Asia long on disasters, short on insurance

Asia long on disasters, short on insurance

SINGAPORE (Reuters): Asia has huge exposure to natural catastrophes ranging from tidal waves to earthquakes but little in the way of insurance to cover the damage, industry executives say.

In Papua New Guinea, for example, while thousands lie dead or injured in the devastation of villages wiped out by walls of water some 30 feet (10 metres) high, most survivors are unlikely to have had any insurance which could help them rebuild their shattered lives.

"I expect there to be very little involvement for the insurance industry," Gerhard Berz, head of the Geoscience Research Group at Munich Reinsurance, told Reuters.

Industry studies show that situation is far from unusual.

Some 72 percent of the 22,300 people killed in natural disasters in 1997 were in Asia, while claims paid by the world's insurers for the catastrophes in the region were US$858 million -- just 13 percent -- out of a world total of US$6.7 billion.

In 1996, the figures were 70 percent of deaths and only 8.7 percent of the compensation, part of a long historical trend.

While disturbing, the numbers are not unexpected.

"There's a combination of two factors really. First that the insurance penetration is not there, second that the accumulation of risk is not there because insured values are quite low," said David Philips, an executive with Swiss Re in Singapore.

Insurance acts as a barometer of economic development, with penetration correlating closely to per capita income.

Although the developing world is home to 80 percent of the global population, it generates only 25 percent of its wealth.

In insurance terms, this translates to just 10 percent of covers being bought in the developing world, says Sigma Swiss Re's research unit.

Consequently when catastrophe strikes, low life insurance penetration means few payouts to surviving family members.

As developing nations do not typically have large numbers of high spending consumers, non-life insurers face little exposure on personal lines business, while low density of factories and high-cost property means commercial insurance exposure is tiny.

Meanwhile, the frequency and severity of natural catastrophes in Asia -- 21 of the world's worst in terms of fatalities have occurred here in the past 25 years -- means what cover is tightly worded, expensive and has high levels of deductibles.

Asia's geological problem is that it sits on the Ring of Fire, the name seismologists give to the arc of volcanoes and fault lines stretching around the Pacific Rim.

"In general, 90 percent of the seismic activity in the world is in the Ring of Fire. There is also high probability of high intensity events," said Berz, whose firm is the world's largest reinsurer and a major underwriter of catastrophe protections.

The escape clause for the insurance industry is that at this stage in the region's economic development, financial exposures are low, with the exceptions of Australia, Taiwan -- and Japan.

"Tokyo is really the worldwide leader for seismic exposure. Projections suggest the worst case loss could be as high as US$2 trillion or US$3 trillion, maybe 10 times what we expect in California, for example," Berz said.

Even so, the earthquake which struck the Japanese port city of Kobe in January 1995, killing 6,000 people and causing US$80 billion in damage, cost a comparatively small US$2.6 billion in insurance claims.

However, excluding seismic events like Papua New Guinea's tsunami, caused by an undersea earthquake, does not much improve Asia's risk profile due to high exposure to flood and typhoons.

Insurers say even if economic development boomed and cover was snapped up by the vast majority of Asian buyers -- a factor that would normally drive prices down -- the rise in insured values at risk from catastrophe would serve to keep prices high.

"Places like the Philippines are exposed to such a high severity of natural perils like earthquake, volcanoes, typhoons and floods that the cost of cover would be huge," Berz said.

In the meantime, the financial exposures have yet to emerge.

"The developing countries in this region simply haven't entered the insurance world yet. Until they do, the financial impact of these disasters will remain small," said one European insurance executive.