One of the most insidious impacts of climate change-related catastrophes in the modern era is the escalating problem of insurance unaffordability, especially for those in high-risk areas.

‘The rise in natural disasters linked to changing temperatures makes it imperative for us to narrow the region’s protection gap — the difference between total economic losses from catastrophes and insured losses,’ says Russell Higginbotham, CEO and regional president Asia at Swiss Re.

He says the Swiss Re Institute estimates this gap at US$60 billion in Asia, pointing to many businesses and households that could be financially devastated by natural disasters. ‘Insuring against these risks would ensure that when shock events strike, communities are able to bounce back and focus on rebuilding.’

New Zealand-based underwriter Euan Osborne agrees. ‘Generally speaking, any risk that poses a large systemic issue and leads to claims exceeding the premium pool can lead to insurance becoming unaffordable, as it can force insurers and reinsurers to pull back capacity and increase their rates in order to remain sustainable,’ he says. 

‘For example, earthquakes have led to property insurance premiums significantly increasing in certain parts of New Zealand, and there is a similar effect as a result of storms, flooding and bushfires across Australia and Asia Pacific.’

In Australia, some parts of the country are more prone to cyclones, floods, bushfires or hailstorms than others, and buildings at those locations are often not mitigated sufficiently to keep premiums affordable.

Other countries in the region have their own issues that can lead to insurance unaffordability. Japan, for example, has to contend with tsunamis, floods, typhoons, earthquakes, cyclones and even volcanic eruptions. And India is exposed to earthquakes, tropical cyclones, floods and droughts. 

Diving into the pool

‘Generally, private insurance markets price risk at expected cost and cannot subsidise premiums for high-risk policyholders to promote affordability,’ observes one actuary, who preferred to remain anonymous. 

‘Because of this, governments across the world have employed a variety of approaches to promote affordability, including forming pools. Pool design can be tailored to the local drivers of affordability pressure.’

Some pools are designed to address a capital shortage due to the size of extreme loss, such as in Japan, California or Florida. In other cases, pools target high premiums resulting from the risk at a location such as a riverbank — for example, Flood Re in the United Kingdom. 

Government-established pools in the Asia-Pacific region include the Earthquake Commission in New Zealand, China Residential Earthquake Insurance Pool, Japan Earthquake Reinsurance, Thailand National Catastrophic Insurance Fund, Taiwan Residential Earthquake Insurance Fund and Southeast Asia Disaster Risk Insurance Facility.

In Australia, the Australian Reinsurance Pool (ARPC) was established by the Terrorism Insurance Act 2003 to correct a market failure in commercial property insurance, which occurred in the wake of the 11 September 2001 terror attacks in the United States.

At the time, portfolio managers and building owners were struggling to obtain cover for high-value properties because of the risk of terrorism. This threatened to stifle commercial property and infrastructure development and distort investment and portfolio allocation decisions.

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