Geopolitics, war, disruptions of supply chains and climate change can have a great impact on the re/insurance industry in China and emerging Asia. These, along with low insurance penetration and the region’s vulnerability to natural catastrophes – enhanced by climate change – can leave people and governments facing major losses from affected assets which had no insurance cover.
- Natural catastrophes in 2021 resulted in economic losses of $270 billion, and insured losses of $111 billion, according to the Swiss Re Institute.
- In the opening six months of 2022, Swiss Re absorbed large natural catastrophe claims of $938 million, mostly related to floods in Australia and South Africa, storms in Europe, and a series of hailstorms in France.
- In the case of Asia, the result of low insurance penetration is a large protection gap, which, according to the Swiss Re Institute, is estimated at $60 billion.
These economic losses need to be covered, as some assets have no insurance protection and the cost falls to governments, individuals and companies to cover these losses.
The Swiss Re Institute estimated nat cat losses in 2020 was over $175 billion globally, and only half of those losses were ensured.
But despite insurance penetration in China and emerging Asia being relatively low, it is an industry that is growing. As the country’s GDP grows people and companies have more assets to insure. The Swiss Re Institute expects that China will become the biggest insurance market in the world, sometime in the 2030s.
Some of this growth comes from GDP growth and economic activity where people own things and want to protect them, which leads them to buy more insurance.
Growth and premiums through climate change is not necessarily a good thing because what you’re doing is charging people more money for risk that’s increasing.
There is also uncertainty and volatility. In a more stable world, that premium wouldn’t be there.
So, actually, the cost of insurance as a result of climate change goes up, which then gives you challenges around affordability as well as availability of insurance in some of the extreme risk areas, which have a negative impact on the protection gap.
But what can insurers do to shorten this protection gap? There are four ways re/insurers can do this.
The first one is for re/insurers to play a leadership role in educating society about the risks of climate change.
Swiss Re Institute think we need to take a leadership role in terms of how we talk about risk and how we explain that to people and businesses in order to improve their understanding of it. This is a starting point, unless people are aware and have the knowledge, there won’t be any further action around this.
Developing affordable solutions to protect clients against climate risks is another way re/insurers can help to narrow the protection gap. There is an old debate in insurance, whether it’s better to have some cover or no cover.
The reason some people say that having some cover is dangerous, is because people think they are fully covered, when they are not. But having cover that you can afford, I would say, is better than having no cover.
As long as you’re aware of where it stops and where it starts. And that’s a challenge for us, for insurers to develop solutions that are appropriate for the environment, appropriate for the people, affordable, and easy to buy.
One of the main things re/insurers need to do when it comes to climate change and the protection gap, is to collaborate with governments to transfer the financial risk.
It is key that we act not just as an insurance sector, but across the whole value chain to address the underlying risks.
Climate change is a multi-dated activity, some people look at it and might say ‘why bother at all?’, but the whole sector needs to move together and address that over the long term.
There are many things we can do in the near term. We can do this by trying to build societal resilience. One of the things about the climate changing around us is how we set ourselves up to mitigate against that. Societal resilience starts with knowledge, understanding and awareness of what is going on and what your susceptibility to risk is.
The next step for re/insurers would be to assist governments and businesses to mitigate and adapt in order to build this societal resilience.
How can you adapt? You can look at things like where you build properties and how you construct them. So, building codes is an important one. You can also look at how you build defences against the natural catastrophes, the secondary perils that are exposed to. So, flood prone areas can build those mitigants into those buildings and into the community.
And then also how you respond when the inevitable happens. What is the emergency response system? And this is a learning cycle. So, what do you know after something like that happens? How do you learn how to develop, how do you adapt? These are the things that are important.
Swiss Re highlighted the importance of re/insurers, governments, regulators, businesses, communities and individuals to act as an ecosystem to not just advance risk knowledge, but also to prepare for the risks.
We all have a role to play in building societal resilience and laying the foundation for faster and more effective disaster recovery.