1. I am very pleased to join you at today’s conference. I would like to thank the Asia Insurance Review and The Geneva Association for organising this event. This is a timely platform to discuss how the insurance industry can respond to the challenges and opportunities arising from climate change.
Impact of Climate Change
2. Climate Change is a serious long term global challenge. It is also one of the most complex challenges we face today. The Intergovernmental Panel on Climate Change or IPCC Fifth Assessment Report is underway. But we know from its Fourth Assessment Report (AR4) published in 2007 that warming of the climate by man-made emissions of greenhouse gases is happening. The AR4 assessed that by the end of the 21st century, global average temperatures could rise by 1.1◦C to 6.4◦C over 1990 levels. And sea levels could rise by 0.18 metres to 0.59 metres over 1990 levels[1].
3. As a result of global warming, the frequency and intensity of extreme weather events like tropical cyclones and droughts are also expected to increase. It has been estimated that “globally, the average number of major weather-related catastrophes such as wind storms, floods and droughts is now three times as high as at the beginning of the 1980s. Losses have risen even more, with an average increase of 11 percent per year since 1980.” [2]
4. Additionally, the secondary impact of global warming would be wide ranging. Changes in rainfall pattern could lead to severe water shortages and flooding. Melting of glaciers could cause flooding and soil erosion. Rising temperatures would cause shifts in crop growing seasons which affect food security and accelerate the pace of vector disease transmission such as dengue and malaria. Temperature increases could potentially increase rates of extinction for many habitats and species. Increasing sea levels mean greater risk of storm surge, inundation and wave damage to coastlines. The earth, and many of its inhabitants, will be vulnerable to the impact of climate change indeed.
Asia’s Vulnerability
5. And Asia is the most vulnerable to climate change because of its high population density, low income levels, heavy dependence on agriculture and a lack of adaptation infrastructure. According to the Climate Change Vulnerability Index 2011[3] , 10 of the 16 most vulnerable countries are in Asia. Bangladesh comes top because of its large population, high though declining levels of poverty, heavy dependency on agriculture, and vulnerability to floods. Other Asian nations at risk include India, Nepal, the Philippines, Afghanistan, Myanmar, Cambodia and Pakistan, which is still recovering from the floods that engulfed a tenth of the country last year.
6. The geography of Asia’s major cities makes them even more vulnerable to the impact of climate change. Many major cities in South Asia and South East Asia are in low lying deltas or coastal areas that would be threatened by sea level rise. The same cities are also located in the tropics, where vector borne diseases are already common. The melting of glaciers in the Himalayas would contribute to short term flooding and longer term water stress in the major cities relying on the 5 main rivers in Asia (Indus, Brahmaputra, Ganges, Yangtze and Yellow Rivers) fed by melt water from the Himalayas. Coastal cities in countries such as Vietnam, China, Philippines and Japan, sitting between the world’s largest landmass – Asia – and the world’s largest ocean – the Pacific Ocean – are prone to typhoons.
Responding to the Impact of Climate Change
7. To alleviate the impact of climate change, countries must continue to work together to reach a comprehensive and legally-binding global agreement to limit global temperature rise. The most effective means would be through mitigation, i.e. reducing greenhouse gas emission. Such an agreement eluded the world in Copenhagen in December 2009[4]. Fortunately, some progress has been made in Cancun last December[5]. There was consensus from both developed and developing countries to cut carbon emissions and to enshrine this promise within the UNFCCC process. As Senior Minister Jayakumar said at the Final Plenary to adopt the Cancun Agreements, “… we look at this document not as an end but as a step forward. It puts us on the path towards global convergence and cooperation in the field of climate change.” To quote the Financial Times editorial[6] : “A binding global deal is still worth holding out for.”
8. Besides mitigating against climate change, countries must also begin to adapt to climate change.Adaptation seeks to reduce the vulnerability to the impact of climate change. This covers a broad range of areas such as developing more drought tolerant crop varieties, expanding irrigation, increasing capacity of stormwater systems, building dams, strengthening coastal seawalls plus river embankments and protecting building structures. The majority of these adaptation measures are driven by or supported by government. But the insurance sector has an important role to play in fostering adaptation.
Insurance is an Important Part of Global Climate Change Strategy
9. The Bali Action Plan in 2007 calls for the “consideration of risk sharing and transfer mechanisms, such as insurance” to address loss and damage in countries particularly vulnerable to climate change. The Long-term Cooperative Action adopted in Cancun also invites all Parties to enhance action on adaptation under the Cancun Agreement Framework, by undertaking, inter alia, risk sharing and transfer mechanisms such as insurance as appropriate.
10. At the most basic level, insurance helps educate the community on the risk and impact of catastrophic climate change events. By offering lower premiums to those who invest in risk reduction measures, insurance can incentivise people to lower the risk and impact that they face. This often translates to a reduction of exposure and an acceleration of adaptation efforts. This broader societal role that the insurance industry plays is not confined to its relationship with the clients but it also depends on close partnership and collaboration with the wider community and the Government.
11. The importance of close partnership with the wider community can be illustrated by the experience of the United Kingdom. Following the 2007 floods which resulted in about £3 billion worth of insured losses, the Association of British Insurers (ABI) and the British Government released in July 2008, an extensive action plan which entailed government, industry and community to work closely to manage flood risk, reduce the damage from floods and offer insurance protection to those at risk.
Room for Insurance of Climate Change Related Risk to Play a Bigger Role in Asia
12. Despite insurance having a major role to play as part of any country’s adaptation measure, many Asian countries are not well insured though they are most vulnerable. Catastrophe risk insurance is low. World Bank estimated that less than 5% of losses caused by the Aceh Tsunami in 2004 were insured. Most instances, we see Asian countries reacting to catastrophes only after they have occurred through emergency and relief efforts. There is scope for more holistic preparation for catastrophes before they even occur through efforts like insurance.
13. Japan, which is prone to earthquake and typhoons, is an excellent example of a country which has taken extensive efforts to mitigate against climate change. Not only is Japan taking steps to reduce greenhouse gas emissions, it is also adapting to the impact of natural catastrophes, which includes catastrophe insurance. Typhoon Melor that struck Japan in October 2009 resulted in an estimated US$1 billion in damage, of which 62% of losses were insured[7].
14. Insurance companies can play a bigger role in helping Asian countries adapt to climate change. To do so, insurance companies must
a. Raise awareness;
b. Tailor product to market needs; and
c. Act in a responsible manner.
Raise Awareness
15. On the demand side, a lack of awareness has led to low levels of insurance coverage. Insurance companies will have to work closely with government, private companies and community organisations to educate people on the impact of climate change and how insurance can help financially to reduce the impact in worse case scenarios.
16. For example, I am told that Lloyd’s, the world’s leading specialist insurance market, announced a partnership in April 2009 with the Brazilian Foundation for Sustainable Development, a leading non-profit organisation in Brazil, to raise awareness of climate change in the country. It planned to raise awareness by working with mass media channels to bring up climate change issues more regularly, getting corporates to sponsor debates and talks on climate change, engaging parliament to promote new legislation and norms, as well as investing to strengthen suitable non-governmental organisations, civil associations and research centres. As part of the partnership’s efforts to raise awarenress of climate change, it has also published a booklet in November 2009 to deepen understanding amongst government, companies and civil society of the challenges climate change brings and the adaptation plans that are necessary.
Tailor Products to Market Needs
17. Apart from more established markets in the developed economies of Asia such as Japan and South Korea, there are also market opportunities for insurers providing coverage against climate change related risk in emerging economies like China, India and Indonesia. These opportunities are expected to come from increasing income levels in these countries. Euromonitor, a leading global research firm, predicts that the total number of middle class households[8] in emerging economies around the world will reach 488 million in 2020 from 331 million in 2010. China, India and Indonesia will account for nearly three quarters of such households. By 2020, 46.2% of households in China will be middle class, 41.1% in India and 58.3% in Indonesia. To realise the market potential of emerging economies within Asia, insurance companies need to develop climate change risk analytics capabilities to enable them to determine the risks that can be insured and devise insurance risk management processes for ensuring the product’s viability.
18. Besides the middle class in emerging Asia, there is also scope to offer insurance coverage to the less affluent, who cannot afford traditional insurance products. The insurance industry can partner international organisations and governments to provide better risk assessment and design innovative and more affordable products like microinsurance, which can be sold to this group.
19. Although microinsurance products have become available in Asia in the last decade, in countries such as India, Mongolia, Vietnam, Thailand and Indonesia, it is still relatively new in Asia. Such products are typically aimed at protecting against catastrophic events. Insurance companies will have to assess the needs and demands of the target market. Affordability and product design preferences should be investigated together to provide real value to the target market. For instance, in the case of flood insurance, if the trigger is too high, residents may not be keen to buy the product as it rarely happens. But if it is too low, moral hazard could set in as residents may become less careful.
Act in a Responsible Manner
20. Designing and offering innovative products like microinsurance benefits both the insured and the commercial insurers. For the former, microinsurance is a lower cost form of protection for the less affluent community against catastrophes. For the latter, it is a means to gaining insurance market penetration in the country and also larger and diversified risk pools. Needless to say, such schemes must be designed responsibly. Trust plays a key role in product take up. In the end, insurance companies must be able to convince the people that their insurance products are valuable, meaningful, and also affordable.
21. Whilst there are commercially viable means to address the risk and alleviate the impact of climate change, the insurance industry should balance maximising individual company premiums (profits) and minimising overall industry wide pooled risk. A proven and effective means of doing so is to encourage households to reduce the impact from a risky event by charging a lower premium if they do so. In the United States, premiums are lower for home owners who invest in fitting window shutters and fixing hurricane straps to hold the roof down, as the extent of damage to their properties are likely to be lower during a hurricane. When individual behaviour plays a major part in risk and impact reduction, associating insurance premiums directly with exposure is a powerful tool to incentivise risk reduction. The insurance industry also benefits as overall losses are lowered in the event of a climate change catastrophic incident.
Singapore’s Value Proposition
22. In the previous section, I highlighted the potential for growing the insurance market for climate change related risk in Asia. Singapore can help by serving as a launch pad for insurance companies to tap the region’s potential. Singapore is an ideal launch pad for the following 4 reasons:
a. Singapore Government’s Commitment and Institutional Capability;
b. Liveability and Availability of Talents in Singapore;
c. Singapore’s Position as an International Financial Centre; and
d. Vibrant IOs and NGOs Community.
Government Commitment and Institutional Capability
23. First and most importantly, the Singapore government takes climate change very seriously. The organisation which I represent, the National Climate Change Secretariat, was set up within the Prime Minister’s Office, to develop a national climate change strategy, which would ensure that Singapore is prepared and ready for climate change threats and opportunities. We take a Whole-of-Government approach and work closely with many Ministries through three main workgroups. The Mitigation Workgroup headed by the Ministry of Trade and Industry and Ministry of Finance, looks at how we can reduce our greenhouse gas emissions across different segments of the economy in a cost effective manner. The Resilience Workgroup that looks into Singapore's physical vulnerability to the impacts of climate change and will develop appropriate adaptation plans to ensure Singapore is able to cope with climate change, is headed by the Ministry of the Environment and Water resources and the Ministry of the National Development. There is also a Workgroup to handle international negotiations, headed by the Ministry of Foreign Affairs. And we report to an Inter Ministerial Committee on Climate Change headed by Senior Minister Jayakumar, with the Ministers for Finance, Trade & Industry, Foreigh Affairs, National Development, Transport, Environment & Water Resources as members.
24. Underpinning strong government commitment are the investments that have been made in developing institutional capabilities and knowledge on climate change science and risk. I shall describe briefly a few of these.
25. The Institute for Catastrophe Risk Management (ICRM) at Singapore’s Nanyang Technological University (NTU) was launched in January 2010. ICRM is the first multi-disciplinary catastrophe risk management research institute of its kind in Asia. It undertakes research and collects data on the vulnerabilities and the potential damages from catastrophic events. It also collaborates with other leading regional institutes in Japan and China. Through its work, ICRM helps the industry and insurance companies to better understand, model and quantify climate change risk.
26. ICRM works closely with the Earth Observatory of Singapore (EOS), another research institute in NTU, which was set up to deepen our knowledge on natural catastrophes and climate change science. EOS research seeks to allow better prediction of regional consequences that can be expected from global climate change, by taking into account global climate drivers active in this tropical region such as the Western Pacific Warm Pool and the Indian Ocean Dipole.
27. The National University of Singapore’s (NUS) Risk Management Institute (RMI) has also done joint work with the University of California at Berkeley on Catastrophic Risk and Asian Catastrophe Bond Market. In addition, NUS Centre for Hazards Research undertakes research on the short and long term effects of natural disasters on buildings and infrastructures in Singapore. Through experiments and analysis of data collected, the centre aims to develop new technologies to reduce the potential risk from natural disasters.
28. Alongside on-going research within our universities, government takes a pro-active role commissioning studies on Singapore’s climate change vulnerability to better understand our risk and how we can best adapt. Led by the Tropical Marine Science Institute (TMSI) in NUS, Phase 1 of the study was completed in 2009 and projected climate change effects such as temperature, sea level and rainfall patterns in Singapore in the next century. Phase 2 of the study, which looks into the projected impacts of climate change on building energy consumption, public health and biodiversity, is currently on-going. The Institute of High Performance Computing (IHPC), a research institute under the Agency for Science, Technology and Research (A*STAR) will be leading this study, working closely with key government agencies and relevant experts from NUS and NTU.
Liveability and Availability of Talent
29. Second, Singapore is able to develop, retain and attract both local and global talent. Singapore’s public schools have a distinctive record of high standards in teaching and learning. International studies such as the Trends in International Mathematics and Science Study (TIMSS) and the Programme for International Student Assessment (PISA) have ranked Singapore students amongst the best in the world. At the tertiary level, in addition to our local universities, which are amongst the best in Asia, Singapore has 10 world class institutions such as INSEAD, MTI and the University of Chicago Graduate School of Business.
30. Furthermore, our ability to attract talent stems from us being a lively and liveable global city. We are a cosmopolitan country at the crossroads of Asia where people from Asia feel right at home and those from beyond feel welcome. Our open and multiracial society gives us a unique heritage and a rich cultural mix. Our city is safe and orderly. It is also recognised as one of the cleanest and greenest in the world, with an efficient and affordable public transport system and world class healthcare services. Furthermore, our geographic location shelters us from many natural disasters such as earthquakes, volcanoes and tsunamis. All these come together to produce a living environment that is considered the best in Asia according to Mercer’s Worldwide Quality of Living Survey.
International Financial Centre
31. Third, Singapore is an international financial centre that offers companies a pro-business environment, excellent infrastructure and cost competitiveness. The World Bank has consistently recognised Singapore as one of the easiest places to do business. Investors have also come to appreciate the high levels of transparency and reliability in business, economic and regulatory affairs in Singapore. We are the only Asian country with a triple A rating from global ratings agencies like Fitch and Standard & Poor. Singapore’s sophisticated telecommunications network and numerous air links keeps us well connected to the rest of the world. Singapore’s corporate tax rate is one of the lowest in Asia Pacific. We also offer the advantage of having a comprehensive network of Double Tax Agreements with more than 60 countries.
32. Recognising our position as a major financial centre, leading insurance, reinsurance and insurance brokerage companies have been launching or expanding their presence in Singapore to tap Asia’s market potential. Currently, there are more than 200 insurance players in Singapore, well supported by a vibrant network of global and local brokers. Singapore is the largest captive domicile in Asia and continues to develop well as the region’s centre for more specialised and complex risks. Singapore therefore is an ideal launch pad to service the region's insurance needs for climate change related risks.
Vibrant IOs and NGOs Community
33. Singapore is home to over 100 international non-profit organisations (INPOs) consisting of both inter-governmental organisations (IGOs), and non-governmental organisations (NGOs) such as World Vision International, Save the Children International, Conservation International, the World Wildlife Fund for Nature and ASKI Global. While these INPOs have mostly embarked on environmental, social and humanitarian initiatives in the region, they have decided to base their regional offices in Singapore as we offer a trusted and neutral platform for them to form partnerships with businesses and other INPOs to further their causes. Insurance companies keen on developing innovative products like microinsurance for the poor in the region should hence consider this vibrant INPO community as a draw in terms of it offering partnership opportunities to develop and distribute these products. The INPO community will of course challenge the insurance companies to ensure that their products really do help the vulnerable and set the right incentives, and in so doing will help to ensure the end products are useful
Conclusion
34. In conclusion, I would like to emphasise that the insurance industry is an important part of any global climate change strategy as it helps society adapt to climate change by educating people and getting them to reduce the risk and impact from climate change events. Here in Asia, where vulnerability is high and insurance penetration is low, there is scope for the industry to play an even bigger role by raising awareness, tailoring products to local market needs and acting in a responsible manner. The insurance companies must convince the consumers that their insurance products are affordable, valuable and meaningful.
35. And Singapore can serve as a very efficient and effective regional platform. It is most appropriate that the first Climate Change Summit for Asia’s Insurance Industry is held here. With that, I would like to wish everybody here a fruitful conference. Thank you.
[1] The AR4 projections are for the period 2090-2099. The temperature and sea level changes are expressed as the difference from the reference period 1980-1999. The year 1990 represents the mid-point of the reference period.
[2] Munich Re report in November 2009
[3] released by Maplecroft, a global risk analysis firm, in October 2010
[4] UNFCCC COP15, Dec 2009
[5] UNFCCC COP16, Dec 2010
[6] Financial Times 14 Dec 2010
[7] Swiss Re Sigma Report 1/2010
[8] defined as those with annual disposable income of US$5,000 to US$15,000
