwealth Bank analysis indicates the following 2024 exposures for the bank:

• Cyclones — A$11 billion, corresponding to about 35,000 properties exposed to high cyclone risk
• Flood — A$16.9 billion, corresponding to about 41,000 properties exposed to high flood risk

• Fire — A$1.8 billion, corresponding to about 4,000 properties exposed to high fire risk.

Ciaran McCormack, head of Market Development for AXA Climate and who previously led climate training for former US Vice President Al Gore, says the intensity and frequency of catastrophes suggest the term ‘natural disaster’ is becoming a misnomer.

“These events are unnatural disasters in that they’re beyond the background rate that would’ve happened without humans burning fossil fuels,” he says. “This is a new norm.”

Looking ahead, McCormack says greater climate literacy will be crucial for insurers, businesses and governments. For this reason, AXA Climate has rolled out online training and education programs on climate, environmental and social sustainability for all 150,000 AXA employees across 51 countries. It also provides the white-labelled content to companies around the world, across all sectors.

McCormack says one element of the goal is “to inform people’s day-to-day work in calculating risk and applying it” across an entire organisation. With the latest predictions indicating that global temperatures are likely to be well in excess of 1.5°C above pre-industrial levels, recent extreme weather events are “just a taste of what’s to come”, says McCormack.

“That’s why there’s such a dire need for literacy and for change to happen, but also for it to happen now.”

Closing the gap

Ernst Rauch, chief climate expert at Munich Re, says events such as Typhoon Mireille in Japan in 1991, flooding in China in 1998 and the Newcastle earthquake in Australia in 1989 serve as a reminder that there is often a significant gap between what businesses and people insure compared with overall economic losses.
“If you look at the last 20 years, for example, the average gap across Asia has been around 90 per cent,” he says. “In other words, only about a tenth of the overall economic losses are insured.

“These kinds of events take a devastating humanitarian toll and cause massive financial losses, highlighting the vulnerabilities in the region to natural disasters. 

“They underscore the need for rapid-response capabilities and building resilience, especially in high-risk areas. And, from an insurer-reinsurer perspective, these events underscore the necessity for excellent — and science-based — understanding of risks from natural hazards, a strong financial basis and risk-adequate pricing to provide natural catastrophe risk-transfer solutions that are reliable and long term.”

Rauch notes that climate change in the Asia Pacific specifically is contributing to more frequent and extreme weather events, such as heavy storms and floods. In response, he says Munich Re is “continuously refining our risk models, incorporating the latest climate science to better account for and prepare for future catastrophes”.

Collaboration the key

With an eye to the future, Manning says it will be essential for insurers to have an “industry-wide plan” as part of a co-ordinated response to natural disasters and other catastrophic events.

At Swiss Re, Thomson notes that affordability and availability of insurance remains “a hot topic”. He says the most effective way to reduce the harm experienced by communities — and, by extension, to reduce the cost of insurance and reinsurance — is through concrete risk mitigation and reduction actions, as well as adapting communities to become more resilient to a changing climate.

“Therefore, it is imperative for a collaborative approach between industry and government to manage and mitigate the level of risk through such risk reduction and mitigation.”

ICNZ’s Faafoi says the focus must be on “supporting the collective effort to improve resilience at the national level”. “By working with central government, councils and others as part of a New Zealand-wide approach, it helps send the right signals to global reinsurers that, as a country, we are reducing risk to ensure insurance is affordable and accessible,” he says.

Rauch agrees that limiting future climate-related losses demands a collective effort from insurers, governments and regulators “who must work together to build resilience and reduce risks”.

“It’s about building codes,” he says. “It’s about land-use planning. And it’s about ensuring economic stability of risk carriers to sustainably offer financial-risk-management solutions to strengthen the adaptation capacity in times of increasing risks from natural hazards.” 

Striking out

The recent disastrous IT outage involving cybersecurity company CrowdStrike poses a question for insurers: Can such a massive international incident be covered?

Lloyd’s coverholder Parametrix estimates losses for Fortune 500 companies from the 19 July event — when a faulty software update disrupted businesses around the world — could reach about US$5.4 billion. However, Parametrix suggests the “portion of the loss covered under cyber insurance policies is likely to be no more than 10 to 20 per cent”.

LMI Group’s Allan Manning is also sceptical that such cyber events can be adequately covered.

“It’s a capacity issue, just like with pandemics and terrorism incidents,” says Manning. “If the event is so big that it affects massive numbers of businesses, I don’t think private enterprise can fund it.”

Building back better

With more floods and cyclones occurring, it makes no sense to keep replacing damaged homes and offices with the same vulnerable building stock. Resilient building design is coming to the fore in recognition of its critical role in climate mitigation and adaptation and ensuring that buildings are greener and last longer.

In the US, some exciting initiatives are occurring. For example, in the aftermath of Hurricane Katrina (2005), the redeveloped Louisiana Children’s Museum in New Orleans has been built on a raised concrete structure to increase flood resistance, and the site and surrounds can hold up to 90 cm of water during storms to stop the building and nearby neighbourhoods being inundated.

Ensuring resilient buildings are also available to low-income communities will be crucial, too. To that end, US non-profit Habitat for Humanity wants governments to prioritise affordable housing that can mitigate climate threats and allow access to low-carbon, resilient housing solutions for poorer families.

AXA Climate’s Ciaran McCormack says any discussion about building resilience should also include the topic of “managed retreat” and the planned relocation of people, buildings and assets from flood zones.

“That’s a touchy subject for policymakers and communities but it’s a conversation that needs to be had,” says McCormack. “Where do we build? Why do we build in those places? How do we retreat from some of those places? And how do we also make sure we’re not developing in flood zones or high-risk coastal areas?”

Lessons learned

The following are amongst the catastrophes that have influenced changes in legislation and insurance cover in the Asia Pacific and beyond.

1974 / Brisbane floods, Australia

• What happened? Swollen river catchments flooded south-east Queensland, causing a public backlash against insurers as most cover at the time did not include flood.
• The toll? 16 deaths; about 13,000 properties affected; the Insurance Council of Australia (ICA) estimates costs of the event today would be about A$3.3 billion.
• The response? The event ultimately led to flood cover becoming standard under the Insurance Contracts Act (1984).

1974 / Cyclone Tracy, Darwin, Australia

• What happened? On Christmas Eve, the cyclone struck the Northern Territory capital, demolishing or damaging about 80 per cent of the city’s buildings.
• The toll? 66 deaths; about 10,000 homes destroyed; A$5.04 billion in insured losses*.
• The response? The disaster led to cyclone mitigation being required under the building code and started the discussion about rapid-claims processing and settlement.

1989 / Newcastle earthquake, Australia

• What happened? A 5.6 magnitude earthquake devastated Newcastle, damaging about 50,000 buildings.
• The toll? 13 deaths; A$4.24 billion in insured losses*.
• The response? The quake spurred the development of catastrophe loss modelling in Australia.

1999 / Sydney hailstorm, Australia

• What happened? The storm hit about 85 suburbs, damaging 24,000 houses and 70,000 cars.
• The toll? About A$5.57 billion in insured losses*.
• The response? The event highlighted the importance of risk assessment for hail-related damage and led to premium pricing for properties in hail-prone areas.

2001 / 9/11 terrorism attacks, United States

• What happened? Al-Qaeda terrorists hijacked four commercial aeroplanes. The most well-publicised attack led to the collapse of both towers of the World Trade Center in New York.
• The toll? 2,996 deaths; insurance claims estimated at US$40 billion.
• The response? While 9/11 catalysed the need for better insurance solutions, such cover remains complex. Many reinsurers and insurers avoid such risk or charge substantially more for it.

2004 / Boxing Day tsunami

• What happened? A 9.1 magnitude earthquake struck off the coast of Sumatra, Indonesia, unleashing a series of tsunamis. India, Indonesia, Maldives, Sri Lanka and Thailand were the countries worst affected.
• The toll? About 228,000 deaths; US$9.9 billion damage.
• The response? Within three weeks, many countries adopted the Hyogo Framework for Action, the world’s first comprehensive agreement on disaster risk reduction.

2009 / Black Saturday bushfires, Australia 

• What happened? An estimated 400 bushfires primarily affected Victoria, destroying more than 2,000 homes.
• The toll? 173 deaths; insured losses of A$1.07 billion, according to Munich Re.
• The response? Stricter conditions and exclusions resulted for properties in high-risk areas. Insurers also pushed for the scrapping of fire service levies, saying they pushed up premiums and led to under-insurance.

2010–11 / Canterbury earthquakes, New Zealand

• What happened? The disaster started with a 7.1 magnitude quake in September 2010, followed by a 6.3 magnitude quake in February 2011, devastating parts of Christchurch and the wider Canterbury region.
• The toll? 185 deaths; estimated economic losses of NZ$40 billion; insured losses of about NZ$31 billion.
• The response? Insurers developed a more rigorous approach in assessing and managing earthquake risk.

2020–22 / COVID-19 pandemic

• What happened? Beginning with an outbreak of SARS-CoV-2 in Wuhan, China, the pandemic quickly spread around the world.
• The toll? 7 million-plus deaths worldwide; insurance broker Howden estimates that by January 2022 COVID-19 had cost insurers US$44 billion.
• The response? Re-examination of underwriting practices, plus greater engagement with regulators and industry bodies to provide legal guidance quickly and at lower cost to policyholders.

2022 / Queensland and northern NSW floods, Australia

• What happened? Severe floods triggered about 240,000 insurance claims.
• The toll? Insured losses of about A$6 billion.
• The response? Findings of an ICA report included the need for insurers to improve catastrophe planning; communicate better with policyholders during disasters; improve their ability to leverage data and insights; and co-ordinate better with government to deliver funding.

2023 / Auckland Anniversary Weekend floods and Cyclone Gabrielle, New Zealand

• What happened? A fortnight after the Auckland region was devastated by mass floods, Cyclone Gabrielle made history as the nation’s costliest non-earthquake natural disaster.
• The toll? 15 deaths; claims expected to reach NZ$3.81 billion.
• The response? New Zealand insurers are increasingly working with government and other sectors to reduce risks and build resilience to natural hazards.

*Source: Insurance Council of Australia, all normalised to 2017 values

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