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Before disaster strikes

Can closer private-public collaboration alleviate the impact of extreme weather events?

Extreme natural events are becoming more frequent and more intense. According to the UN, more than 7,000 disasters have been recorded since 2000. The comparison with the previous two decades, which saw closer to 4,000 reported disasters from natural hazards, is stark. Between 2008 and 2016, more than 20 million people a year were forced from their homes by floods, storms, wildfires and extreme temperatures.

And when disaster strikes, there is often no insurance mechanism in place to help with the catastrophic economic impact. Only a third of economic losses caused by natural disasters have been covered by insurance; the remaining two-thirds fall into a protection gap that is difficult to plug with public relief – especially when there are added problems such as lack of infrastructure and poverty.

Funding gap

Sachiko Hori, General Manager, Reinsurance Dept., Mitsui Sumitomo Insurance (MSI)

Across Asia Pacific, the impact of these losses is often uneven. “Small island countries that are prone to natural disasters also have small economic output,” says Ms Hori, General Manager, Reinsurance Dept., Mitsui Sumitomo Insurance (MSI). “Governments that have less financial resilience are not able to provide the help required.”

Hori says that in the event of a disaster there is a need to close the gap using public-private partnerships (PPPs), whereby private and public sector bodies collaborate to provide relief.

“PPPs are becoming increasingly important in helping to mitigate the impact of natural disasters,” she says. “We can provide coverage and offer expertise to governments in this area. We can also provide risk consultancy services, helping to minimize losses by offering loss mitigation measures.”

Disaster finance schemes

Inhabitants of the Pacific Islands recognize the benefit of these collaborations. Since 1950, tropical cyclones and earthquakes are estimated to have caused more than US$3bn in damage and losses in Pacific Island countries.

Disaster risk finance is now in place under a scheme launched by World Bank as part of the Pacific Catastrophe Risk Assessment and Financing Initiative. Financial assistance comes from donor countries, including Japan, Germany and the UK, to the Pacific Catastrophe Risk Insurance Company (PCRIC), a Pacific-owned insurance company that provides earthquake and cyclone coverage to its member countries. And MSI is supporting the PCRIC as one of its reinsurers

The scheme works well for two reasons. First, because of the way payment is distributed. “Insurance payments are made to the government rather than individuals,” says Hori. “As the government knows where it can be used most efficiently in order to promote the recovery phase.” Second, it is parametric insurance cover, which means that payments are made based on the parameters related to a predefined event, such as an earthquake, rather than for actual loss incurred, and pays out according to a predefined scheme. Since there is no need for damage survey, funds can be provided almost immediately.

The World Bank has launched a similar regional platform for ASEAN countries, the Southeast Asia Disaster Risk Insurance Facility (SEADRIF), and established SEADRIF Insurance Company in Singapore in 2019 with the cooperation of the governments of Japan and Singapore. Its first financial product, flood risk insurance for Lao PDR and Myanmar, is to be launched soon. As insurance companies domiciled in Asia, MSI and its sister company, Aioi Nissay Dowa Insurance, two of the major non-life insurance companies within MS&AD Insurance Group (MS&AD), are looking to act as reinsurers under this new scheme.

The emphasis is on collaboration. “We operate in Singapore and across Asia, and have local subsidiaries who have established good relationships with government agencies,” says Hori. “But this would not be enough to set up a facility like SEADRIF. We need funding – a sponsor to make contributions. We are engaged in PPP activities as part of our business, and that is key to us operating in a sustainable manner.”

Continuing education

Informing developing countries about the function and benefits of insurance is an ongoing process, and the need for education spreads wider.

“Even in developed countries – including Japan – insurance is not something that is always fully appreciated or understood,” says Hori. “When people suffer loss, they are not clear on the type of coverage they had. We want to extend a helping hand to those people. As part of our literacy enhancement initiative, we are helping customers to understand their claims.”

Even in developed countries — including Japan — insurance is not something that is always fully appreciated or understood.

Sachiko Hori, General Manager, Reinsurance Dept., Mitsui Sumitomo Insurance (MSI)

MS&AD is also putting emphasis on digitalization. It has opened digital hubs in Tokyo and Singapore that aim to enhance the customer experience and promote open innovation. The Singaporean hub will support the ASEAN market, where digital business is developing rapidly.

At an academic level, the University of Tokyo and Shibaura Institute of Technology are collaborating on research into global flood risks caused by climate change. And at a national level, lessons learnt in Japan could be shared globally.

Japanese lessons

The country’s ageing population poses particular challenges for the government, which is collaborating with the insurance sector to find ways to deal with them. One scheme, established in Kobe, combines a dementia diagnosis finance support facility and a dementia-related accident relief facility consisting of a benefit system and liability insurance. MSI acts as the sole insurer for the city’s citizens in a scheme that is financed by municipal tax.

“We can use our experiences and successes in Japan in other markets,” says Hori. “We operate in 42 countries. The challenges posed by an ageing society are not exclusive to Japan.”

Other global events are under discussion within the industry – pandemics, for instance. One issue is speed of response. With a natural disaster there are ways, through parametric cover, of creating almost ‘automated’ pay-outs. But that becomes harder in the case of a pandemic, because of the wide-ranging social effects.

“The spread and impact of Covid-19 shows us how important it is to build a resilient and sustainable society,” says Tetsuji Higuchi, Representative Director, Executive Vice President, Chief Financial Officer, MS&AD. “That’s why we’re working with universities and the start-up community to find new, innovate ways to solve social challenges.”

Ultimately, MS&AD’s aim is to minimize or mitigate the impact of natural disasters and other dangers facing the world. PPPs, collaboration and continuous education will all play a part in making an unpredictable world more secure.

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