Speeches
Published Date: 20 September 2011

Opening Address by Mr Ng Nam Sin, Assistant Managing Director (Development Group), Monetary Authority of Singapore, at the Financial Risk Management of Natural Catastrophes in Asia Pacific 2011

    

 Opening Address by Mr Ng Nam Sin, Assistant Managing Director (Development Group), Monetary Authority of Singapore, at the Financial Risk Management of Natural Catastrophes in Asia Pacific 2011, at the AXA University Asia Pacific Campus on 20 September 2011

 

Ladies and Gentlemen,

Introduction

1    A very good morning. It is my pleasure to join you today at this conference put together by AXA and Aon. Threat of increasing natural catastrophe risks globally, especially Asia.

2   Over the years, the incidence of natural catastrophes has increased globally and in Asia. In 2010, it was estimated that globally, at least 300,000 lives were lost and more than US$210 billion of economic losses were incurred due to natural and man-made disasters.  Asia was the hardest hit region, accounting for approximately 50% of the total number of catastrophes worldwide, and 35% of the world’s total economic losses from 2010’s catastrophes.

3   So far this year, the insurance industry has incurred significant losses from a high incidence of natural catastrophes. Insurance markets such as Australia and New Zealand were hit with sizeable hailstorm and earthquake losses. For the first half of 2011, Asia accounted for approximately 50% (US$30 billion) of the total insured losses globally .  The most notable natural catastrophe would be the earthquake and resulting tsunami in Japan in March this year, where insured losses are estimated to be around US$15 billion to US$35 billion , with total losses amounting to approximately US$200 billion to US$300 billion.

Management of natural catastrophes risks is Asia’s biggest challenge.

4   The management of natural catastrophe risks remains to be one of the biggest challenges facing Asia, particularly given the highest cat risk exposures but lowest coverage globally.

5   The threat of increasing natural catastrophe risks in Asia is further compounded by 3 factors based on our observations:

6   Firstly, Asia’s geographical position makes it vulnerable to natural catastrophes. Many Asian countries sit on the Pacific Rim of Fire. As reported in the Climate Change Vulnerability Index 2011 released by Maplecroft, 10 out of the 16 most vulnerable countries are located in Asia.

7    Secondly, Asia has the largest growth of real assets and urban centers. The number of mega-cities  grew from 2 in the 1950s to over 10 in 2010 (e.g. Singapore, Shanghai, New Delhi) and this number is expected to grow.  Due to rapid urbanization and growing economic concentration, the Asia Insurance Review (“AIR”) estimated that insured natural catastrophe losses are expected to double every ten years.

8    Thirdly, climate change is likely to worsen the impact of natural catastrophes on Asia. Some studies have pointed out that climate change can increase both the frequency and intensity of extreme weather events such as storms and torrential rain.

9   Despite suffering the most from the natural catastrophes, historical data suggested that Asia has the least amount of safety net or risk transfer mechanisms. Catastrophe insurance penetration is extremely low in developing countries in Asia. Most of these countries  have insurance penetration rates  of less than 1% . In 2010, total insured losses for Asia stood at only 3%  (approximately US$2 billion) of the total economic losses from the natural catastrophes.

The need for stakeholders to address the high natural catastrophe risks in Asia

10   To mitigate the impact of high catastrophe risks in Asia, this calls for the need for a strong public-private-people partnership to subscribe to a holistic disaster risk management programme. The programme needs to understand the vulnerabilities of specific regions and the nature and scale of potential damages, as well as include measures to prevent, mitigate and reduce the impact of catastrophe risks.

11   We feel that the insurance industry can play a bigger role in helping countries in Asia to manage its risks against natural catastrophes. This can be done in 3 ways:

        i.   Raising the awareness for good risk management;
        ii.  Introducing affordable and innovative protection; and
        iii. Deepening the research and risk modeling capabilities.

Raising the awareness of risk

12    First, raising the awareness for good risk management.  Insurers can help to raise awareness in various ways. Insurers can lend their expertise and provide advice to private and public organizations on catastrophe risk management. The global and regional players in the re/insurance industry including brokers have deep expertise in risk modeling and risk management. They are therefore in a good position to provide risk advice, and help mitigate exposures faced by their clients.

13    Insurers can play a leading role in promoting platforms which raise public awareness. Conferences such as this, AIR’s Asia Climate Change Conference held in January 2011, and the ASEAN Disaster Risk Financing and Insurance Forum which will be held in November this year are prime examples of the effective partnership between key stakeholders.

14    Insurers can play an active role in engaging governments and organizations in regional cooperation efforts. For instance, the Asian Development Bank (“ADB”) currently assists member countries in the Asia-Pacific in developing a regional approach to disaster risk management.  In addition, the ASEAN Agreement on Disaster Management and Emergency Response (“ADMER”) Work Programme has been formed in the region, which aims to discuss options for natural disaster risk financing and insurance strategy for the ASEAN countries. There are clearly opportunities for closer collaborations amongst the regional authorities, as well as with the insurance industry.

Introducing affordable and innovative protection

15   The second role is for the insurance industry to develop affordable and innovative solutions to mitigate natural catastrophe risks. These can include insurance, risk transfer mechanisms such as catastrophe bonds, and regional risk pools. Specifically for the less affluent population, they are more exposed to impact of natural catastrophes, given lower financial preparedness and higher dependency on agriculture. Given that Asia is at varying stages of development, it is important for insurers to not only cater to needs of the affluent, but also the significant proportion of low-income households in Asia.

16   Microinsurance is an example of a more affordable insurance tool which can be offered to the less affluent population in Asia. We are heartened to note that the insurance industry and academia have come together in the annual Microinsurance Roundtable Forum in Singapore, led by Nanyang Technological University’s Institute Catastrophe Risk Management (“ICRM”). Since 2007, the annual forum has served as a platform for discussing how to bring microinsurance to the needy in developing countries. This forum has also facilitated public and private collaborations on pilot microinsurance projects in Asia.

Deepening research and risk modeling capabilities

17   Thirdly, it is critical for insurers to continue to invest in catastrophe risk research and modeling needed to develop effective risk solutions.  Establishing reliable and quality data is the first step.  It is thus worthwhile for industry to forge meaningful partnerships with governments and academia to collect reliable loss data, as well as raise the data standards over time such that robust pricing and risk modeling can be done. There are indeed several ongoing initiatives between academia and industry to deepen research capabilities. One of them is the Global Earthquake Model (“GEM”). GEM is a private-public partnership which was initiated in 2006 by the Global Science Forum of the Organisation for Economic Co-operation and Development (“OECD”). It aims to build a global database of historical information on earthquakes, which will be free for all to access .

18   In Singapore, the Nanyang Technological University (“NTU”) launched the Institute of Catastrophe Risks Management (“ICRM”), to study catastrophe risks in Asia. In the initial stage, it will focus on 2 research projects which study “Flood Risks in Jakarta” and “Seismic Risks in Singapore”. Through its work, ICRM helps the industry and insurance companies to better understand, model and quantify natural catastrophe risks in the region. In addition, we have seen industry setting up research and modeling teams in Singapore. For instance, Aon Benfield has set up Impact Forecasting, its risk modeling arm, in Singapore. The primary role of the unit will be to develop catastrophe models and other relevant innovations for Asia Pacific.

Conclusion

19   In conclusion, natural catastrophe risks management remains as one of the biggest challenges for Asia economies. Despite being exposed to high natural catastrophe risks, Asia remains highly underinsured. This calls for key stakeholders, including the insurance industry, to work together and steer relevant developments in the insurance marketplace, be it in raising risk awareness, introducing affordable and innovative protection or deepening the research and risk modeling capabilities. Singapore, as a leading re/insurance hub with deep research capabilities, can serve as a good regional base for insurance players to participate in initiatives.

20   On this note, I wish you a productive and memorable time at this conference and in Singapore. Thank you.