Asia Risk Roundtable

This session explored different perspectives on data collection and utilisation, identified common threats facing the financial system and opportunities for cross-sector collaboration, and engaging policymakers on risk identification and awareness.

 

Enhancing Data Collaboration and Utilization in the Financial Sector, supporting risk navigation and building resilience through Data Intelligence

Risk is increasing. Enhanced risk identification and awareness can enable strategic decision-making, agenda-setting, and resilience measures. Yet, elevated levels of uncertainty and volatility, combined with low levels of information, limited or conflicting data and decision-making biases, can impede the ability to assess future trends and risks and limit innovations in developing and implementing solutions to address the increasing risks.

 

The financial sector is uniquely vulnerable to various risks but also uniquely positioned to identify data gaps, improve collection, and enhance our analytic capabilities. Several vital challenges contribute to existing gaps, stemming from diverse factors, including mindset, capability, and resource availability. A significant obstacle arises from the reluctance to share data, compounded by varying data structures that hinder effective analysis. This often results in a lack of clarity among those interpreting the data, impacting decision-making processes.

 

Data is also fragmented across various entities: governments, commercial entities, academia, and insurers. This fragmentation poses collaboration and data-sharing challenges due to proprietary concerns.

 

Data interpretation also has limitations, particularly in stress-testing scenarios reliant on predicted outcomes. The inadequate understanding of data outcomes also leads to decisions made without a full grasp of potential consequences, especially in critical areas like mitigation and disaster financing. Governments face difficulties determining necessary finances due to a lack of insight into the potential returns on interventions.

 

Emphasising objectives for data use and nurturing new, sustainable industries instead of fixating solely on data accumulation and stress testing without clear purposes was one of the recommendations to work around this challenge.

 

The public sector's role in providing data is essential to address these challenges. This can be further complemented by valuable information the private sector holds, especially insurance companies with substantial claims data, although the insurance industry may view data as a competitive advantage. Hence, advocating for enhanced data sharing can help the understanding of risks, promoting informed decision-making and, ultimately, improving the insurance market.

 

One approach to addressing the challenges involves gathering data at its source, such as acquiring energy consumption patterns from regulators and service providers to evaluate a building's environmental impact. This strategy emphasises collaboration with industry players, as seen through projects like Project Greenprint in Singapore, which consolidates ESG data on a trusted platform and makes the information accessible.

 

Additionally, the significance of data sharing in managing and recovering from natural disasters like earthquakes is significant. Highlighting instances where disparate perspectives among stakeholders caused decision-making delays due to a lack of shared data, a panellist shared his experience in developing a data agreement in New Zealand after the 2011 earthquake in the country. This example underscores the benefits of shared data in building resilience for the future.

 

Presently, methodologies for data collection vary across regional agencies and countries. Overcoming these challenges require concerted efforts in consolidating data, enhancing analytical frameworks, implementing a standardised approach to ensure more consistent risk assessment, and fostering deeper understanding among stakeholders.

 

Insufficient understanding of risks, especially given the changing environment, can lead to biases in risk perceptions, which, in turn, can hinder effective decision-making. For example, mortality tables utilized by the insurance sector for pricing and evaluating their products, as well as many risk models rely on historical data, or assumptions, highlighting the industry's inherent bias.

Furthermore, future expectations often stem from past and current realities. For example, regulatory stress test scenarios are derived based on historical trends and insights, but the COVID-19's diverse impacts had demonstrated the oversights in pandemic preparedness from these stress test scenarios. As such, it is important to widen perspectives to avoid anchoring to present viewpoints, particularly in assessing future climate risks.

 

Overall, enhancing data collaboration and utilization in the financial sector involves overcoming several key challenges. These include breaking down data silos, standardizing data structures, fostering open data-sharing cultures, and developing robust analytical frameworks. Navigating risks and building resilience through data intelligence in the financial sector requires addressing biases in risk perception, expanding the scope of data interpretation, and fostering collaboration both within and beyond the sector.

 

Advancing Cross-Sector and International Collaborations for Global Risk Management

In the context of global risks, such as climate change, different sectors could collaborate to build a collective risk-awareness framework that transcends national boundaries, especially in Asia.

 

International collaborations aimed at establishing comprehensive risk awareness frameworks across borders, such as the South Asia Disaster Risk Insurance Facility (SEADRIF), an ASEAN initiative on disaster risk financing and insurance, and the Resilient Asia program, a partnership between the UK government and the World Bank focusing on climate resilience and understanding climate change impacts in South Asia, were illustrated as effective collaboration examples.

 

The SEADRIF initiative specifically addresses protection gaps arising from regional disasters, concentrating on flood insurance in Laos and customising products to suit the distinct needs of different ASEAN nations. Its approach prioritises understanding and meeting the specific requirements of each country rather than adopting a one-size-fits-all market strategy. Such initiatives underscore the challenge of educating diverse ministries and stress the necessity for a comprehensive approach to capacity development across ASEAN markets.

 

There is also opportunity for better synergy between financial regulators and other public entities to explore avenues for facilitating and orchestrating data collection. For example, insurers have the potential to access critical health-related data, such as mortality and morbidity statistics, through partnerships with health agencies and ministries.

 

The Hazards Insurance Partnership exemplifies this synergy, whereby the Australian government and the insurance sector in the country collaborate to consolidate fragmented data origins, enabling informed risk mitigation strategies and bolstering societal resilience against hazards that widen protection gaps.

 

Policymakers can provide support to enhance risk identification and awareness, especially in areas like cyber threats, pandemics, and climate change, where public awareness is paramount. Policymakers could also extend financial incentives and industry support to tackle these uncertainties.

 

The need for regulatory coherence and uniformity in data requirements across the ASEAN region was highlighted, with the Monetary Authority of Singapore (MAS) cited as a model for regulatory clarity. In this regard, continuous dialogue and discussions are crucial in collectively navigating challenges.

 

Overall, advancing cross-sector and international collaborations involves fostering collaborative mindsets, sharing knowledge and resources, and aligning regulatory frameworks. Such concerted efforts are crucial for effectively managing risks and enhancing overall resilience.

The most crucial step we can take to reduce the protection gap and improve resilience is to reduce risk. As we scale up finance for climate adaptation, it is essential to consider how these investments can also contribute to risk reduction. The financial sector can play a pivotal role in driving this risk reduction. This session explored how the financial system can actively mitigate risks, expand investment opportunities, and allocate funds strategically to high-impact projects that promote resilience and sustainability.

 

Community Engagement & the Financial Services Sector's Role

Risks can be classified into two categories: individual risks affecting specific individuals and can be mitigated through incentives, like reduced insurance premiums for healthier lifestyles or safer driving, and broader risks impacting entire communities or regions, such as climate-related hazards like wildfires or hurricanes.

 

To address the broader risks, local communities could be engaged in constructing resilient infrastructure to mitigate the impacts of inevitable events, even if they cannot be completely averted. The overarching goal is to devise effective strategies for managing risks that extend beyond individual incentives, fostering collaboration and community involvement to combat these challenges.

 

The financial services sector's involvement in risk reduction is outlined through four primary roles. First, the significance of empowering stakeholders to understand risks, citing reinsurers, corporate insurers, and brokers as effective examples. The second function emphasises the importance of connecting transfer functions e.g. payment functions. The third is to establish managed pools akin to existing models in sectors like nuclear or agriculture, promoting collective responsibility. Finally, insurers' unique requirements in terms of asset-liability management given the insurers' long-term liabilities, could be utilised to leverage these long-term assets, capitalising on the illiquidity premiums inherent in risk reduction investments.

Lloyds's ongoing Sustainable Markets Initiative, which aims to expand global insurance projects, was shared as an example of a resilience-building initiative. This initiative involves collaborating with the UN Capital Development Fund (UNCDF) to support projects in economically challenged countries by providing reinsurance capacity and enhancing local insurance market capabilities.

It is crucial for the insurance industry to adapt its products and strategies in response to evolving risks. Examples of such adaption range from advising corporate clients to consider flood risks in long-term investments to suggesting cost-benefit analyses that factor in future hazard risks impacting infrastructure. For instance, in Africa, there is a livestock insurance program leveraging satellite data to prevent economic losses for herders during droughts.

 

The insurance industry's need to engage with governments and regulators was stressed, citing an example from China where regulatory encouragement led insurance companies to report on their mitigation efforts.

 

Integrating insurance into the design and concept phase of project development could leverage the industry's knowledge and data to enhance resilience investment. Analogies can be drawn to the early engagement of contractors in the construction industry, highlighting the potential benefits of incorporating insurance insights earlier in the process to improve resilience options and gain a better understanding of the return on investment.

 

Ultimately, the insurance industry must keep adapting and taking a lead in risk mitigation to stay pertinent amid evolving risks and emerging industries.

 

Enhancing Insurance Accessibility and Innovation in Risk Reduction

There is a pronounced gap in financial literacy and insurance accessibility in Southeast Asia and South Asia. The imbalance between the awareness of risks on both supply and demand fronts highlights the need to improve services for underserved population who lack not only adequate insurance coverage but also knowledge in this area. To counter this, a multi-sector collaborative approach could help to bolster financial literacy and narrow the protection gap for those genuinely in need of insurance products.

 

To foster innovation in risk reduction projects, insurers could take on more risk in emerging sectors like hydrogen and waste-to-energy, fostering technological development and construction projects. As these sectors expand, insurers will show increased interest, achieving a better equilibrium in the supply-demand equation and steering behaviours driven by profitability.

 

Nonetheless, two key barriers hinder the scaling up of investment opportunities for risk reduction. First, the importance of data standardisation and its role in regional regulations and land planning. There is a need for regulators and governments to collaborate in establishing standardised policies and viewing standardisation through a policy lens.

 

Second, insurance viewpoints could be integrated into future planning, especially concerning land use, building regulations, and public procurement. Considering future insurability at the initial design stages, particularly public-private collaborations, could significantly enhance future resilience in construction and planning.

 

Collaborative opportunities between banks and insurers could potentially revolutionise the landscape of risk reduction investments, particularly in risk pricing, bancassurance and the embedding of insurance within banking services. Both entities hold the potential to educate the public on insurance functions and the impact of risk management on costs. There is a call for joint action among banks, insurers, and governments to invest in infrastructure for minimising risks and to shift from reactive spending post-disasters to proactive prevention. The calculated returns on disaster resilience investments, as assessed by institutions like the Asian Development Bank, make this a compelling avenue for engagement.

 

Balancing Risk Reduction and Conventional Investments: The Role of ESG and Sustainable Finance

The financial sector could collaborate with governments and international organisations to mobilise funding for critical projects that reduce risk exposure, particularly in areas such as climate risk and sustainable finance.

 

A robust green audit system was proposed to evaluate projects from inception and monitor their alignment with sustainability goals over time, complementing existing standards like IFRS Disclosure. This would involve government agencies initiating support for project credibility, followed by private sector engagement and insurance coverage to bridge protection gaps aimed at establishing a standardised financial structure.

 

Another key area is bridging the gaps in adaptation funding and mitigation funding, especially for large-scale infrastructure projects in Asia. The financial sector, governments, and international organisations play crucial roles in addressing this shortfall.

 

An example is when a bank explores the use of a blended finance platform to attract investors for projects that may be marginally bankable. Simultaneously, they invite the insurance industry to provide de-risking mechanisms. These efforts include encouraging life insurance investments in infrastructure through adjusted risk requirements and sandbox frameworks. The goal is to stimulate investments in sensible infrastructure projects and to assess their long-term viability.

 

As for allocating funds to high-impact risk reduction projects, the perspective from credit rating agencies highlights a disparity between strong ESG claims and the actual credit quality found in investment portfolios. A robust ESG stance does not always correlate with higher credit quality, highlighting potential risks like unproven technologies or startups that add insurance complexities, challenging reliable pricing.

 

Insurers directing funds toward impactful risk reduction projects are mindful of integrating ESG considerations into their investment portfolios, with meticulous screening, a commitment to green investments, and ethical deliberations. Evaluation strategies entail assessing their impact on portfolio diversification, potential concentration risks, and whether these actions will enhance earnings or increase exposure over the medium to longer term.

 

The significance of a company's sustainability strategy is pivotal in addressing stranded assets and effectively transitioning its asset portfolio. This involves a focus on climate sustainability disclosures, investment certifications, employment policies, and the sufficiency of governance structures linked to insurance and investment activities, all under the ESG umbrella.

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Nonetheless, greenwashing is a concern in sustainable finance. Specialised ESG teams must collaborate with credit teams to qualify assets as green investments and guide companies toward sustainability. Third-party certifications are integral, and collaborations with governments and regulators aim to establish credible certifications, preventing greenwashing by ensuring tangible evidence of sustainability.

 

A nuanced understanding of returns on risk reduction investments is crucial, noting their tendency to yield lower returns due to their inherently lower risk nature, which aligns with sustainable investments. Rather than rewarding investors in risk reduction initiatives with higher returns, the focus should shift towards recognising companies making investments through elevated valuations.

 

Investors must remain cautious about maintaining realistic expectations regarding returns on ESG investments, highlighting that such investments often yield lower returns albeit with lower volatility. Rather than expecting higher returns for ESG investments, the focus should be on rewarding companied that prioritise risk reduction.

Increasing access to risk management tools and products at the macro, meso, and micro level is critical. Understanding how to leverage the roles of different sectors within the financial system will help improve the financial wellness of individuals, families, businesses, and communities. This session explored how to strengthen collaboration between the different sectors within the financial system, identify specific products or services that could improve financial wellness across stakeholder groups and how collaboration can help address challenges in reaching and retaining customers, as well as at the macro and mesa levels, particularly within Asia's emerging economies.

 

Risk Management through Cross-Sector Collaboration and Innovation

Risk analytics and cross-sector collaboration can be utilised to manage and mitigate risks effectively. Risks, including those linked to climate change, are distributed across the system due to contracts and guarantees. Using the example of a resilient infrastructure project in Jamaica, it was illustrated how various stakeholders collaborated to assess and manage risks collectively. Instances like parametric hurricane cover for sovereign debt in Belize and coral reef insurance tied to conservation activities demonstrate how collaborative approaches reduce overall risk costs and involve multiple actors.

 

However, collaboration often requires breaking down silos and driving innovation beyond traditional barriers. One strategy is to ensure sustained collaboration is the sandbox concept. The sandbox concept is beneficial not just for testing new technologies but also for experimenting with novel regulatory ideas. Sandbox testing environments aim to address regulators' concerns about the potential impacts of new regulations. The push to expand this initiative across markets is deemed essential to adopt successful ideas and mitigate regulatory disparities that escalate costs within the insurance sector.

 

Ultimately, there must be standardisation within sandbox projects to scale successful initiatives, thereby reducing costs and enhancing access to insurance, especially in the life and health sectors where high fixed costs impede affordability for those in need.

 

Another example is the collaborative relationship between banks and insurance companies in instances like trade credit insurance, where banks lend money for trade flows between markets without a presence, using insurance to manage risks linked to unknown buyers. Additionally, in mortgage financing, banks often require borrowers to take mortgage insurance as a risk mitigation measure. Amidst the transition to a green economy, banks facilitating this shift will increasingly rely on insurance companies to mitigate associated risks.

 

Non-profit organisations such as the Global Asia Insurance Partnership (GAIP), multi-lateral development banks, and policymakers play a role in facilitating and nurturing cross-sector collaboration for innovation. Platforms like GAIP should be utilised to harness the convening power for commercial approaches, aiming for actionable steps. Leveraging existing influential documents like the International Association of Insurance Supervisors (IAIS) papers to sway regulators and emphasise identified issues' is of equal importance.

 

The various stages of development across the Asia region necessitate different approaches to innovating banking and insurance products to enhance financial wellness. While there is a spectrum of financial innovations implemented across different countries to address sustainability challenges, including green bonds, social bonds, and sustainability-linked bonds, the focus should shift to newer innovations like structural products and green deposits.

 

Leveraging Technology for Financial Inclusion and Literacy in Emerging Markets

Technological advancements are game changers in the financial sector's ability to reach and serve traditionally underserved markets. An example highlighted was that of India, which has made remarkable strides in terms of technological advancements in its financial landscape, particularly in digital payments, establishing digital identities, and enabling microtransactions for a broad population. These advancements have opened doors for sectors like insurance to serve previously underserved segments effectively. The Indian government's efforts have been instrumental in fostering a digital economy, enhancing customer access and service efficiency. Although these developments are still in their initial stages, they represent a substantial leap in addressing customer needs and tailoring products.

 

Cross-sector collaboration and digital integration have also assisted in revolutionising India's financial ecosystem. Critical elements like Aadhaar, a biometric identity system, Unified Payment Interface (UPI), Digital Locker, and E-sign have driven financial inclusion. These systems provide direct access to credit, government benefits, health insurance, and agricultural support, empowering individuals for entrepreneurship and scalability.

 

Technology can also be tapped to improve financial literacy to educate communities about the differences between life and non-life insurance. By empowering people to comprehend the protection gap concept, technology can help to significantly improve insurance literacy, moving away from pushing insurance products and instead enabling individuals to make informed choices about their insurance needs.