How Can Companies In Asia Mitigate Climate Risk And Prepare For Natural Catastrophes?
OVERVIEW
The world has seen two of the costliest back-to-back years on record for weather disasters – and there is no region where this is more apparent than in Asia, which had more billion-dollar natural disaster events in 2018 than anywhere else. Tropical cyclones Jebi and Trami in Japan, Typhoon Mangkhut in Philippines, China, and Hong Kong, and two earthquakes in two months in Indonesia not only resulted in billions of dollars’ worth of economic losses, claiming thousands of lives.
After two of the costliest back-to-back years on record for global weather disasters, how can companies in Asia address the long-term implications to climate risk? Aon experts evaluate the impact of natural disasters in Asia in 2018 – and offer analysis on how to build resilience towards future shocks.
IN DEPTH
Aon’s Weather, Climate and Catastrophe report found that at least 17 separate events triggered economic losses of $1 billion or more in 2018 in Asia-Pacific. These events included five separate floods (three in China and one each in India and Japan) and four tropical cyclones (Jebi, Trami, Mangkhut, and Rumbia). Overall, Asia-Pacific suffered economic losses of more than $87 billion in 2018 due to natural disasters, with payouts exceeding the 21st century average by almost 79 percent and the median by 271 percent.
“With rapid population and exposure growth in some of the world’s most vulnerable areas, economic loss events are expected to increase in the coming years,” says Jiunn Woei Lee, Head of Complex Property & Casualty, Crisis Management – Asia, Aon.
Minimizing the protection gap
One of the biggest impacts of natural disasters is the protection gap – the portion of the economic loss not covered by insurance. Since 1980, the percentage of tropical cyclone-related damage is 31 percent – which means that 69 percent, or $1.1 trillion, of global storm damage globally has gone uninsured.
The primary reason for this is the low level of insurance penetration in landfall-prone areas – especially in parts of Asia. As tropical cyclones make landfall, wind or water-related damage can be widespread and significant. On top of that, a high proportion of people living in the path of the storm do not have homeowner insurance policies in place to handle the cost of the event’s impact.
“Beyond the lack of insurance, many properties in these developing regions are not often built to withstand the intense nature of hurricane-force winds or built along the coast without proper elevation to alleviate potential storm surge inundation,” says Lee.
Prioritizing the management of climate risk
Recent trends in weather patterns and natural disaster activity – as highlighted in Aon’s study – are putting pressure on various industries across public and private sectors to examine how they can manage evolving climate risk. This is also an opportunity for collaboration across stakeholders – investors, lenders, insurers and policymakers – to explore how they can best manage and respond to increased physical risks of climate change using insurance products and industry knowledge.
“This aligns with G20’s Financial Stabilities Board’s Task Force on Climate-related Financial Disclosures, which recommends that physical risk is included on organizations’ annual filings to build corporate resilience,” Lee says. “This aims to provide investors with more transparency to efficiently allocate capital and manage systemic financial risks – at the same time as protecting individual assets for sustainable business continuity management and strengthened balance sheets.”
So, how can companies in Asia be more resilient in 2019?
In response to the worsening impact of natural catastrophes in Asia, organizations are implementing measures such as consolidating their insurance policies to achieve economies of scale and adopting risk management best practices across their different business units. These include:
1. Modernizing and implementing stringent building code requirements
When natural catastrophe events occur, the amount of damage varies significantly between locations with modern, developed construction standards and those without.
“As we continue to experience an increase in the number of extreme weather events, it is incumbent upon governments, regulators and the construction sector to ensure that best practices are utilized in the construction of new buildings,” says Lee. “In some areas of Asia where large rural communities live within catastrophe zones or populations live in older buildings, enforcing these standards becomes challenging.”
2. Developing public and private risk mitigation solutions to reduce vulnerabilities
Across the region, governments are introducing initiatives such as early warning systems, physical protections such as flood shelters and crisis management and evacuation plans.
“In the instance of the December 2018 tsunami in Indonesia, which impacted Java and Sumatra, we witnessed the importance of implementing and maintaining sophisticated and interconnected early warning systems and crisis plans,” says Rupert Roberts, Director of Specialty Growth – Asia, Aon.
The tsunami, which was caused by part of a volcano falling into the sea, went undetected as the system in that area was only geared up to detect earthquake events. On top of this, the tsunami buoys in the area weren’t functioning at the time and, as a result, there was no warning before the wave struck, resulting in several hundred deaths and significant property damage.
In addition to physical protection against natural catastrophe events, private-sector organizations are also focusing on mitigating the financial impact of a major catastrophe event through sophisticated business continuity planning. These measures include: backup of business-critical infrastructure at alternative sites, building redundancies into production processes to allow for excess capacity to be drawn upon if required, sourcing alternative suppliers, and reducing dependency on a small number of key suppliers to protect supply chains.
3. Introduce insurance strategies to close the global protection gap
As the impact and frequency of natural catastrophe and extreme weather events increases, the financial exposure becomes too great to bear for many organizations in Asia and so the risk must be transferred to the insurance market.
“We see a steady increase in the take-up of insurance solutions in the region. A broad suite of weather and catastrophe-related insurance products is available to organizations here, ranging from flood to cyclone and earthquake perils.”
In addition, as the global climate continues to change, organizations are becoming increasingly concerned about extreme weather events beyond the traditional earthquake, typhoon, volcanic eruption, tsunami and flood-type perils. These include weather-related risks such as droughts, wildfires and pollution events which are becoming ever more commonplace and severe.
“For such events, a new generation of products is now available, offering coverage for previously uninsurable or partially insurable risks,” says Roberts.
Time to start planning
Climate change is set to become a bigger concern as extreme weather events impact more and more areas. “Communication of risk and uncertainty remains a challenging, yet vital component of resilience planning,” says Lee. “However, with careful planning, we can collectively build resilience towards future shocks in an increasingly volatile world of natural disasters.”