How insurance regulatory reform can help with disaster recovery in Asia Pacific

Asian Development Bank recently published a report which suggests the Asia Pacific region could benefit from legislative reforms targetting the insurance sector.

ADB, based in Manila, aims to reduce poverty in the Asia Pacific region through loans, grants and technical assistance targetting urban development and the finance sector.

The report, titled Investing in Resilience: Ensuring a Disaster-Resistant Future, suggests that recovery from disasters depend in part on insurance.

“Higher-income countries typically have higher levels of insurance penetration, better access to international financial and reinsurance markets, and larger budgetary resources in the hands of both national and subnational governments, even in times of recession,” according to the report.

“As such, they are better placed to support rapid recovery and reconstruction, thereby reducing the indirect and secondary effects of the event and helping to ensure that there is sufficient financing available to upgrade capital stock.”

ADB notes the purpose of the report is to develop “ideas for reflection” rather than to “present prescribed courses of action.”

The report stated lower-income countries can implement disaster risk financing strategies, but suggested in these cases, “scarce resources” might be used to built up contingency reserves and pay insurance premiums rather than to invest in new infrastructure.

The report also suggests some Asia-Pacific nations should consider legislative reforms in order to better assess and reduce risk from disasters.

“Existing legal and regulatory systems covering insurance markets provide an obvious example,” the report says. “Reforms may be required to strengthen trust in risk transfer products, to improve solvency, to remove obstacles to access to reinsurance markets, and to provide greater incentives for investment in (disaster risk reduction).”

Mortgage rules could be tied to insurance coverage and municipal zoning compliance, ADB suggests in a passage recommending ways of developing disaster recovery financing.

“Financial lending institutions can be obliged to require compliance with building codes and disaster insurance before approving mortgage and business loan applications,” the report states. “Insurance companies can be required to file premium rate and deduction differentials for properties on which (disaster risk reduction) measures have been employed; this has been the case, for instance, for residential property insurance in Florida in the United States since 1994.”

One chapter includes historical statistics on disasters in Asia Pacific, including a graph showing direct physical losses as a consequence of natural hazards, from 1971 until 2010.

For the period from 2006 until 2010, the direct physical loss worlwide, in 2010 U.S. dollars, was $478.3 billion. The figure for the Asia Pacific region was $284.4 billion, or 51% of the worldwide total.

Two pie graphs, using data from the Centre for Research on the Epidemiology of Disasters, break down natural hazard losses by category, one for loss of life and one for physical losses. Floods, earthquakes and storms accounted respectively for 35%, 32% and 23% of direct physical losses from 1970 until 2000.

“Hazard events can exact a toll on all forms of livelihood assets-human, social, natural, physical, and financial-with potentially particularly severe consequences for the poor and near-poor,” the report says. “For instance, hazards are more likely to result in the loss of places of work (including homes), tools, livestock, and inventories of the poor and near-poor, and these lower-income groups are less likely to have savings, insurance, or access to formal credit to restore their physical assets.”