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Managing risk in a hotbed of disaster exposures

Posted On: Nov. 20, 2015 12:00 AM CST

SINGAPORE — The susceptibility of Asia-Pacific emerging markets to natural catastrophes and a high rate of underinsurance pose serious challenges to companies operating in the region, said risk managers and executives with global insurers.

And the damage caused by these catastrophes are not confined to the affected areas — they can have far-reaching effects in the global supply chain, such as the Thai floods and Japanese tsunami in 2011.

So, companies have to carefully consider where they open facilities and ensure they are properly insured for business interruption, said Kent Chaplin, CEO of Lloyd's of London (Asia) Pte. Ltd. in Singapore, Tuesday during the Pan-Asia Risk and Insurance Management Association conference here.

Half of the world's natural catastrophes last year occurred in Asia, yet only 5% of economic losses there are insured, according to a report issued in September by the Asian Development Bank. That compares with about 40% in Europe and the United States combined or each?.

According to the Lloyd's City Risk Index, released in September, cities across the Asia-Pacific region have a potential $2.1 trillion in economic activity over the next 10 years at risk from a wide array of potential natural disasters as well as man-made threats such as market crashes, cyber attacks and terrorism. The world's top four cities in terms of risk from disasters to gross domestic product are all in Asia, according to the index. They are Taipei,Taiwan; Tokyo; Seoul, South Korea; and Manila, Philippines.

Threats in the region vary widely from country to country, from volcanic activity, tsunami, sovereign default and terrorism to market crash, flooding and plant epidemic, to name a few. Coupled with the fact that insurance penetration is extremely low in Asia, Mr. Chaplin said it's a “perfect storm.”

“Emerging economies also have the most to lose and are the most exposed to risks due to rapid urbanization, and the cities have not developed the necessary risk management,” Mr. Chaplin said. “In the Asia-Pacific, we are highly exposed here and highly underinsured and those two combine to create a perfect storm.”

Not only that, but many companies in the region, even those in developed economies, do not have adequate business continuity plans in place.

Joe Venetico, Hong-Kong based head of property underwriting in Asia for Assicurazioni Generali S.p.A., said 90% of Japanese businesses he spoke with after the tsunami in March 2011 said they had business continuity plans, but only 80% of them were able to execute those plans because staff had not been trained on them.

“The message there is that we can actually do a lot without investing significant amounts n terms of training and developing our people, so that even in? the event of a major natural catastrophe they can actually do a lot in terms of saving lives and saving physical assets,” Mr. Venetico said.

In terms of insurance coverage, companies traditionally have focused on the kinds of business interruption that are more apparent, such as a fire closing down their operation or some other calamity that directly affects them, said Alex Koukoullis, Marsh Risk Consulting's Singapore-based Asia practice leader of forensic, accounting and claims services.

But events in the past few years, including the recent explosions at the Tianjin port in China, have brought to the fore just how interconnected seemingly unrelated companies are.

This means it's essential that insurance buyers understand that events far beyond their reach can affect their operations and that they may need to consider specific insurance policy extensions such as contingent business interruption, Mr. Koukoullis said. And that requires additional due diligence.

“When you have a first-tier supplier, do you understand what the risk is behind them? And what does the second-tier supplier look like and how important are they to your supplier?” he said. “Look at your policies and make sure that you have some supplier-related extension.”