Christopher Au, Director of WTW's Asia-Pacific Climate Risk Centre, shares his views on the implications of rising sea levels on the insurance sector, as well as the challenges and opportunities it brings.
I'm Christopher Au. I work in WTW's Asia Pacific Climate Risk Centre, which is focused on financial quantification of climate risks across Asia and insurance product innovation and design.
Rising sea levels is one of the largest impacts of climate change – what do you think are the major implications on the insurance sector in Asia due to this?
Rising sea levels are clearly a very important trend that's coming out from climate change. We see rising sea levels all over the world. But in Asia and in Southeast Asia, the observed rates and the predicted rates are actually moving ahead of global averages. So we see impacts to Bangkok, famously, to Jakarta, to Tokyo, to Singapore, to metro manila. This is not something we can outrun, this is not something we can simply build against. And because it is chronic, long term, because it is expected, it's quite hard for there to be insurance products directly available against rising sea levels.
Now insurers are focused on the continued accumulation of risk. We see many places around Southeast Asia that have 10,15,20 million people living there affected directly today, and there's going to be hundreds of millions more to be affected between now and 2100. What that means is there is a lot of value risk, there is a lot of exposure, and there are a lot of people living in these areas to be directly impacted by rising sea levels. And so our response from the insurance industry, quite fairly, is to price this a little bit higher because the risk level has increased. But we also need to consider the social impacts on communities and on businesses as they continue to go about their everyday. With this increase in risk and increase in rising sea levels, we see lenders, investors, quite possibly asking businesses for financial protection against rising sea level. This is certainly going to be the case for households and mortgages.
So insurance is going to need to continue to innovate, to support the economy and to support communities. One way I think we could look at this is that insurance is a source of risk management expertise, as well as risk transfer and risk capital. And so the tools and solutions of the industry could be used earlier in the value chain to help with risk management and risk reduction, as well as risk transfer.
Given these implications, what are some of the challenges or opportunities for the sector ?
Challenges, basically are opportunities, so we think about these two things together. In this era of increased risk, increased exposure, the move to price risk more effectively, and to price the benefit of resilience across different assets and from different areas is probably going to be one of the most important things the industry can tackle. If we were able to price the benefit of resilience more effectively, we could guide wider society, wider investment towards assets that are more resilient. And in turn this can support adaptation efforts. If risk keeps increasing, then it starts to push at the limits of what can be insured.
We see pressure already in the gulf of Mexico, in wildfire in California, where the insurance industry is very uncomfortable with the level of risk that society and assets are exposed to. This shows a future that may be relevant for Asia for as long as risk continues to increase. And so we need much more attention on risk reduction and risk engineering perhaps to help bring overall risk down.
When we take a wider view of risk, we look at the different sources of exposure, and something we have done recently is to look at the benefit, in disaster risk reduction terms, that ecosystems are providing to communities, livelihoods and economic activity. Coral reefs, for example, have been shown to attenuate 50% to 90% of wave energy, and mangroves in the Philippines help avert $1.7billion of damage each year from extreme events. So these ecosystems are providing disaster risk reduction benefits, and through insurance models, we're actually able to try and quantify some of this. In turn, what that allowed us to do was design a coral reef insurance product that provides conservation funds for the reef following a typhoon or tropical cyclone that goes over the reef. These funds are released to local communities for conservation efforts, and they help restore the functional benefit of the reef.
So if we take this approach, and if we were taking this approach globally, we would start to identify sources of exposure and start to address how to we support the health of those so that we are enabling resilience more broadly.
How can GAIP support the industry in overcoming these challenges or tapping into the opportunities?
GAIP has a unique position and that, I think, is to be able to take a step back and consider the system and how insurance and insurance type thinking can be integrated more broadly into economy and society.
This tripartite nature means GAIP has the ability to look at all areas of planning let's say, to look at zoning, to look at public transport design, to look at investment, to look at underwriting. This trend of urbanisation in Southeast Asia is very strong and there are a few signs of it abating and there are direct implications on the number of people affected and on livelihoods, with the continual increase in sea level rise in different forms of flooding.
And so we're going to need more PPP, we're going to need stronger policy, we're going to need more innovation from the industry. And so GAIP's convening power is going to be very helpful for that agenda.
I think as long as we continue to push for innovation, we continue to push for initiatives on risk programme design, on risk transfer and product design, on thinking about insurance prices beyond the 12 months basis, and how do we close some of these protection gaps, these are all items that are going to be central to a resilient society going forward. And that's why we work with GAIP.
