Just last month, Hong Kong was hit by an exceptionally heavy rainstorm, which prompted the government to issue the Black Rain warning signal for a record breaking 16 hours. Authorities said that more than 158 millimetres of rainfall was recorded by the Hong Kong Observatory in the hour after the warning was raised, the highest since records began in 1884.
The rainstorm caused flash floods in several areas, landslides and road subsidence. At least one person was killed. Subways, shopping malls and homes were inundated, with related insurance claims expected to be well over $100m.
Lack of insurance coverage
In the aftermath of this dramatic weather event, Hong Kong is well off in one respect, in that insurance coverage in the city is relatively high.
Over the past two years, markets from India to China to Malaysia have been hit hard by flooding. Asia has historically suffered the highest flood related economic losses globally, but it remains seriously underprotected against flood risk, especially in emerging economies. There were more than twenty severe floods in Asia in 2021, the highest in any region. Yet over the last ten years, only 7% of flood losses in the region were insured.
Rising flood risk
Flood risk across Asia continues to rise as the region goes through rapid economic development and urbanisation. Cities (which cannot in any case absorb water as well as the natural environment) tend to be located on coastlines or near rivers that are increasingly prone to flooding. Much of Asia is also vulnerable to tropical cyclones, which can generate severe floods from both storm surges and in inland flooding following heavy rainfall. Moreover, development of defensive infrastructure, such as sea walls, dams and levees, often lags the expansion of cities and is not keeping pace with extreme weather events.
With climate change arguably exacerbating the threat of flooding in urban areas, and incremental economic growth meaning that the extent of potential losses becomes ever greater, policy makers and insurers need to take steps both to extend insurance coverage and to improve risk management and climate resilience.
Improve risk modelling
The first challenge is to improve risk modelling. Actuarial models rely heavily on historical events and loss data, which are increasingly inadequate in the face of rapid urban development and the potential impact of climate change. These traditional models need to be adapted to reflect conditions on the ground, and ensure that rainstorms receive as much attention as large scale disasters such as tropical cyclones and earthquakes. (Smaller losses related to flooding are often underreported, meaning they may not be accurately reflected in future modelling).
Understanding of flood risk is improving in Asia, as the larger insurance companies are developing sophisticated flood risk mapping and fully probabilistic catastrophe models, but more efforts are required to improve data quality and granularity using new technologies. For example, weather data can be collected via lightning detection networks and used to improve crop reports and provide fast acting alerts on severe weather events.
New solutions
Extending insurance coverage throughout the region is essential to close the flood protection gap. Well designed climate risk insurance is not only protects valuable assets and infrastructure, but can also contribute to alleviating poverty. In addition to responding to disaster, it can help to improve the anticipatory, absorptive and adaptive capacities that are essential to building resilience for poor and vulnerable people in Asia’s emerging markets.
Parametric insurance has emerged as one of the new solutions to help protect against mounting risks, and as a way to make catastrophe policies more widely accessible. Unlike traditional insurance, which covers actual losses after the event, a parametric policy is based on independently verifiable parameters, such as measured wind speed or rainfall, and pays out predetermined sums quickly and without lengthy assessment and claims procedures. This type of insurance enables rapid provision of funds for emergency response, early intervention and recovery activities.
One Storm Philippines, for example, launched in 2017 by Munich Re and JLT Philippines, offered insurance coverage against potential storm impact for businesses, municipalities and local govts, which allowed them to insure against the costs of fortifying a number of utilities and properties such as water treatment facilities, community centres, public schools and hospitals in order to be storm ready. They could also insure against actual losses, including wind and water damage, costs for clean up after the storm, additional work hours which may be required from employees and other costs associated with getting back to normal business.
Microinsurance
Microinsurance schemes are another potential solution to provide cover to vulnerable agricultural communities, but many ventures to date have not been effective due to high administrative costs and the inability of cash poor smallholders to afford the insurance premiums.
A programme in HARITA in North Ethiopia, funded by the Rockefeller Foundation and Swiss Re, might serve as a model which could be replicated in some of the poorest markets in Asia. Here, the local farmers themselves suggested that, instead of cash premiums, they could pay for insurance with their labour by engaging in community identified projects to reduce risk and build climate resilience, such as improved irrigation or soil management. In the event of a seasonal drought, insurance pay outs are triggered automatically when rainfall drops below a predetermined threshold, enabling farmers to afford the seeds and inputs necessary to plant in the following season.
Sustainable infrastructure
Insurers can also contribute to flood resilience by making long term investments in sustainable infrastructure. Traditional flood management systems, such as dams and levees, can be optimised by construction of “green infrastructure” or nature based solutions. Preservation or restoration of mangroves, wetlands and coral reefs can alleviate flood risk by allowing excess water to soak into the ground. Rivers also have their own systems of flood management, expanding and contracting over flood plains. In multiple locations in Asia, the inclusion of nature based solutions into flood defences has proven to be beneficial.
For example, in Kochi, a city on the coast of Kerala in India, the Swiss Re Foundation is supporting a “green grey” infrastructure solution for large scale canal restoration and flood management. The project will incorporate nature based solutions such as planting mangroves, wetland construction and using porous surfaces for canal walls, together with traditional elements such as small scale breakwaters, dikes and wooden fencing. The expected benefits of this integrated approach include greater protection against floods, improved water quality and mitigation of urban heat.
Flood risk can be managed
Flood risk can be managed, but it requires action from the insurance sector, as well as policy makers and business. Risks must be more fully understood, and there is a need for better monitoring and sharing of granular exposure data. Modelling and underwriting decisions also need to adjust to rapidly changing economic and climatic conditions. At the same time, greater investment in climate change adaptation in Asia will support the creation of more resilient infrastructure and communities, and reduce the likelihood of significant losses in future years.