Due to their unique position near the world’s biggest ocean, it’s not an exaggeration to say that Asian countries – especially those that border the Pacific – face a greater threat posed by natural catastrophes stemming from climate change. In fact, a recent report from global broker Aon found that a staggering 86% of economic losses stemming from climate disasters in the region in 2022 were not insured at all.
This figure puts into perspective an impending crisis facing Asia, especially as it tries to cement itself as the prime emerging sector for most of the world’s industries. In conversation with Insurance Business Asia, Aon Asia Pacific Reinsurance Solutions head of analytics Peter Cheesman (pictured) pointed to the low insurance penetration as a prime challenge for the sector, in addition to explaining why the outlook towards insurance may change in the coming years.
“The low insurance penetration rate is a common challenge to many of the developing markets and (South) Asia markets are no exception to this,” Cheesman said. “There are many reasons to this, ranging from low risk awareness or understanding of the underlying risks, to affordability of insurance and its correlation with economic development levels.”
Citing the floods in Malaysia last year, Cheesman said that the recent increase in climate disasters is leading to renewed and improved risk awareness. However, the surge of natural disasters has also been a double-edged sword; increased loss activities impacted the supply side of insurance products, making relevant propositions more expensive or restrictive for insurers to provide.
“Furthermore, there are flood products available for various situations but the take up rates have historically remained low. The recent flood loss activities are expected to help increase awareness of the various flood products available among potential insureds,” Cheesman said.
Underinsurance, more often than not, cannot be tacked onto a single facet or issue. It is almost always the result of several problems, each contributing to develop the bottom line. That said, Cheesman did concede that the current insurance offerings on the market could be a lot better, especially as Asia itself is an entirely different beast when it comes to insurance penetration.
“There are certainly many aspects which can be improved for the existing product offering, such as pricing strategy, coverage, and distribution channels. However, with the potential of increase in future flood activity as a result of the impact of climate, insurers also face challenges including increase in loss cost, higher cost of (catastrophe) reinsurance, extended flood exposure, etc,” he said.
Cheesman also stressed that “insurance must be an integrated part of the risk management process,” a forward-looking approach that sees the industry acting in the interest of loss prevention rather than as a safety net in the direst of moments. To that end, he said that the industry has a huge role to play, and it also comes with the understanding that various industries need to understand their roles as well.
“The fundamental first step is to understand the potential challenge and increase the awareness of the potential hazards and impact of the increasing climate risks, none of which can be assessed easily with existing tools,” Cheesman said. “This requires a joint effort of the risk community, from government, business operators, insurers, reinsurers, institutes, academies to work together. This is not merely an insurance challenge, but within a much broader and holistic risk management framework. From understanding and assessing the risk, to quantifying and mitigation, and completed with risk transfer (insurance) and retention.”
Addressing uninsurance, staving off the effects of climate change, and building for a more resilient future are all important aspects that need to be addressed as Asia faces more frequent and deadlier climate disasters. To that end, Cheesman said that Aon is committed to doing their part for their clients’ journey in tackling these challenges for better climate resilience.
“As a leading global professional services firm, Aon continues to devote its efforts within the risk community in several aspects, including its 2023 Weather, Climate and Catastrophe Report: Asia Pacific Insights,” Cheesman said. “Aon continues to leverage its existing strength in hazard assessment and modelling, utilizing its global network and outreach, trying to provide its business partners and the broader communities understand the potential impact of climate disasters with advice and solutions that give them the clarity and confidence to make better decisions to protect and grow their business.”
He also cited the broker’s impact forecasting model solution team, which can model the potential impact of climate change as a long-term strategy with short-term deliverables. The team does this by analysing the financial impact of today’s catastrophes and tomorrow’s climate risk by incorporating peer-reviewed science across the broker’s broad-reaching academic partnerships.
“Furthermore, Aon has recently established a Singapore-based climate innovation hub that will provide data, analytics, insights and solutions to help clients manage environmental risks and explore alternative opportunities to help them shape business decisions for the better. The Climate Hub is an expansion of Aon’s Center for Innovation and Analytics (ACIA) that delivers impactful analytics solutions such as Aon Architect and our Operational Risk IQ services that reduce volatility and help clients across the globe maximize their performance,” he said.
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