The race to insure Southeast Asia against climate risk

Last month, global insurer Munich Re released data on natural disaster losses in 2023, and it showed that Asia Pacific is poorly indemnified. Typhoons and floods, along with geophysical events such as earthquakes, caused US$50 billion of damage in the region, but just 14 per cent of this amount was insured.

Only Africa fared worse at under 7 per cent insurance coverage, while North America was the most well insured, with 67 per cent coverage.

Without sufficient insurance coverage, experts warn that the situation on the ground in developing regions will only get worse as extreme weather caused by global warming intensifies.

Dr Jack Xia is the chief actuary of Singapore-based insurer Igloo. Dr Christopher Au is the head of WTW’s Asia Pacific Climate Risk Centre.

Joining the Eco-Business Podcast to examine the factors holding Asia back on climate insurance are Dr Jack Xia, chief actuary of Singapore-based insurer Igloo, which offers an automated “Weather Index insurance” for farmers in Vietnam, and Dr Christopher Au, head of risk advisory and insurance firm WTW’s Asia Pacific Climate Risk Centre.

Tune in to our discussion on:

• The reasons Southeast Asia is underinsured against growing extreme weather risks
• How insurers can strike a balance between keeping premiums affordable and ensuring business continuity
• The risk of uninsurable climate risks in the region
• The role of government and blended finance models
• What climate insurance could look like in the future

The edited podcast:

Jack, tell us more about the Weather Index Insurance, which automatically pays farmers when there is too much or too little rain. What is your experience rolling it out in Vietnam?

Dr Xia: We launched the Weather Index Insurance in November 2022, starting with rice farms in the Mekong Delta, and now we have expanded to coffee farms in the central highlights, along with various crops in Southern Vietnam.

What we see is that there are typically three different models of agriculture insurance. The first is government-sponsored projects. For these, premiums and payouts are both relatively high, but the premiums are heavily subsidised by the government.

The second model is where someone sponsors projects, but this is hard to sustain in the long run once funding runs out.

Igloo runs things slightly differently. We see very low insurance penetration in Southeast Asia and customers are unable to afford very high premiums, so we developed this micro-scale agricultural insurance. We made it index-based (Igloo tracks local rainfall measurements for anomalies), so no manual examination of farms is needed before payouts. You get payouts if there are adverse weather events.

The purpose is really to educate farmers about insurance. This is well-aligned with our vision of insurance for all. We start with this micro-scale Weather Index Insurance product to let farmers know how insurance works. Then as the market and economy grows, we will introduce insurance products with higher coverage, more variety, and also extend to other markets, like Indonesia.

In Vietnam, we started with three provinces, and now we cover 19 out of 63 provinces and cities. So it is about one-third of Vietnam, mainly in the South. As of last month we have over 50,000 farmers on board.

We work closely with two distribution partners. The first is through the agricultural value chain, with a company that teaches farmers how to farm, sells them seeds and fertilisers, and buys products from them. The second is Vietnam’s largest telco player Mobifone, via their MobiAgri programme which provides farmers data, weather forecasts and agricultural advice. We can cover a lot of farmers by distributing our product through them.

We’ve seen the Munich Re figures for underinsurance in Asia. What is your experience with low climate insurance rates in Southeast Asia? What are the challenges to scaling products like the Weather Index Insurance to more sectors, or customers?

Dr Xia: Munich Re is probably more focused on South Korea, Japan, China, basically East Asia. In terms of Southeast Asia, insurance penetration is very low. Agricultural insurance penetration is close to zero in some markets.

Two years back, when we were developing the Weather Index Insurance in Vietnam, farmers did not understand what insurance is about. They may have received some kind of insurance from the government, but they understand it as financial support instead. So the farmers weren’t really willing to pay for insurance as a product, and us as a company could not sell directly to them. That is why we start small and sell this product through partners.

Christopher, what is your view on this? Are there any sectors or countries particularly underinsured against climate risks in Southeast Asia?

Dr Au: We have similar conversations with larger corporates in the region as Jack has had, in his experience in the agricultural sector in Vietnam.

Unfortunately, the way things are headed, we are definitely having more disruption events, and more property damage, which is starting to eat into worker productivity – think of the effect of extreme heat on workers building a new factory or housing development. The climate risks are also impacting financial valuations and capital allocation.

On sectors and countries – we are talking about something that is pretty systemic. It is not just about the hazard, but exposure to it. With growing intra-regional trade and social interdependency, the impacts of one climate event are not necessarily constrained to one country. 

For instance, the impact of transboundary haze in Singapore shows how these events are becoming regional. Haze insurance was not something necessarily thought about in the past, but we are absolutely in a position where businesses should be planning for the impact of haze. If I run a mall, what does that do to my footfall?

Also, heating is taking place in the oceans too. What does that mean for fish catch? Will extreme typhoons become more likely? In the Mokong delta, what does sea-level incursion and salt-water intrusion look like? Bangladesh is building gas plants that could be impacted by future sea-level rise – and what does that mean for businesses dependent on them for power?

So overall we are seeing a general increase in risk, and it is showing up in places we haven’t previously considered to be vulnerable.

Both of you mentioned low awareness about insurance being an issue. But Southeast Asia has been facing climate risks for years; people are definitely feeling the impacts. So why are they still under-insured? Is it an issue of affordability or a lack of supply of suitable products?

Dr Au: It is going to be a mix of those factors. Businesses and individuals need to better understand the risks they are facing today, and in 10 years’ time. Insurance is just one form of risk management – in fact it is about risk  transfer. Insurance rarely works alone, it needs to work with other services, and we are seeing businesses starting to look at the risk landscape from climate change.

Part of it involves increased investment in risk management such that you bring down exposure to extreme events. 

I think there is a little bit of nuance in this protection gap debate. At WTW we see that 2023 was the fourth consecutive year globally with global insured losses of over US$100 billion, and total economic losses last year were at around US$350 billion. While there is that gap, you don’t necessarily insure against every dollar of loss, that is not necessarily the optimal way to deploy capital.

So I’d say insurance helps to influence how capital gets allocated, in terms of pricing future flood risk today for residential, commercial and industrial valuations. Perhaps this will affect the understanding of risk exposure and economic value of new developments, and from there have a more informed conversation around managing risk.

Sticking to Southeast Asia, where we typically see issues of governments and businesses being somewhat cash-strapped – how does Igloo strike a balance between making premiums affordable for farmers, while also ensuring business continuity?

Dr Xia: So we cover extreme weather events. If you focus on one particular household or farm, there will be a lot of volatility in claims. In a good year, nothing happens, and once in 10 years, something happens and you have to pay out a large sum. It doesn’t make sense for insurance companies to just cover one farm, because cash flow will be too unstable.

Typically, what insurance companies want is for the government to step in, build an insurance product and expand it to whole regions, to the whole country. Governments need to allocate at least US$10 million to sponsor a nationwide programme, and this kind of budget in any country would take a few years to negotiate, and some may never get it done. That is why Igloo starts small, distributes products with partners, and slowly increases coverage and conditions.

We are starting with a very low premium. We have two products. One is a seasonal plan, costing US$2 per hectare of land. The second is an add-on to phone data plans, and the insurance premium is a small small fraction of the price plan.

Internationally, reinsurers (who fund insurers) are generally alright with such programmes, which have been working quite well in other markets, such as Europe, Australia, China, India, Japan and South Korea.

A follow-up question for you on the Weather Index Insurance, Jack – have you done any projections of future rainfall in a 1.5°C, 2°C or beyond 2°C world, and how that affects insurability?

Dr Xia: Global warming is a problem, and it is reducing agricultural yield in many regions. But generally, when we look at the past 20, 30 years of rainfall data, the impact is not that big. We’ve worked with our reinsurer, and we believe that our current pricing is sustainable at least for the next five years. Of course there are more typhoons in some areas, but for rainfall patterns it is not too bad. Also, the government is investing in systems to make sure that farms get enough water from different sources, so we believe, at least for our insurance product, the product is quite sustainable in the near future.

For bigger risks like typhoons, we have an insurance product covering such risks in the Philippines. But the payout, which can go into thousands of dollars, cannot just be triggered by indices. If a house is really destroyed, somebody would need to head down to assess the damage.

Christopher, how big is the possibility that there could be uninsurable climate risks with global warming rising to 1.5°C or beyond in southeast Asia?

Dr Au: This is one of those medium-term trends that probably keeps a few people in the insurance industry up at night. It is fascinating to see the innovation in this space, like what Igloo is doing, but our sense is that looking at climate science, we are quite clearly headed for more significant damage and interruptions on the horizon. The continued environmental change that science indicates is going to question insurability.

Southeast Asia already has very high natural catastrophe risk, and this is going to get worse across both acute and chronic events, be that flood, cyclones, wildfires, haze and drought. It is not just about volatility of water availability, but the impact when you pair that with economic growth and competing claims for water in the region.

So I think we are headed to a place where the technica insurance price for some of these risks is going to be very, very high. Quite possibly outside the conventional realms of affordability and insurability.

If you look at the global property insurance market, we have seen quite significant double-digit percentage price increases in the past two years. This is influenced by big losses in America and Europe, where insurers are already very exposed to climate risks. Following bad losses, some of them say, I don’t want to participate and provide too much capital.

This calls for continued innovation. In the United States, we see the Florida government becoming an insurer of last resort, it now has over a million policyholders, and has become the largest property insurer in the state. In Europe, there are public-private partnerships developed or in operation; the United Kingdom has one called Flood Re.

There is higher state participation as prices increase, and I think this is a sign of how the risk financing dynamics may play out in Asia if catastrophe risk continues to accumulate unchecked and without risk management investments.

Insurers pulling out of high risk areas is interesting. Last year’s UN adaptation gap report mentioned that such moves increase vulnerability in the short run, but reduce vulnerability in the long run as people will take the hint and move away from disaster prone areas. But also, what is your take on the calls for more foreign aid for developing regions? 

Dr Au: Hope is definitely a word to use in this context. For government financing and aid, the loss and damage mechanism developed at COP, and the US$700 million pledged thus far is definitely in the right direction. There are other initiatives too, for instance the G7’s Global Shield initiative has pledged €300 million in disaster risk financing and insurance development. These are certainly helpful in supporting new forms of insurance, or scaling existing programmes.

The World Bank also recently announced that in some of their core projects, beneficiaries are able to access 10 per cent of undisbursed funds per project following a catastrophe event. The World Bank’s investments may be in the scale of US$2 billion dollars, and 10 per cent of that amount being used for resilience measures essentially makes the World Bank an insurer of sorts, taking on first loss. 

It is important to test and scale these programmes, and they have to balance supply and demand. There are many pilot programs that bring something new and shiny, but they may be a bit more supply-led than demand-led.

Also, it doesn’t have to be public funding alone. Recently, WTW placed a parametric insurance programme for coral reefs in Fiji, the benefits of which are to help local communities following a catastrophe event. The premium is supported by Australian natural resources company BHP.

Dr Xia: Igloo’s approach with governments is slightly different, we take a more private-sector approach and team up with multiple channels, such as e-commerce firms, banks and so on. 

The Weather Index Insurance works as it is, but it is not enough to cover all risks a farmer may face. In advanced economies, say the US, the farmers just pay 5 to 10 per cent of their annual income, and get more or less fully subsidised if extreme events happen. For us, when the governments (in Southeast Asia) are ready to provide more sponsorship and support, we can scale to provide higher coverage, beyond rainfall, to better safeguard farmers.

Jack, are there future plans to better serve the climate insurance market in Southeast Asia? And Christopher, similar question – what more can we do?

Dr Xia: Igloo is present not only in Vietnam, but also in the Philippines, Thailand, Indonesia and Malaysia. We’ve been working hard on the core insurance aspects of our product, in terms of calculating risk and premiums.

We are also strong on technology and infrastructure. We have it running in Vietnam, and similar systems should work across Southeast Asia. We also work with many partners – a minimum of 10 to 20 insurance firms in any country, and we work with almost all the regional insurance players, along with global reinsurers.

I would say we will grow together with our partners, and to roll out new products. Our next step is really to cover the whole Vietnam, and to cover Indonesia and the Philippines. We will see how it goes from there.

Dr Au: I think at the micro-level, we really need to look for more distribution mechanisms to reach more people, be it banks, social security programmes. 

Other than that, when we zoom out, we see more discussions and interest on public-private partnerships. We support them as long as they do not add additional risk onto sovereigns – that would be unjust by principle, and unsustainable. The last thing we want to do is to add risk to the governments of Indonesia, Philippines, Thailand and Vietnam. But you do see state interest in areas that are socio-economically important, such as crops, livestock, aquaculture.

There are public-private partnerships in countries such as India, Thailand, the Philippines, Vietnam and Japan, and we do expect to see more of such programmes in the future. 

Internally, we are looking at working with insurers, both domestic and international, to examine risks in the next 5 to 10 years, and what their risk-adjusted returns look like on allocated capital, for instance in a natural catastrophe insurance scheme in Vietnam. What is the price they charge, and can we think more systematically so that we are not just going towards higher prices or lower capacity? Also, how do we pair insurance with other risk management services?

I think we are in a position where we can make such capital more affordable. This is going to play an important role in our future landscape with more physical risks.