Jacqueline Loh: Public-private partnership - the way forward for natural
catastrophe risk management in Asia
Opening address by Ms Jacqueline Loh, Deputy Managing Director of the Monetary Authority
of Singapore, at the 5th Institute of Catastrophe Risk Management Symposium, Singapore,
24 April 2014.
* * *
Professor Bertil Andersson (President, Nanyang Technological University, Singapore),
Professor Haresh Shah (Founding Chairman, Institute of Catastrophe Risk Management
("ICRM")),
Professor Pan (Director, ICRM),
Distinguished guests, ladies and gentlemen, good morning.
Introduction
1. It is my pleasure to join you today at the 5th ICRM Symposium. The theme for this
year's Symposium, "Financing of Natural Catastrophes in Asia - The Role of Private Sectors,
Governments and Regulators in Natural Catastrophe Management", highlights the
importance of having both the private and public sectors collectively manage natural
catastrophe risks. Management of catastrophe risks spans a spectrum of activities across the
entire risk management value chain, from raising risk awareness, to promoting effective risk
assessment and pricing, and co-developing ex-ante risk financing solutions. This is a very
relevant discussion topic, at a time when Asia is facing increasing vulnerability to natural
catastrophes.
2. In keeping with the conference theme, I will be sharing a few observations on how
we can strive towards sustainable risk financing using a Public-Private Partnership ("PPP")
approach. Asia is more at risk from natural catastrophes
3. Over the last 30 years, Asia has borne the brunt of natural catastrophe losses,
accounting for almost half of the world's estimated economic losses from natural disasters1.
However, less than 5% of the losses were insured, compared to 40% in developed
countries2. Over the last five years, the region experienced a series of high-profile and very
painful disasters such as the Tohoku Earthquake and Tsunami in Japan, floods in Thailand,
and the Super Typhoon Haiyan in the Philippines. Losses from these three disasters are
estimated to be close to USD 360 billion3, about the average GDP of the Philippines and
Thailand in 2012. As these economies were underinsured, the bulk of the financial burden
was ultimately borne by the governments.
4. The development of catastrophe risk management in Asia is still at a nascent stage,
compared to more mature markets in the US and Europe. Yet Asia is expected to continue to
experience a rise in natural catastrophe losses, as a result of climate change, and rapid
population growth, urbanization as well as economic concentration in heavily exposed
regions. So With this confluence of factors, the financial burden from natural catastrophes is
expected to intensify.
Minding the protection gap in natural catastrophe risk management
5. Going forward, governments can no longer act as the "insurer of last resort". In light
of Asia's widening protection gap, governments would need to shift away from retaining risks,
and transfer a larger proportion of risks to the insurance industry, in order to increase their
national resilience against natural disasters. Instead of tapping on ex-post disaster risk
financing options such as government budgets, public debt issuances and international
donations, it is increasingly important for economies in the region to pursue ex-ante risk
financing solutions to finance natural catastrophe losses.
6. Amongst the various risk financing solutions, insurance in particular, has been found
to exert a positive effect in mitigating financial consequences of a natural catastrophe event.
A study on the macroeconomic costs of natural catastrophes4 has shown that an increase in
insurance penetration by 1 percentage point can lower the cost borne by taxpayers by
approximately 22 percent. It has also been found that with adequate insurance coverage,
economic activity returned to pre-catastrophe levels long before reconstruction was
completed.
7. Specifically, insurance can lower the fiscal impact of natural catastrophes on
governments in two ways5:
(i) Firstly, it has a preventative effect by providing price signals, which in turn create
incentives for the insured to undertake physical risk prevention measures. This
reduces their physical vulnerability to natural hazards, and can help to avoid more
costly damages in a loss event.
(ii) Secondly, it has a loss mitigation effect by providing prompt financial relief to
support immediate reconstruction efforts, which will help to moderate further indirect
losses, such as from business interruption. This reduces the need for private and
public borrowing following a natural catastrophe.
Public and private sectors each has its role to play in increasing insurance penetration
8. The responsibility of ensuring adequate insurance coverage does not reside solely
with the governments. Individuals and businesses, too, should have vested interests to
ensure that their respective exposures to natural catastrophe risks are sufficiently mitigated
and insured.
9. However, increasing insurance penetration is certainly not without its challenges,
and here I will highlight three:
(i) Firstly, the lack of awareness of natural catastrophe risk and solutions amongst
individuals, businesses and governments; which can go some way to explain the
lack of appetite for catastrophe risk transfer solutions in Asia. This is where I think
the insurance industry can play a proactive role in raising awareness, through
lending expertise and offering risk management advice, engaging governments and
organizations in regional collaborative efforts, ,and through industry conferences
such as the ICRM Symposium.
(ii) Secondly, a lack of quality Asian catastrophe risk data, which impedes the industry's
ability to conduct robust risk assessments, modeling and underwriting for the region.
In response to the importance of quality quantification of catastrophe risk in the
region, we have seen many notable efforts being undertaken in various quarters.
At the regional level, the ASEAN Natural Disasters Research Works Sharing ("ANDREWS")
Committee has been formed to facilitate dialogue and information exchange between
academia and insurance industry professionals on latest research and market developments
relating to natural catastrophes. In Singapore, industry players have ramped up catastrophe
analytics and modeling efforts rapidly in recent years. This is supported by scientific and
state-of-the-art catastrophe risk research undertaken by research institutes such as the
ICRM, the NUS Centre of Hazards Research and the Earth Observatory of Singapore.
(iii) Thirdly, a shortage of expertise to properly understand and assess catastrophe
risks. Even where catastrophe models are employed, it is essential to overlay deep
expertise and good judgment to challenge assumptions in modeling outputs, in order
to have a more robust assessment and interpretation of the risks. The Thailand
floods in 2011, for example, offered useful learning lessons about how there can be
blind spots, without a deep understanding of the underlying risks:
(a) Thailand was not even designated by insurers as a catastrophe-prone prior to
the floods, despite the potential risks and exposures;
(b) Secondary losses arising from the business interruption claims were heavily
underestimated; and
(c) The accumulation of risks arising from Japanese cedants relocating their
supply and production chains to Thailand from Japan, which had been hit with
an earthquake and tsunami just months before, was generally overlooked.
Therefore, I would encourage the industry to build deep expertise in the regional markets and
be in close proximity to Asia, so as to attain a good understanding of the Asian risk and
underwriting environment.
10. While the industry is taking measures to enhance its capabilities in risk modeling
and analytics, regulators also play an impartial role in steering the industry to model
uncertainties better and in turn, strengthen the financial resilience of the industry. This has
been done via new regulations which explicitly take into consideration insurance catastrophe
risks in capital frameworks. We have seen these in countries such as Australia, Switzerland,
Bermuda and the Euro Area. In Singapore, MAS has proposed the introduction of insurance
catastrophe risk requirements in the RBC 2 framework, where we are currently working very
closely with the industry in the calibration of catastrophe risk charges. In addition, the set of
Enterprise Risk Management ("ERM") requirements, which came into force from 1 Jan this
year, can steer industry to model catastrophe risks better as insurers are required to identify
and manage material risks such as catastrophe risks. The panel discussion on the topic of
"Regulatory Environment on Catastrophe Risks in Asia" this afternoon would focus on how
the regulatory environment can support the effective financing of natural catastrophes in the
region.
PPP - A collaborative approach for sustainable disaster risk financing in Asia
11. While it is important to have different stakeholders step up in their respective roles in
natural catastrophe risk management, it is not likely to be sufficient. A corroborative effort
involving both public and private sectors, through a public-private partnership, is key,
especially in Asia. This is in light of the large size of risks to be insured, the substantive size
of population which needs insurance cover but remains unreachable, and the lack of natural
incentives for the private sector to offer sufficient coverage for certain risks. A PPP approach
recognizes the different roles as well as limitations of governments and private insurers, and
can enable innovative solutions collectively. Public-private financing solutions, such as
natural catastrophe insurance pools, micro insurance, and alternative risk transfer solutions
such as catastrophe bonds, have the potential to enlarge the financial capacity of insurance
solutions, by providing affordable cover to a wider pool. With the expertise and capital
support from international and regional organisations, the public and private sectors can work
together in developing purposeful risk transfer solutions for the region.
12. It is encouraging that governments, regulators, industry, academia and international
organisations in Asia have already taken initial steps to develop effective PPPs to enhance
natural catastrophe risks management. In October last year, for example, the International
Finance Cooperation ("IFC"), a member of the World Bank Group, announced a partnership
agreement with MAIPARK Indonesia, a specialised catastrophe reinsurer formed by the
government and industry, to develop an earthquake-index insurance product to help protect
banks that provide loans to individuals and micro, small and medium enterprises from losses
due to natural disasters such as earthquakes6.
Singapore as a PPP knowledge partner
13. As the leading reinsurance hub in Asia-Pacific, Singapore can play a critical role by
being the first responder to natural catastrophe events in the region. Over the years,
Singapore has developed a strong ecosystem to support Asia's growing needs; comprising
reinsurers specialized in property-catastrophe risks, a network of brokers with catastrophe
risk modeling capabilities, commercial catastrophe modeling vendors and research
institutions. I am very heartened to see the insurance industry's active participation in the
Natural Catastrophe Risk Working Group, which is an industry panel formed by the MAS in
October last year. To meet increasing protection needs in Asia Pacific, the Working Group is
looking at recommending policies and initiatives which could catalyze the development of
underwriting capacity and expertise in Singapore's catastrophe insurance and reinsurance
market; and raise the overall risk awareness in the region. One of the initiatives being
explored is the proposed establishment of a Natural Catastrophe Data Analytics Exchange -
this is a facility which we hope could aggregate data from both private and public sectors,
with the aim of generating new insights and catalyzing innovative disaster risk financing
solutions for the region. This is a concept which will be validated with the industry over the
next few months, and we look forward to engaging both the public and private sectors on
this.
14. I would like to take this opportunity to commend ICRM as Asia's first and only
multidisciplinary research institute that is dedicated to enhancing the understanding of
catastrophe risks in the region. I understand that ICRM is actively involved in a number of
PPPs in the region, including the Global Earthquake Model ("GEM"), a PPP with OECD
aimed at developing and deploying tools and expertise for earthquake risk assessment
worldwide; and the ASEAN Earthquake Model ("AEM"), targeted at developing earthquake
risk assessments for the region.
Conclusion
15. Let me conclude. Natural catastrophe risk management will be an increasing priority
for Asia. The interconnectedness of natural catastrophe risk management calls for going
beyond borders; and across stakeholders, both government and industry, to coordinate
holistic strategies and manage natural catastrophe risks in a sustainable manner.
16. The ICRM annual symposium serves as a unique opportunity for various
stakeholders to come together to discuss challenges, and chart the course for natural
catastrophe risk management in Asia going forward. I understand that there is a line-up of
interesting presentations covering very pertinent topics such as post-disaster impact analysis
experiences and the types of catastrophe risk transfer and financing solutions, over the next
2 days.
17. On this note, I wish you a productive and memorable time at this Symposium and in
Singapore. Thank you.