Managing natural catastrophes in South Asia

South Asia faces an immense challenge in trying to find ways of protecting communities from natural catastrophes.

Consider that only 9% of households have taken out earthquake insurance in California, one of the richest parts of the world, where GDP per capita stands at close to US$50,000 and a major earthquake is long overdue.

In Nepal, where GDP per capita is a mere US$750, tremors still pose a grave threat to life and livelihood but insurance protection is almost non-existent in the most exposed communities, such as those affected by the huge Gorkha earthquake in April this year.

“What is the role of the insurance industry in closing that gap?” asked James Nash, Asia chief executive of Guy Carpenter, during the SIRC conference in Singapore last week.

“It’s clearly a very difficult problem to resolve,” he continued, while speaking on a panel to discuss risk solutions for natural catastrophes in South Asia. “We now have a huge amount of capital in the industry that has the ability to support risk and our job as reinsurance brokers is to find ways to get that capital to the risk. But my belief is that it cannot be done in the traditional way so we have to find new ways.”

Another part of the challenge is that few of the risks in the region are well understood. Half the losses in India during the past 12 years were unexpected, said Alice Vaidyan, chief financial officer of India’s state-owned reinsurer General Insurance Corporation. From tsunamis to volcanic eruptions, insurers do not have a good understanding of where the exposures lie.

Other members of the panel, including Saneth Kumar, also from GIC, and Amer Ahmed from Allianz, mostly agreed that strong government involvement was needed in one way or another to help close the protection gap and direct abundant insurance capital towards natural catastrophe risks in South Asia.

One such model is a pilot disaster insurance facility that launched in 2013 to provide parametric insurance cover for typhoon and earthquake risks to a group of Pacific Islands, set up as a cooperative scheme among the islands’ governments with assistance from the World Bank and the Japanese government.

The big question, as expressed by a member of the audience from Swiss Re, is whether governments in South Asia are sufficiently committed to make such a scheme work.

“It’s possible,” said GIC’s Kumar, though he stressed that any such effort would require considerable patience and persistence.

“For governments, it’s a discussion of the urgent versus the important,” said Ahmed, Allianz’s reinsurance chief executive, who argued that the industry needs to come together with agencies such as the World Bank to articulate the scale of the issue. “We need to create an understanding that the problem is real. The price of not doing something is too high.”

It would certainly help, added Ahmed, if it could be proven that an effective insurance solution would be reflected in a country’s sovereign credit rating, thereby offering tangible economic benefits in terms of lower borrowing costs — not to mention national prestige.

Appealing to the vanity of politicians is as good an idea as any that were discussed, but the reality is that all potential solutions seem to require many years of hard work to produce results, whereas politicians rarely see more than four or five years into the future.

Acknowledging this, Nash spoke of the need for “quick wins”. It is undoubtedly true, but how to achieve them? That remains to be seen.

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