Anis H. BajrektarevicFormer legal practitioner and the presidentof Young Lawyers Association of BiH Bar (late1980s). Former MFA official and career diplo-mat (early 1990s).Research Fellow at the Institute for ModernPolitical-history analyses, Dr. Bruno KreiskyFoundation as well as the Legal and PoliticalAdvisor for CEE at the Vienna-based PoliticalAcademy, Dr. Karl Renner (mid 1990s).Senior Legal Officer and Permanent Repre-sentative to the UN Office in Vienna of the In-tergovernmental Organization ICMPD(1990s). Attached to the IMC University ofAustria as a Professor and Chairman for Intl.Law and Global Political Studies (2000s – 10s).For past 15 years, he teaches subjects of Geo-

political Affairs, International Law (including Intl. Relations, Lawof IOs and EU Law) and Sustainable Development (Institutionsand Instruments of ). Besides, he served as a pro bono expert nu-merous academic institutions, think-tanks and intergovernmen-tal institutions (such as the UN ECE, OSCE, Council of Europe,American Bar, Oxford Academy of Total Intelligence, etc.). Profes-sor is editor of the NY-based GHIR (Geopolitics, History and Intl.Relations) journal and editorial board member of numerous sim-ilar magazines on three continents. The International InstituteIFIMES has recently entrusted him as its Department Head forStrategic Studies on Asia, and its Permanent Representative toAustria and Vienna-based IOs. Prof. Bajrektarevic is the author of dozens presentations, publi-cations, speeches, seminars, research colloquiums as well as ofnumerous public events (round tables & study trips, etc.). His writ-ings are frequently published on all five continents (in over 50countries and in 20 languages).Author of the book Is There Life After Facebook? - Geopolitics ofEnergy and other Foreign Policy Essays (Addleton Academic Pub-lishers, New York, 2013), and the forthcoming book No Asian Cen-tury.He lives in Vienna, Austria.Prof. Anis BajrektarevicProfessor and Chairperson Intl. Law & Global Political StudiesE-mail: anis[at]bajrektarevic.eu

Carla Baumer is post-graduate student of Vienna School of Eco-nomics

The re-insurance industry does not have theluxury of time in which to debate the ‘possibil-ity,’ of climate change but rather to focus on the‘probability’ of the consequences. Right now,the economic implications of natural catastro-phes is 2-9% of GDP in aggregated monetizeddamage (1-1.5% for the OECD and 2-9% for thedeveloping, non-OECD nations. With the costof natural disasters predicted to rise exponen-tially in coming decades, the issue of humansecurity is measured in economic terms. The economic effect of climate change isvague with popular measures of market costs,changes in quality of life, lives lost, species lostand variations in cost distribution and subse-quent benefits. These costs are summoned intowillingness to pay (the readiness of people toexchange their capital or income for improvedhuman security) and willingness to acceptcompensation (the amount ofcompensation needed to‘smoothen’ inhabitants to acceptdeteriorating conditions). In response, the RE-industry hasmoved to new catastrophe mod-elling systems, developed new in-surance products, flaunted ‘green’initiatives and created new de-fences against climate-relatedclaims in order to analyse andmore effectively assess the proba-bility of risks and integrate prob-lem solving mechanisms systems(including the so-called ‘No-go-Zones’).

CLIMATE CHANGE & RE-INSURANCETHE HUMAN SECURITY ISSUE

Prof. Anis Bajrektarevic& Carla Baumer

www.moderndiplomacy.eu

05. INTRODUCTION

08. INSURANCE DEVELOPMENT AND PURPOSEInsurance Origins | Insurance and Ideology | Islam and Insurance Risk Probability | Types of risk

12. INSURANCEProtection against Risk | The Law of Numbers | The insurance market

14. RE-INSURANCERisk Management in Reinsurance | Underwriting | Asset management | Capitalmanagement | Principles of Insurability | Further Considerations- Capacity and Accumulation | Ethics and Fairness

18. NATURAL DISASTER INSURANCENatural Disaster Trends

20. CLIMATE CHANGEClimate Change and Insurance | The implications for reinsurance

Country Risk Management

26. THE SOUTH EAST ASIAN INSURANCE MARKETClimate Change in South East Asia | Climate Change and Small IslandsDisaster Prevalence in South East Asia | Mainland South East AsiaCase: The Mekong Region | The Archipelago of South East AsiaCase: Indonesia | China | Japan

36. CLIMATE CHANGE AND THE REINSURANCE INDUSTRY

38. HUMAN SECURITYEnvironmental and Social sustainabilityDevelopment and Disaster Risk Management

41. NO-GO ZONESNo-Go zones in South East AsiaImplications and Vulnerabilities of No-go zones on the South East Asian RegionMigration | Implications for Australia and New ZealandWelfare | Security | Reinsurance V governmentInternational Community and Foreign AidConclusionBibliography

limate change, itsexistence, causesand effects, hasbeen disputed by re-searchers, academ-

ics and policy makers. The givendegree of international consensusvaries greatly between those mostaffected by changes to climatic con-ditions in contrast to those who areestimated to only experience a lim-ited effect. Controversially, it can also beclaimed that some regions are setto gain from climate change such asthe polar region nations currentlydisputing resource claims and logis-tic networks. In analysis of availabledata, research suggests the in-creased intensity of storms, hurri-canes, cyclones, flooding, droughts,bushfires, mudslides and hailstormsalong with increased temperatures,rising sea levels, and changing topressure systems. With climatechange as a global phenomenon,not isolated to a certain region, theinterest of stakeholders remainsstrongest in those with the ‘smallest’voice such as the coastal areas, is-lands, commonly catastropheprone and ‘future’ catastropheprone regions in South East Asia.

The re-insurance industry does nothave the luxury of time in which todebate the ‘possibility,’ of climatechange but rather to focus on the‘probability’ of the consequences.With the cost of natural disasterspredicted to rise exponentially incoming decades, the issue ofhuman security is measured in eco-nomic terms. The economic effectof climate change is vague withpopular measures of market costs,changes in quality of life, lives lost,species lost and variations in costdistribution and subsequent bene-fits. These costs are summoned intowillingness to pay (the readiness ofpeople to exchange their capital orincome for improved human secu-rity) and willingness to accept com-pensation (the amount ofcompensation needed to see in-habitants forgo certain standardsand accept deteriorating condi-tions). With 2005 noted by the insuranceindustry as holding the highest eco-nomic loss (USD $230 billion), theeconomic implications of naturalcatastrophes is apparent holding 2-9% of GDP in aggregated mone-tized damage.

C

prospering nations, situation in medium to high riskareas for natural disasters, the risk must be carefullycalculated; after all, it is a business. This region holdsa high propensity for natural disasters includingearthquakes, tsunamis, flooding, mudslides, andstorms whereby currently effected regions are ex-pected to be joined with newly affected regions dueto global warming.

Whilst the economic imperative is addressedthrough the continuous revision of insurance policyand claim trends, the question of ‘protection’ re-mains. The role of insurance is that of a safety net; tocatch those who stumble and fall in situations whichcould not have been circumvented. With the indi-vidual and the community at the centre of thehuman security issue the issue prevails; who willcatch them when they fall?

Human security surpasses traditional notions of se-curity to comprehensively include environmental,political, social and economic aspects. In the case ofenvironmental security, the threat thereto is not iso-lated to a particular individual or community, butrather an intensified affected core with global reper-cussions. Risk management, as in the case of insur-ance risk, credit risk, market risk, and operationalrisk, is the cornerstone of re-insurance with under-writing controlling the limits of insurance and iden-tifying information such as in the case of naturalcatastrophes and environmental threats.

Re-insurance is not a philanthropic concept or sup-port network, but rather an industry interdependentwith the global economy and market trendswhereby weakened global financial markets and in-vestor pessimism are critical factors.

As 1-1.5% of this aggregated mon-etized damage occurs in OECD na-tions and 2-9% in developingnations the interests of regionalstakeholders can be distinguishedaccording to strength of climaticconditions on their area. In re-sponse, the re-industry has movedto new catastrophe modeling sys-tems, developed new insuranceproducts, flaunted ‘green’ initiativesand created new defenses againstclimate-related claims in order toanalyse and more effectively assessthe probability of risks and inte-grate problem solving mechanisms.

As in all industries, re-insurance is acase of supply and demand withdominant players holding the reinsof the insurance industry to miti-gate larger risks by providing finan-cial backing, reduced exposure toinsolvency, and stability due to thegeographically spread risk. TheNorth American market has longbeen the most strongly insured ofthe regional global markets withthe Asian region seen as the risingstar due to the increased economicdevelopment and subsequent de-mand for insurance. Depending onthe region, insurance coverage aswell as government relief funding,will be limited in relation to the lo-cation’s level of risk. As the SouthEast Asian region hosts increasingly

Climate Change and Re-Insurance: The Human Security Issue

SPECIAL REPORTS 06

In the case of the South East Asianregion, particularly in coastal areasand islands, the ‘no-go zones’ willhave a profound effect on humansecurity as inhabitants seek protec-tion and welfare support. From thisit can be suggested that environ-mental peril may be grounds onwhich seek and be granted asy-lum.This may lead to new migrationtrends and subsequently straininter-regional relations, immigra-tion policies and welfares systemsas well as setting precedents for fu-ture ‘no-go zones’ and other un-pro-tected areas.

The economic paradigms dominat-ing the global must be consideredin relation to the interests of humansecurities by examining the re-in-surance market and the implica-

tions for humanitarianissues in the SouthEast Asian region andsubsequent interna-tional policy develop-ment to cater forsocial developments.

The re-insurance industry, particu-larly internationally, is marginallytransparent with the safety net notextending to all areas. The series of‘no-go zones’ demonstrates theeconomic imperative and businessrationalism which conducts the in-surance, and indeed protection, ofregions. The ‘no-go zones’ are spe-cific geographic regions consideredtoo ‘high risk’ for re-insurance andsubsequently insurance companiesto insure. Thus, the plight of theseareas is dependent on effective fis-cal policy and a strong national wel-fare system to mitigate risksassociated with climate change.

The ‘no-go zonesare specific

geographic regionsconsidered

too ‘high risk’ for re-insurance

and subsequentlyinsurance

companies to insure

The origins of insurance developed in correlationwith civilization as the rise of economic activitythrough trade and organized social welfare systemsasserted the need to manage risk. Ancient welfaresystems catered to the risk associated with deaththrough the development of charitable or benevo-lent societies. However, the structures of these are limited in linkswith current health or life insurance systems. Withthe development of structured societies and law, theconcept of insurance as it is known today, emerged. The greatest developments were trade and prop-erty. Economic implications for civilizations grew astrade flourished, with merchants developing sys-tems to protect their goods from potential loss. Inconsequence of trade, the development of marineinsurance became the first systematic insuranceform, due to the enormous economic implication oflost cargo as well as the high risk environment of thefreight. The seas and waterways have historicallybeen considered an area of ‘danger’ or risk, often as-sociated with legends and myths whereby man andhis mission were at the mercy of the water.

Another key element which affected the need for in-surance is fire. As property became synonymouswith the ability to address physiological needs aswell as security, belonging, and esteem through sta-tus objects, the risk of fire critical. Although fire wasthe essence for warmth, living, and often working,its misuse or mismanagement could lead to signifi-cant problems and therefore posed a constant, un-predictable, threat.. Indeed the idea of insurance asit is known today was largely developed in Britainand Germany, before spreading across to the UnitedStates whereby regulation regarding insurance forfire, property, marine and health with of World WarII seeing a rise in Multinational Enterprise insurance(Wilkins, 2009).

he urge to circum-vent risk is primal,with physiologicalneeds and the abilityof humans to ensurethat these are met in

the unforeseeable future allowingfor development. Arguably, thestorage of food, the establishmentof multiple shelters, as well as groupcohesion are all instinctive methodsof insurance. These efforts to act incounterbalance of external factorsor unsure elements are not onlytrue for mankind but also for floraand fauna; security is primal.As Maslow suggests, the desire andindeed need for security runs aclose second to our innate physio-logical needs with self actualisationas the ultimate motivation (Mitchie,2001). When considering humandevelopment from the early groupsand tribes to civilizations, it is evi-dent that the cohesion was security,prior to fulfilling the need for be-longing. These groupings for secu-rity lead to protection againstnatural elements, predators, or un-foreseeable events such as fires. Inessence, insurance is the manage-ment of risk or possible negativeconsequences based on the proba-bility of these occurring.

T

INSURANCEDEVELOPMENT AND PURPOSE

INSURANCE ORIGINS

SPECIAL REPORTS 08

The concept of insurance relies on the idea of ‘risk,’and the probability of this risk indeed occurring. How-ever, prior to complex mathematics and statisticalanalysis, the risk could not be adequately assessedwith the likeliness of the occurrence as well as the ex-tent of the consequences being discussed throughpersonal perspective and agreed on through consen-sus. As ideological beings, humans have attemptedto explain life, the world and its meanings throughvarious ideologies, belief systemsand religions. Whilst prayer andworship were often used as ameans to mitigate risk, economicand social insurance strategies forsecurity were developed. How-ever, the concept of risk may notexist if one’s ideology suggeststhat indeed all chances, losses andgains are for a specific purpose ordestiny determined by a greaterpower.

Life insurance is a further ideolog-ical contrast, as life is given a sumof its worth in monetary form. Thiscommodification of life was re-jected as unethical in Europe dur-ing the abolitionist movement.However, the critical element ofproperty and security emerged inlater years with the benefits out-weighing ethical considerations.In some cases, insurance and sub-sequently reinsurance are againstideological constructs with somecommunity or religious groups therefore refute theconcept. The Amish community displays distaste forinsurance, suggesting it is the role of the communityand church to work together and ensure common se-curity. For this reason, the Amish community reject in-surance as well as social security which is a starkcontrast to the insurance driven United States ofAmerica and a paradox to the security networks forwhich it strives.

The idea of risk management through insurance isconsidered illicit as the community is to take care ofone another and thus does not need ‘insurance’ as itis commonly understood if the community is follow-ing its religion wholeheartedly. This can be seen in theMuslim faith whereby Al-Gharar (Uncertainty) and Al-Maisir (Gambling) as well as Riba (Interest) are associ-ated with common conventions of insurance andtherefore are not in accord with the Islamic law.

In response to the innate need forsecurity, the Muslim communitydeveloped the system of Takafulbased on Al-Mudharabah (profitsharing), Al-Takaful (joint guaran-tee) and Tabarru (elements of do-nation) . The popularity of Takafuloperators has increased steadily inthe past decades with organiza-tions often run in partnership withgovernment institutions.

For example, the Dubai Islamic In-surance and Reinsurance Group(AMAN) is owned by Dubai IslamicBank and investors whilst licensedto the Dubai Department of Eco-nomic Development. Accordingto their website AMAN highlightsthe aims of Islamic insurance to: a.Support social solidarity. b.Helpprotect the community from thenegative impact of adverse cir-cumstances. c. Improve quality oflife through the peace of mindthat comes from security. d. Save

and invest money through a shared system that dis-tributes profit on premiums invested by policyholderson an annual basis. The Muslim system of Takaful maybe considered insurance in theoretical terms with theinvolvement of a common finance pool to allowmembers to bear each other’s burdens. For this pur-pose, the Islamic banking industry operates differ-ently to the western system and caters to the needsof its religious followers.

INSURANCE AND IDEOLOGY ISLAM AND INSURANCE

The South East Asian insurance and rein-surance market hosts a diverse range ofideological elements which effect prac-tice and operations. In the considerationof human security and the associationwith insurance and re-insurance, it mustbe noted that the statutory system of na-tions not only differs due to sovereigndevelopments but also due to the ideo-logical basis of these constructs. Islam inrelation to insurance is particularly strongin South East Asian nations such asMalaysia where Takaful is increasing. As amulticultural nation, Malaysia hosts boththe conventional insurance system aswell as the Takaful system with the Taka-ful 1984 Act introduced to superviseTakaful activities no longer covered in theprevious insurance act. Indeed the Taka-ful industry in Malaysia alone is headedby four pillar organisations including notfor profit models and variations of coop-erative models.

From the example of Malaysia, it can beseen that South East Asia as a region bal-ances many multicultural issues whichalso pertain to industries such as insur-ance and re-insurance. Whilst the SEAhosts both conventional and Takaful or-ganizations, the response to risk man-agement in the face of climate changeand human security issues will be signifi-cant.

Confirmed by neuroscience, humans are riskaverse by nature with decision making in theface of risk determined by two importantcomponents; the rate of error and the pre-dictability of the set outcome. Indeed wherethe outcome of the decision is ambiguous,the Orbitofrontal cortex becomes the key el-ement in the process. Whilst ‘chance’ is seenin a positive light, risk has a negative conno-tation. In daily life, as well as in business, theassessment and management of risk ensuressurvival.

Essentially, the assessment of risk allows ed-ucated decisions to be made. The realm ofdecision making greatly depends on the abil-ity to foresee outcomes and the likelihoodthereof with strategies often developedwhen information is lacking. However, whenrisks prove immanent, incalculable, or un-avoidable, people become willing to acceptrisk. In the case of the insurance industry, riskis accepted once an external partner is will-ing to take the risk on the individual or com-pany’s behalf. Whilst insurance ‘protects’ peoples and busi-ness from negative externalities of uncon-trollable forces by replacing the loss withmonetary assistance, insurance does not pro-tect against the loss itself but acts as a com-pensatory mean. Indeed, insurance is not theshield with which to ward off the occurrenceof such events, but rather limits the negativeimpact or ‘risk’ by monetary means.

IMPLICATIONS FOR SOUTH EAST ASIA RISK

SPECIAL REPORTS 10

The basis of risk is probability; or thelikeliness of an outcome occurring.This is crucial in decision making asthe likeliness of a risk occurring willdetermine whether or not the per-son or organization will decide foror against the decision.

Probability is based on the informa-tion given including statistics, data,personal information, trends, exter-nal factors and others. The probabil-ity of the risk occurring is thencalculated from this informationwhich demonstrates how high theelement of risk is in the decision. The success of insurance as an in-dustry depends on its ability to es-tablish the probability of the riskand the subsequent likeliness of itsoccurrence as well as its outcomes.As insurance firms are a business,and not philanthropic organisa-tions, the ability to establishgrounds for insurance throughprobability is critical to their suc-cess.

In the insurance industry risks canbe categorized into pure risks, fun-damental risks, or speculative risks.Pure risk relies on the possibility ofloss with chance detracted as a vari-able leaving the optimal outcometo be status quo. Fundamental risksare large scale events whichthreaten people and property suchas natural disasters. Indeed funda-mental risks are a threat to humansecurity. Most commonly insuredrisks pertain to a particular riskwhich has limited negative effectswhereby the outcome only affectsone of a number of people nega-tively. This is contrary to the funda-mental risks borne by a group.

In addition, the corporate sectorhouses additional risks includingspeculative or entrepreneurial risk.This is where the risk is often un-in-surable as the risk depends on com-mercial decision taken and whetherthe subsequent transactions will re-sult in a gain or a loss. To act in com-pensation of speculative risks,financial management tools such ashedging and forward contracts maybe implemented with other busi-ness risks reduced through im-proved efficiency, adaptingtechnology or diversifying theproduct base.

TYPES OF RISKPROBABILITY

In the insuranceindustry risks can

be categorized intopure risks,

fundamental risks,or speculative

risks.Pure risk relies on

the possibility ofloss with chance

detractedas a variable

leaving the optimaloutcome to be

status quo

This concept of insurance is common in NorthAmerica, Western Europe and Asia dominatingthe market with customers interested in being‘covered’ in the case of an unlikely, but costly,event occurring. As the insurance firm is madeup of many clients, the laws of probability sug-gest that only a small number of these clientswill be effected thus the funds collected by theinsurance company through premiums beingmore than adequate to cover these costs. Fromthis it can be seen that statistical analysis andcalculation is crucial. In order to be able to in-sure against such risks, insurance firms prescribeconditions which must be met in order for aclient to qualify for insurance. A key componentof insurance is that the timing or occurrence ofthe loss is uncertain and therefore a risk; onlypredictable to a degree but not foreseeable andin essence random.

nsurance is the promise of protec-tion against potential future risk inexchange for a premium paid today(Swiss Re, 2004). Indeed, Van Cay-seele (1991) draws comparisons be-tween insurance and savings

accounts from a consumer’s perspectives asboth aim to ward off risks. Today, insurance canbe sought for tangible as well as intangible as-sets including health, life, home, car, contents,business, and travel. The insuring party therefore takes a portion orthe entire risk by terms of contract or insurancepolicy, in exchange for a premium or fee. In theevent of the risk indeed occurring and negativeoutcomes prevailing, the holder of the insur-ance is entitled to claim the amount lostthrough the occurrence from the insurer ac-cording to the amount due as per the policy.

I

PROTECTION AGAINST RISK

INSURANCE

SPECIAL REPORTS 12

According to Swiss Re (2004) thelaw of (large) numbers is a statisticalprinciple suggesting that the moresingle or independent risks addedto the reinsurer’s portfolio, the morestable the outcomes will be as di-versification can provide a higherlevel of protection.

As probability is used to calculaterisk, insurance firms depend on therisk assessment of future losses. Inorder to do so, the likelihood ofsuch occurrences is based on mass.The ‘Law of Large Numbers’ is usedto calculate the expected loss of alarge group, thus allowing a pre-mium to be calculates when the riskis spread across the group. In thecase of insurance, the more uniquethe risk or the more likely that it willoccur, the greater premium be paid. While economists suggest insur-ance is, like any market, under theterms of supply and demand, oc-currences are not necessarily inde-pendent (natural disasters) orunintentional (terrorism) and mayindeed depend on the identity ofthe purchaser (health). Further-more, Giarini (2001) highlights theconcept of insurance as ‘market fail-ure’ in relation to the notion of theperfect market equilibrium whereall information is available as insur-ance firms base their considerationson uncertain future terms.

For this reason, insurance has oftenbeen criticized as being discrimina-tive (Palmer, 2007). In contempo-rary setting, this is particularly ofconcern with climate change andthe denial of insurance coverage forregions of geographic locationsruled to be too high risk.

The insurance market is a multi-bil-lion dollar industry with competi-tiveness ruled by implications ofsupply and demand. Private insur-ance activities have increased at anestimated 5% per annum to ad-dress inequalities and vulnerabili-ties related to industrialisation,production, environmental issues,technological developments, per-sonal vulnerabilities (unemploy-ment, death, health, accident,retirement) and social vul-nerabilities (political instabil-ities and state welfare issues)(Giarini, 2001).

Today, it is common to seeadvertisement for insuranceand the implement insur-ance brokers to seek thebest deal. This ‘shopping’ forinsurance has become com-monplace whereby somenations prescribe insuranceas necessary practice partic-ularly in public institutions.

Although the market isderegulated, in the interestof citizens most govern-ments offer solid statutorybase (such as through InsuranceActs) to ensure that the insuranceholder as the weaker partner is onpar with the firm or vendor. Insur-ance policies must be approved byregulatory agencies prior to beingput on the market. The codificationof insurance law on an internationallevel was developed in the Ameri-cas and Western Europe post worldwar two and is today largely gov-erned by the International Associa-tion for Insurance Law (AIDA)(Mango, 2003).

THE LAW OF NUMBERS THE INSURANCE MARKET

n the case of insurance firms facing riskthemselves, re-insurance acts as the meanswith which the firms can reduce their expo-sure to risk or loss. According to GlobalReinsurance Highlights (cited in Swiss Re,2004) it is estimated that 250 reinsurance

entities are in operation globally with shareholder eq-uity in the 40 biggest firms amounting to USD 249 bil-lion in 2003. Furthermore, the top four reinsurancefirms in 2002 held 35% of the global market sharewhich is an increase from 22% in 1999 (Trump, 2002)The reinsurance industry is integral to the insurancemarket as it allows a larger capital base to spread risk(CEA, 2006).

The re-insurer takes on the burden of risk (financial)in exchange for a premium and may chose to manageonly single risks through facultative reinsurance orunder contract terms through treaty reinsurance. Inother words; reinsurance is the insurance of the insur-ance firms. Reinsurance provides direct or primary in-surers, multinational corporations, reinsuranceintermediaries, nations, and captive insurers with re-duced volatility, improved financing, and access toadditional expertise (Swiss Re, 2004).

IThe top fourreinsurance firmsin 2002 held 35% of the global marketsharewhich is an increase from 22%in 1999

RE-INSURANCE

SPECIAL REPORTS 14

Reinsurance is purchased for anumber of reasons. According toSwiss Re (2004) the degree of rein-surance purchased falls due to port-folios and exposure to catastrophicevents (natural disasters), inade-quate capital to diversify risk, spe-cialization leading to higher risk,risks hold high exposure (aviationindustry), life insurance with mor-tality or disability risk element are athigher risk, when entering new re-gions or developing new products,or to improve regulatory considera-tions through an improved balancesheet. Essentially, these reinsurancereduces the exposure to insolvencyand provides balance for insuranceissuers.

Re-insurance is different to insur-ance as the parties negotiate atequal standing through contractsrather than in the case of insurancewhere the client or insurance holderis at a disadvantage to the insur-ance company. The reinsurancefirm holds an advantage in the con-tract with the insurance entity stat-ing that the reinsurance firm cannotbe held responsible in the case ofinsufficient funds being available toguarantee support (Swiss Re, 2004).Therefore, it is of interest to the in-surance firm to make sure the rein-surance firm is healthy and liquid.Furthermore, reinsurance firms canact globally in order to spread theirrisk.

Naturally, reinsurance entities arenot entirely free from risk and there-fore invest significant time and re-sources in accurate calculation andmanagement of risk. The risk capac-ity of reinsurers cannot be miti-gated by lesser conditions thanother actors in the capital market asthe volatility of the reinsurancebusiness is higher and thereforeneeds to carry higher returns tocapture and retain the interests ofshareholders (Trumpp, 2001). Riskmanagement in reinsurance is thebalance between underwriting,asset management and capitalmanagement. These implicationsare considered through modellingas seen in Figure 1.

RISK MANAGEMENT IN REINSURANCE

The main objectives of the under-writing process are the assessmentof risk including terms and condi-tions, ensuring that the assignedlimits are respected, implementingcontrols for a peak and accumula-tion risks, and ensuring appropriatewording and pricing (Swiss Re,2004). According to Swiss Re (2004)underwriting examines prices, as-sesses and classifies risk for a certainsegment, single risk or contractterms.

The premiums received by a rein-surance firm are again invested.Asset management is responsiblefor delivering portfolio data to riskmanagement where asset alloca-tion corresponds with the charac-teristics of the liabilities also knownas asset and liability managementor ALM (Swiss Re, 2004). In assetmanagement, accurate informationis critical in order to assess both itsvalue as well as its subsequent lia-bilities. Considerations in this process in-clude currency exposure, payoutpatters, inflation, credit risk,changes in interest rates, equity,real estate prices and market move-ments (Swiss Re, 2004).

Capital management is critical toreinsurance as the amount of capi-tal and its management is determi-nant of reinsurance firm’s ability tomeet its promise as well as its ap-peal to the primary insurer. Accord-ing to Swiss Re (2004),capital is most critical foradverse situations regard-ing investment income,depreciation of assets,stock market slumps, eco-nomic downturns, orwhen payments exceedpremiums. As in a business situation,capital acts as a shieldagainst unexpected loss orcash flow issues. Capitalmanagement must bal-ance the capital and risk ofthe reinsurance firmwhereby a lack of congru-ence cues the increase thecapital base or lighten theinvestment risks and un-derwriting (Swiss Re,2004).

UNDERWRITTING

ASSET MANAGEMENT

CAPITAL MANAGEMENT

Risks are accepted if they meet the limits of the set criteria as well as demonstratingthe principles of insurance

SPECIAL REPORTS 16

Insurance and indeed reinsurancemust adhere to certain principleswhich limit the insurability of a caseor situation according to its associ-ated risk. The risk criteria must befulfilled in order for the risk to be in-sured based on assessibility, ran-domness and economic efficiency(Swiss Re, 2004).The ability to assess a risk is criticalin order to quantify the probabilityof its occurrence and possible con-sequences as well as the estimatedseverity in order to determine theappropriate premium (Swiss Re,2004). Randomness is also critical asthe timing and likelihood of theevent occurring critical to the insur-ance calculation as well as being in-dependent of the will of the insured(Swiss Re, 2004). Regarding the pre-mium, economic efficiency must beidentified in relation to the risk(Swiss Re). Regarding natural catastrophes andassociated insurance behaviour, thelikelihood of the event occurringand the associated costs are basedon scientific data and past record.Consequently, premiums are set ac-cording to this level of risk and thelikeliness of the occurrence. In anarea prone to certain disasters suchas flooding, bushfires, storms orearthquakes, the premium for insur-ance may be higher and/or limitedin coverage.

Risks are accepted if they meet thelimits of the set criteria as well asdemonstrating the principles of in-surance. The capacity or the maxi-mum amount of coverage whichcan be offered by the reinsurancefirm for a specific risk, depends onthe portfolio and data with thehigher the degree of risk, thegreater the stringency on applyingthe limit (Swiss Re, 2004). In corre-spondence, accumulation refers theinterdependency of risk, often thecase in natural disasters or in theconcentration of shares (Swiss Re,2004).

As discussed by Palmer (2007), in-surers and reinsurers aim to be prof-itable thus setting premiums basedon the probability of adverse eventsoccurring. Whilst debate surroundsthe assessment of individualsthrough categorising their case oron statistical discrimination, in thecase of human security the ethicalconsideration is that of access.Palmer (2007) highlights that lack ofaccess to insurance has social impli-cations particularly if the govern-ment social security net does notprovide a substitute suggestingthat goods imperative to an ade-quate standard of living should notbe entrusted in a private, commer-cial industry.

ETHICS AND FAIRNESS

CAPACITYAND ACCUMULATION

PRINCIPLES OF INSURABILITY

The exposureto natural

catastrophesis growing due to

higherpopulation density

and subsequentmigration

and urbanizationas well

as climate change

NATURAL DISASTER INSURANCEhe exposure to natural disasters corre-sponds to the location of the insurer, assome locations or geographical areashave a higher propensity for certainnatural disasters than others. The as-sessment of this likeliness is based on

past records and scientific data with reinsurancefirms, such as Munich Re, having specialized depart-ments dealing with this particular field. The exposureto natural catastrophes is growing due to higher pop-ulation density and subsequent migration and urban-ization as well as climate change (Swiss Re, 2004;Munich Re, 2009). The loss potential for the insuranceindustry is high in these instances and reinsurance iscritical in managing these risks.

According to Berz (2002) the propensity for naturaldisasters has dramatically increased in recent decadesdemonstrating clear risking cost trends. Berz (2002)notes that prior to 1987, only one natural disaster evercost the insurance industry more than USD 1 billionand by 2002, 29 natural catastrophes have cost morethan this precedent amount. Whilst highlighting thesignificant losses to the insurance industry, it must benoted that during this time the insurance market alsogrew substantially as well as changes in economic im-plications.

T

NATURAL DISASTER TRENDS

SPECIAL REPORTS 18

It is estimated that claims arise froman estimated 600 natural hazardevents annually with the increasedcosts a combination of increased in-sured liabilities and their values aswell as increased occurrences inhighly exposed areas (Berz, 2002).As the reinsurance industry is basedon predicting the risk related to nat-ural disasters, reinsurance firms areattuned to scientific research partic-ularly regarding climate change.The purchase of natural disaster in-surance and reinsurance productsrelates to the propensity for the ca-tastrophe to occur as well as the fi-nancial position of the market withmore affluent nations having astronger reinsurance market (Klein,2009).

Due to the climate trends associ-ated with global warming, reinsur-ance firms are reconsidering theterms of contract being careful indefinitions related to time and ran-domness (Klein, 2009). The green industry trend has ledreinsurance providers to developnew products for customers ex-hibiting green behaviour includingdecreasing carbon emissions anddefensive climate change ap-proaches (Klein, 2009). Policies andproducts are being, and have been,developed to address wind andsolar energy production, efficiencyrenovations, carbon reduction andinsurance for humanitarian emer-gencies as well as products for car-bon market related risks (Klein,2009).

he UN Framework Convention on Cli-mate Change (UNFCCC) considers cli-mate change to be attributed eitherdirectly or indirectly by human actionwhich may change the natural com-position of the environment addi-

tional to natural climate patterns (IPCC, 2007). Asreported by the International Centre for TechnologyAssessment (2004) the accumulation of greenhousegasses in the atmosphere created through the com-bustion of fossil fuels is the driver of climate changeeffecting temperature, sea level, climate, biodiversityand geology. Whilst the CTA (2004) focuses its defini-tion of climate change more so on human behaviouras a driver, the IPCC (2007) suggest climate change,whether due to human behaviour or natural patterns,can be identified due to variability of the mean asmeasured over a period of years or decades (IPCC,2007). Subsequently, climate change infers issues inhealth, biodiversity, agricultural production, socialmovement and migration patterns as well as eco-nomic and political implications (Schwartz & Randall,2003).

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CLIMATE CHANGE

SPECIAL REPORTS 20

The IPCC’s (2007) research notes observations ofclimate change and the warming of the climatesystem to be evident in:•Warming temperatures globally•The increase of arctic temperature at double theaverage global rate•The change in frequency and intensity of ex-treme weather events•Rising sea levels•Decreased snow and ice•Changes in precipitation•Increased tropical cyclone activity in the North-ern Atlantic region

From these observations using data from the1970s to present day, the IPCC (2007) related ob-servations of the following effects:•Temperature changes have effected physical andbiological systems•Changes to permafrost•The development of glacier lakes•Changes to Arctic and Antarctic ecosystems•Changing run off patters for water sources andwater ways

•Effects on thermal structure and subsequentwater quality•Changes to terrestrial biological systems•Changes to marine and freshwater systems•Changes to human activities in the Arctic•Health Issues (heat and disease related)•New patterns for agriculture and forestry man-agement•Loss of Coastal Wetland•Increased coastal flooding

The IPCC (2007) suggests that the future of cli-mate change and its subsequent impacts on thesocial, environmental and economic capacity ofthe world is clearly related to greenhouse gassesand their effect on temperature. Subsequently,IPCC (2007) temperature forecasts include thescenarios of whether greenhouse gas emissionswill remain at the level seen in 2000 (best esti-mate 0.6*C increase), intermediate population,economic growth, and local sustainable develop-ment efforts (best estimate 2.4*C increase), orrapid growth coupled with new technologies andfossil fuel intensive activities (best estimate4.0*C).

Issues and Areas Estimated Future Impacts of Climate Change

Ecosystems Changes to ecosystems, 20-30% increased number of flora and fauna at the threat ofextinction, changes to terrestrial systems and subsequent biodiversity

Food Shifts in geographic locations suitable for agriculture production, slight increase toproduce food until a 3*C rise is reached at which point the production again de-creases

Coasts Exposed to increased risks and flooding

Industry, settlementsand societies

Areas close to coastal regions or waterways are at greatest risk, as are those which areeconomically dependent on certain resources, areas prone to extreme weatherevents, or areas where urbanization is rapid

Health Increased disease, injury and deaths related to extreme weather, increased likelihoodof infectious diseases as population density grows, increased diahorreal diseases, in-creased cardio-respiratory problems

Water limited fresh water supply, energy source, changes to seasons, increasedflooding/droughts according to precipitation

Table 1: Estimated Future Impacts of Climate Change According to IPCC Data (IPCC 2007)

The acknowledge-ment of climatechange resonates amessage of social, eco-nomic and political is-sues currently debatedwith critical future im-plications. Climatechange debate in the

past decade has moved from thecrusade of left-wing minorities andenvironmentalists to key industrybodies. The reinsurance industry issounding a warning bell as it de-scribes the economic and social im-plications of climate change for theindustry. As described, reinsuranceis based on calculations, statisticsand data to manage risk effectively,contrary to the whimsical connota-tions often associated with climatechange debate.

In 2005, the total fatalities due tonatural disasters were 97 000 with atotal loss of USD 230bn in losses.Notably, the series of hurricanes inthis year accumulated to USD170bn with the Gulf of Mexico’s hur-ricane Katharina creating USD135bn in damages (Swiss Re, 2005).The majority of financial losses re-lated to insurance and natural dis-asters are in high density areas,particularly in industrialized nationswith a greater number of valuableproperty assets.

The estimated insurance bill for2050 is expected to exceed £200bndue to climate change related ex-treme weather conditions and ris-ing sea level (Brown, 2001). Thepredicted global losses are relatedto the increasing frequency as wellas intensity of natural catastropheswith the sum of these events hold-ing the potential to damage the in-surance industry as well as havingsignificant liability costs for nations(Berz cited by Brown, 2001).

As noted by the Association ofBritish Insurers (2009), the eco-nomic implication of climatechange on the insurance and rein-surance industry has the potentialto effect the global economy. Whilstthe insurance market aims to caterto the needs of insurance holdersby expanding their offers, the im-pacts of climate change would in-deed see a reduction of insuranceoffers or insurance at much highercosts due to climate change poten-tially increasing the severity and fre-quency of natural disaster risks andsubsequently equates to increasedlosses (ABI, 2009). With primary insurers taking onhigher risk, a greater call well bemade for reinsurance. However, asthese funds are also based on capi-tal, they are not free from economicburden.

CLIMATE CHANGE AND INSURANCE

SPECIAL REPORTS 22

The implications forreinsurance are prima-rily fixated on financialloss. As an industry, fi-nancial loss on a largescale will have strongimplications for theglobal economy (ABI,2007). As reinsurance isnot obligated to paybut rather is based onpromise, the ability of the reinsur-ance firm to do so greatly effectsthe primary insurer (Swiss Re, 2004).

This infers health, business and in-vestment, property, social, politicaland economic considerations willsubsequently be effected. Althoughinvestment is often thought of in aprivate sector, it must be noted thatreinsurance also caters to the inter-ests of public sector.The high exposure to natural catas-trophes are but one aspect, as theincreasing population, urban den-sity and economic growth increasethe exposure of areas or nations ata greater rate that climate changewith the subsequent increase in de-mand for insurance and reinsuranceseen as a cost effective means ofadaption (Swiss Re, 2010). Indeed,reinsurance can be seen as the pro-ponent of risk management(Thumpp, 2002)

Climate change poses a problem forreinsurance not only due to thepossibility of economic loss but alsodue to issues relating to risk calcu-lation, underwriting and forecast-ing. Further implications includechanges to premiums, having to de-crease offers, changes in the rela-tionship with certain regions orinsurers of that area, changes to in-vestor relations and changes tocountry risk management and sub-sequent no-go zones.

However, it can be seen in the caseof micro-insurance and country riskmanagement, climate change cre-ates both risk and ambiguity with apossible associated increase in pre-miums and decrease in reinsuranceproducts as well as proposing op-portunities (Swiss Re 2009). The fearin regards to climate related issuesas well as the increased risk createsboth opportunities and threats forthe reinsurance industry.

THE IMPLICATIONS FOR REINSURANCE

Country risk management seesreinsurance manage the economic,financial, societal, political and en-vironmental risks through an ‘all-hazards approach,’ citing climatechange at the forefront of risk con-siderations and economic impera-tives (Swiss Re, 2009). The argumentof the reinsurance industry is thatrisks, particularly in globalised con-temporary society, does not halt atnational borders with typical risksassociated with country risk man-agement including natural disasters(storms, floods, earthquakes,droughts), health issues (pan-demics), war (including terrorism),public and corporate assets, infra-structure risks, private property andfood and energy security (Swiss Re,2009).

The economic argument prevailswith Swiss Re (2009) highlightingthat in 2008 only USD 50bn of USD225bn in global economic lossesdue to natural or man-made catas-trophes was covered by insurancewith governments, businesses andthe private sector paying the losseswhich occurred. This leads to higherdebt, the need to raise taxes, de-ferred investment, decreased in-vestment, and higher debt, all ofwhich according to Swiss Re (2009)can be mediated through countryrisk management.

Swiss Re (2009) proposes risk miti-gation and risk transfer. By shiftingthe economic impact from post-catastrophe to pre-catastrophe byencouraging government invest-ment in risk mitigation as a pre-emptive measure dealing with theeconomic impacts of disasters inthe long run will be more financiallyviable. However, as not all catastro-phes can be mitigated, thus risktransfer allows the securing offunds before theevent throughreinsurance orcapital marketsolutions (SwissRe 2009). This canbe developedthrough govern-ment fundswhere the rein-surance firm willmake capital im-mediately avail-able if thec a t a s t r o p h emeets the set cri-teria, for pro-grams for charityassociations, or inassociation withthe World Bank.

COUNTRY RISK MANAGEMENT

SPECIAL REPORTS 24

THE SOUTH EAST ASIAN INSURANCE MARKET

he Asian market for re-insurance hasgrown dramatically in the pastdecades as the third largest marketregion after North America and West-ern Europe (Swiss Re, 2004). SouthEast Asia has been particularly

marked with change in the past decades with eco-nomic rises and falls, industrialization, urbanization,a change in socio-economic conditions and politicalissues. The increase in reinsurance in the South EastAsian market is in relation to legislative changes aswell as through the increased number of internationalprimary insurers and reinsurers (Banks, 2010). Also,the South East Asian market has been more resilientin the face of the economic downturn than the twoother key insurance markets, namely North Americaand Western Europe, as well as having a more frag-mented and less saturated market than its northernneighbours (Banks, 2010).

However, the South East Asian region also carries ahigh propensity for disaster with typhoons, earth-quakes, floods and droughts all examples of commonnatural catastrophes for this area (Guy Carpenter &Co., 2006). Commenting on individual nations in theSouth East Asian market AON (2010) noted that inter-national insurance agents have moved into the regionin the past two years and that the market has notchanged dramatically regarding renewals.Indeed, na-tions which had higher rates of renewal (such as In-donesia) were the nations which had been exposedto natural disasters in the past year (AON, 2010). An-other characteristic of the South East Asian market isthat although disasters occur at a large scale the costis rarely as high as in the North American or WesternEuropean markets.

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Singapore is currently the regional leaderin South East Asiaregarding reinsurance and in particularcountry risk management

SPECIAL REPORTS 26

According to Swiss Re (2010) Singapore is currentlythe regional leader in South East Asia regarding rein-surance and in particular country risk management.Singapore has a ‘Whole of Government IntegratedRisk Management’ framework (WOG-IRM) which isconsidered best practice as it redresses inequalities,helps address gaps in risk management, and identi-fies risks which would otherwise go unnoticed.

The diversity of the Asian continent houses a widescope of climate change effects with different re-gions experiencing these in different forms and atdifferent levels of intensity. The Asian continent as awhole is at risk of social, economic and political per-ils with South East Asia also susceptible to specificrisks (Schwarz & Randall, 2003). The IPCC (2007) ob-served the effects of climate change in Asia to dateas:•Climate change effects different sectors of the con-tinent •Marine and coastal eco-systems are vulnerable torising sea levels•Some industries (agriculture and fishing) are expe-riencing negative effects possibly related to climatechangeAlthough the Asian continent seems too vast toanalyse, the IPCC (2007) noted the following as sig-nificant future effects of climate change:•Decrease in freshwater availability•Increased risk of flooding in coastal mega-deltaareas•Increased pressure on natural resources due to ur-banization•Health issues associated with floods and droughtsset to rise•Extinction of some flora and fauna•Rise of health issues particularly air and water bornediseases

For example, Typhoon Ketsana inVietnam and the Philippines in Sep-tember (645+ deaths and 7.4mil-lion+ claims) only amounted toinsurer loss estimates of USD260mn and economic loss esti-mates of USD 1.03bn (AON, 2010).In contrast, severe weather duringJuly in Switzerland and Austria (11+deaths and 5,000+ claims)amounted to an estimated insurerloss of USD 1.25bn and an esti-mated economic loss of USD 2.5 bn(AON, 2010).

According to Swiss Re (2010) theglobal nature of the reinsurancemarket makes it difficult to isolatetrends to a specific region, howeverthe following comments on SouthEast Asia can be made:

•Some highly fragmented primarymarkets result in relatively high ces-sion rates of primary insurers;•Competition is keen. Apart frominternational reinsurers, many re-gional and national reinsurers arealso looking to expand into SEA;•Natural catastrophe reinsurance isdeveloping alongside increasinguse of models. However, penetra-tion is still relatively low. Govern-ments sometimes resort to poolarrangements to increase penetra-tion;•Regulatory changes towards tight-ening of solvency regulations arehaving impacts on reinsurance be-haviors. More insurers are purchas-ing reinsurers for the purpose ofcapital management;

CLIMATE CHANGE IN SOUTH EAST ASIA

The impact of cli-mate change onSouth East Asiavaries as the re-gion’s diverse ge-ography includesthe archipelago

nations, coastal nations, and land-locked areas (see Figure 4). The IPCC(2007), notes climate change ashaving a significant impact in theSouth East Asia and the small is-lands of the pacific region. This re-gion has experienced change intemperature with an increase intemperature between 0.1-0.3*C perdecade (1951-2000) as well aschanges to precipitation particu-larly in the Philippines and Indone-sia (Manton et al., 2001, cited byIPCC, 2007). Flooding, droughts,changes in precipitation, changes intemperature, heatwaves and ty-phoons have all been noted to haveincreased in past decades (IPCC,2007).

Heatwaves were experiencedmildly compared to other Asian re-gions through the increased num-ber of warm days and warm nightshowever flash flooding and land-slides obviously increased withcases in Vietnam, Cambodia and thePhilippines (IPCC, 2007). Further-more, abnormal droughts were ex-perienced in the Philippines, Laosand Cambodia (IPCC, 2007). Be-tween 1990 and 2003 the Philip-pines saw the number of Cyclonesincrease by 4.2 (PAGASA, 2001 citedby IPCC, 2007).

Small islands are given special con-sideration due to their abundancein the South East Asian- pacific areaand their vulnerability to climatechange as well as their position inreinsurance. The small islands arecharacterized by the IPCC (2007) asbeing located in tropical latitudes,being of limited size, housing asmall population and being openlyexposed to natural forces and sub-sequently climate change, sea levelrises and extreme events.

“While small islands are not respon-sible for the causes of climatechange, they are likely to be the firstto experience the worst effects ofclimate change, particularlythrough sea-level rise on low lyingislands or through water shortageson porous and low lying islands,”(Timothy 2002 cited in Goffman,2006)

CLIMATE CHANGE AND SMALL ISLANDS

SPECIAL REPORTS 28

The region comprises of 10 nations with diverse cli-matic conditions and susceptible to a range of cli-matic and geologically related catastrophes. Thesenatural disasters include earthquakes, floods, ty-phoons, tsunamis, droughts, volcanic eruptions andstorms. As indicated by the IPCC (2007) the diversegeography of South East Asia including coastal land-scapes, low lying islands, fault lines, rivers, moun-tains, and volcanoes puts this region at strong riskof the possible negative implications of climatechange (Guy Carpenter, 2006). The geographic division of the region can be con-sidered in terms of the archipelago, coastal and landlocked countries. The archipelago includes Indone-sia, Singapore, the Philippines, Brunei, Malaysia, andEast Timor whilst Cambodia, Laos, Vietnam, Thailandand Myanmar are considered the South East Asianmainland with Laos a notably landlocked nation. Forthe purpose of this paper, some consideration is alsogiven to China and Japan as well as the pacific re-gion due to the geographic proximity of these na-tions and their considerable interrelations withSouth East Asia.

Compared to the global insurance and reinsurancemarkets, Asia has a relatively low insurance penetra-tion with areas such as China seen as upcoming mar-kets (Thumpps, 2002; Guy Carpenter, 2006). In thecase studied examined, it may be noted that insur-ance coverage and the demand therefore, is stronglycorrelated with the ability of the market to affordsuch a product. However, as noted by AON Bene-field (2010) this has not halted the industry with keyplayers having entered, and successfully remained,in South East Asia in the past decade.

In the Pacific Islands, where 50% ofthe population lives within one kilo-metre of the shore, the rising sealevel, storm surges and erosion arevery real threats to the environ-ment, the society, and the economy(IPCC, 2007). The pacific islands ofTuvalu, Kirribati and Palau are al-ready trying to adapt to, or ratherescape from, the implications of cli-mate change and are expected tobe followed by others (ALP, 2006).

As many small island economies arebased on natural resources, the ef-fect on marine life and the relatedfishing industry is critical in the sur-vival of the island populations

(IPCC, 2007). Fur-ther soil salinity, sealevel rises, floodingand fresh watercontamination willbring agricultureand self sustenanceto a halt as well aspredicted adverseeffects on humanhealth (IPCC, 2007).Furthermore, thetourism industry,particularly theleisure market, willsuffer as a result ofclimate change dueto lost resources, in-frastructure, culture,water shortagesand diseases (IPCC,2007).

DISASTER PREVALENCE IN SOUTH EAST ASIA

Compared tothe global

insurance andreinsurance

markets, Asiahas a

relatively lowinsurance

penetrationwith areas

such as Chinaseen as

upcomingmarkets

Due to the political structure ofsome South East Asian countriesalong with their propensity for nat-ural disasters and the low socio-economic development rate,governments are often the mainsource of mitigating their financialrisks particularly with small primaryinsurers whereas larger primary in-surers choose international reinsur-ance firms. The regional reinsurancemarket of Singapore providesgreatest capacity of support inSouth East Asia.

Consisting of Laos, Cambodia, Thai-land, Vietnam and Myanmar, theSouth East Asian mainland is climat-ically affected by a combination orcoastal threats as well as land basedissues. As noted by ASEAN Leaders’Statement on a Joint a Response toClimate Change (2010) the NationsFramework Convention on ClimateChange (UNFCCC) and the KyotoProtocol (2009) are acknowledgedas the legal instruments of the inter-national community to address cli-mate change. The goals of theleaders include moving toward aglobal solution for climate changeas well as ensuring South East Asia’sresilience to climate change (ASEAN2010).

Concerns for South East Asia in re-lation to climate change are highdue to the diverse levels of develop-ment in the region as well as the de-pendency on natural resources.

The mainlandarea is particu-larly concernedby the possibleeffects of in-creased extremeweather condi-tions such as cy-clones, stormsurges, changingcoastal conditions, temperatureshifts (such as the effects of meltingglaciers in alpine regions on theriver systems), precipitation andflooding. Of particular concern is the Mekongregion of the South East Asianmainland with the combined im-pacts on Vietnam, Laos, Cambodia,and Myanmar (Swiss Agency for De-velopment and Cooperation, 2010;ASEAN, 2010). Further, the state-ment highlights the need for de-tailed information, climate changeassessments and cooperation(ASEAN, 2010).

The Mekong Region has receivedinternational attention in recentyears particularly due to cyclone ac-tivity, the impeding danger of waterbased diseases through flooding,the significant population densityand the calls for regional and inter-national cooperation for socio-eco-nomic development (Swiss Agencyfor Development and Cooperation,2010).

THE MEKONG REGION

MAINLAND SOUTH EAST ASIA

SPECIAL REPORTS 30

The Mekong Region is consideredone of the fastest growing eco-nomic subregions yet this growth ispartnered with its vulnerability toeconomic shocks and negativerepercussions associated with de-velopment challenges Asian Devel-opment Bank (ADB), the WorldBank, and the Mekong River Com-mission (MRC), ASEAN, the UnitedNations Economic and Social Com-mission (UNESCAP) and variousstate aid programs sharing an inter-est in the regions sustainable devel-opment.

Climate change and the rise of ex-treme weather events is a criticalconsideration for the region partic-ularly due to the dependence onnatural resources and economic de-velopments synonymous increasein energy consumption (AusAid,2007). The implementation of de-velopment strategies may be im-pacted by climate change with thedeveloped ASEAN nations urged toassist their developing regionalneighbours as the access to, andsustainable use of natural resourcesis critical the Mekong Region’s suc-cess (ASEAN, 2010; AusAid, 2007) Acentral issue to climate change andthe impact on the Mekong Regionis the lack of information on currentclimatic conditions and future im-plications related to climatechange. It is estimated that particu-larly Vietnam and Laos will be im-pacted by changing riverconditions and precipitation (in-crease or lack of ) due to the de-pendence on the Mekong Riversystem (AusAid, 2007). Further-more, the economic developmentof the area will consequently im-pact the region’s environment.

The archipelago of South East Asia includes Singa-pore, Malaysia, Indonesia, Brunei, East Timor and thePhilippines. These island nations vary greatly in theirlevel of development and population density al-though their coastal-island geographic unites themin their vulnerability to climate change and chang-ing environmental conditions. As noted by SwissRe(2010), Singapore’s proactive approach to climatechange and development is considered best prac-tice for country risk management by the reinsuranceindustry. The disparity in development in South EastAsia calls for the various neighbouring countries toassist one another in a cooperative effort to developthe region’s resilience to climate change (ASEAN,2010). Environmental sustainability, management ofnatural resources, and regional cooperation are in-tegral to the success of the region (ASEAN, 1997).

Indonesia’s pacific location places the nation of smallislands at the cusp of global warming implicationsthrough rising sea levels and storms as well as in ahazardous earthquake zone of the Sumatran fault.Between 2009-2004, Indonesia was hit by at leastone devastating earthquake in its region annuallywith further quakes expected in the future. These offshore earthquakes are known as tsunami triggerswith Spranger (2009) demonstrating the implica-tions of such geological occurrences in his assess-ment of the 2009 Pandang earthquake. Spranger(2009) cites the humanitarian catastrophe as beinga result of incomplete evacuation plans, poor recon-struction of buildings after previous major earth-quakes, and lagging building and constructionregulations.

THE ARCHIPELAGO OF SOUTH EAST ASIA

CASE: INDONESIA

The insured losses amounted to lessthan US$ 100ml, making it the mostexpensive to date in Indonesia how-ever the amount is trivial comparedto the death toll and loss of liveli-hood with the poorest victims lack-ing financial protection in its mostbasic form. Again, insurance is aprivilege of those who have the fi-nancial means to secure them-selves, which in Indonesia are onlya limited segment of the popula-tion. The insurance industry has theknow how to address this issue andcollaboration is needed in order forfuture victims to be financially pro-tected (Spranger, 2009).

The Indonesian reinsurance marketin 2009 was rather uneventful, apartfrom losses associated with thePadang earthquake (AON Benefield,2010). The main area of reinsurancein Indonesia is in business withcompanies reviewing catastrophecoverage and increasing the capac-ity as well as a significant increaserelated to fire risk (AON Benefield2010). Furthermore, the revisedearthquake tariff to be introducedin 2010 will see an increase in costsfor earthquake coverage in certainareas (AON Benefield 2010). Sug-gestedly, these adjustments are re-lated to the changing climaticconditions and the need to changehabitual calculations.

Although strictly speaking not con-sidered as part of South East Asia,due to the large geo-scape of thecountry and the effects of its eco-nomic movement and participationin the reinsurance industry, China ismentioned in this context.

China as a market for reinsurancehas enormous potential as the di-rect insurance market is largely un-tapped suggesting potential forfuture sustainable growth, particu-larly when considering its complexrisk environment including thepropensity for natural disasters, in-dustrialisation, high metropolitanpopulation density, urbanisation,and increasing values (Thumpp,2002). The reinsurance industry alsoholds a significant interest in China,but the interest in this area is alsoinfluenced by the current and fu-ture implications of climate change.China’s wide and diverse terrain issusceptible to varied climatic con-ditions including flooding, sea levelrises and earthquakes (IPCC 2007).China’s extensive waterways havelong been a source of life and liveli-hood, however the changing cli-matic and geological conditionsassociated with climate change areexpected to alter the current stateof this relationship. According to the IPCC (2007) theYangtze Delta will be effected bygeological and climatic effects lead-ing to a 0.5-0.7m sea level rise by2050 (above estimated global aver-age). Furthermore, increased flood-ing during the summer months arepredicted in the lower- mid reachesof the Yangtze River along with thesedimentary Huang He River alsoposing potential flood risks (IPCC2007 cited by Munich Re, 2009).

CHINA

Singapore’sproactive approach to climate changeand developmentis considered best practice for country riskmanagement by the reinsuranceindustry

SPECIAL REPORTS 32

The flood plains are popular settle-ment areas and home to signifi-cantly large populations. Inaddition, the level of precipitationin areas such as Shanghai also pres-ents a significant risk particularly toproperty and business with such ex-periences mirrored across the coun-try.Although China has a high predis-position for natural disasters, thelevel of insurance is limited. Accord-ing to Munich Re (2009), the tenlargest natural disaster events since1980 amounted to an aggregateloss of US $135bn, however insur-ance losses only accounted for 1-2% of this sum. To mitigate lossesrelated to torrential rain and flooddamage, Munich Re (2009) ac-knowledges that forecasting andtherefore protection is extremelydifficult. Whilst the state authoritiesrecognize the necessity for floodprevention and act accordingly,true risk prevention is far from cer-tain.

A more destructive force thanflooding are earthquakes withChina having a reputation for in-tense and deadly quakes (MunichRe, 2009). Although the earth-quakes are sporadic, the highesthazard propensity is in westernChina and the bordering Himalayanregion. Furthermore, the country isravished by the annual Typhoonseason which predominantly ef-fects the southeast provinces.

In calculating probable maximumloss (PML) the insurance industryfocuses on China’s economic centrewhere the hazards are high and thepotential for loss are economicallysignificant.

Notably, these industrial centres are core businessareas ensuring the continuation of the Chineseeconomy including the areas of Beijing, Tianjin,Guangzhou, Shenzhen and Hong Kong, theGuangzhou metropolitan area (Munich Re, 2009). Inrelation to typhoons, only 5%- 20 % of the estimatedtotal losses related to these natural disasters are in-sured.

China’s insurance market is rapidly growing in met-ropolitan areas, however the demand for this prod-uct is limited to those who have the economicmeans to partake (Munich Re, 2009). China’s socio-economic disparity sees a stark contrast betweenthe growing demand of the affluent urban mid toupper class in contrast to the hampered rural areasor lower socio-economic groups. Whilst Munich Re(2009) suggests that the insurance industry is indeedgrowing faster than the economy itself, the per-centiles previously noted regarding insured lossesin the case of natural disaster suggest that insuranceis a privilege. Contents, third party and business related insuranceare still relatively unknown with life and health in-surance becoming more common place. In a culturewhich focuses on the central family unit and the roleof government in taking care of its people, insurancehas borne cultural hurdles in entering the market.Essentially, risk mitigation is the role of the familygroup and the authorities rather than by individualcase as seen today as a result of rising incomes, so-cial insurance reforms, health care system changes,and private pensions (Munich Re, 2009). In order forequality in access and support to be possible, insur-ance groups, reinsurance bodies and the Chinesegovernment with the assistance of experts mustwork together.

The current data available on natu-ral disasters in China are insufficientfor reinsurance firms to effectivelycalculate the risk and subsequentterms of engagement, leading to afunding pool situation where indi-vidual municipalities then adminis-ter payouts according to theintensity of the catastrophe (Mu-nich Re, 2009). The interest of insur-ance firms in the Chinese market isnot only related to the newly afflu-ent group but also in health insur-ance, new forms of catastropheinsurance and engineering insur-ance (Munich Re, 2009). In order forthe reinsurance market to functionin the Chinese market, the capitalbase needs to be expanded to mit-igate risks and take on the role ofrisk manager (Thumpp, 2002)

Although the IPCC (2007) suggestsJapan’s cost is more protected thatthat of its South East Asian neigh-bours, Japan has a high propensityfor natural disasters given its pacificlocation in proximity to fault lines aswell as its unprotected island land-scape making it a target of ty-phoons. In the 1990s, Japansuffered from the highest numberof sequential natural catastrophes

in recent history with 2004 being the mostsignificant year of the past decade due to theoccurrence of 10 typhoons as well as the Ni-gata earthquake (Guy Carpenter, 2006). Japanis also subjected to flooding, volcanic erup-tions, tsunamis and winter storms. The 2004,typhoons amounted to USD 6bn in insuredlosses and USD 600 mn in the Nigata earth-quake (Guy Carpeter, 2006). The high popula-tion density of the island nation, highpropensity for natural disasters as well as theits socio-economic wealth in comparison tosome of its South East Asian neighboursdemonstrates a different aspect of the SEAreinsurance market.

Property policies provide protection fromsome, but not all natural disasters with earth-quake shocks or fire following an earthquakenotably absent (Guy Carpenter, 2006). This isredressed through the Earthquake Fire Ex-pense Insurance (EFEI) which provides cover-age for small expenses caused by fires afterthe earthquake (Guy Carpenter, 2006). Resi-dential earthquake insurance is administeredby local primary insurers with provisionsmade by the Japanese Earthquake Reinsur-ance Company and Japan’s largest domesticinsurer, TaoRe (Guy Carpenter, 2006). The cur-rent level of earthquake coverage taken bypolicy holders is at 37.4% (Guy Carpenter,2006).The Japanese market has a higher rate of in-surance, and subsequent reinsurance than itsneighbouring South East Asian countries dueto its economic advantage and high risk envi-ronment (AON Benefield, 2010). Indeed, theJapanese market was the only insurance mar-ket to remain stable growing during the pe-riod of the financial crisis particularly in lifevariable annuities and retirement (AON Bene-field, 2010). The number of earthquake capac-ity purchases made between 1996 and 2003demonstrates a strong growth trend (Guy Car-petner, 2006). Products are continuously de-veloped for this market due to the growingdemand, and the financial ability to purchase.

JAPAN

The interest of insurancefirms in theChinese market is notonly related to the newly affluent groupbut also in health insurance, new forms ofcatastrophe insurance andengineering insurance

SPECIAL REPORTS 34

CLIMATE CHANGE AND THE REINSURANCE INDUSTRY

n 2009, the US National Association of Insur-ance Commissioners issued a mandatory re-quirement that all insurance companiesdisclose the risk the face in relation to cli-mate change yet this was changed to vol-untary participation with the association

stating that the data from the survey would remainconfidential (NAIC, 2010). Beyond the potential losseswhich could be incurred in relation to climate change,the reinsurance industry must also consider its legalliabilities (Klein, 2009). With class action lawsuits hav-ing occurred in gas, oil, mining and chemical compa-nies in relation to environmental damages, thereinsurance industry could also be effected by suchsuits (Klein, 2009). As Klein (2009) points out, reinsur-ance has further liability issues due to its relationshipwith investors and portfolio diversity suggestingplummeting stocks due to incongruent policy or fundbehaviour as case for legal implications. Further, pro-fessional liability issues related to lack of informationdisclosure could also provide case (Klein, 2009).

According to Swiss Re (2010), it is not climate changeas an isolated factor which effects reinsurance, butrather in association with region and population. Theimpact of extreme weather conditions can be seenglobally, with South East Asia being particularly ex-posed to natural catastrophes.Yet, the increasing pop-ulation and economic growth in South East Asia arethe dominant concerns in reinsurance as these will ul-timately increase the demand for reinsurance as ameans to adapt to the changing social setting and en-vironment (Swiss Re, 2010). Essentially, reinsurancecan be seen as cost effective adaption to climatechange however insurance market penetration inSouth East Asia remains (Swiss Re, 2010)

IThere are also significanthuman securityimplications regarding climatechange and thereinsurance industry whichare most prevalent, currently, in the South EastAsian no-go zones

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A recent study of the Economics ofClimate Adaption Working Group(2009) Noted that enough data isavailable to base decision makingon cost efficient adaption measuresciting the economic value at risk todue to climate change risk being 1-12% of GDP by 2030 at today’s cli-mate or 1-19% of GDP by 2030 inaccordance with high climatechange. An estimated 40-65% ofidentified risk associated losses maybe averted with insurance meas-ures holding the potential to ad-dress low-frequency events withhigh severity (ECA Working Group,2009).In summary, economic losses as aresult of natural disasters in Asia2009 amounted to close to USD17bn or 0.07% of GDP, most ofwhich would be uninsured (ECAWorking Group, 2009). Of thosewho perished in the catastrophicevents of 2009, an 9400 lived in Asiaamounting to over half the totalnumber of victims.

Of the natural catastrophes which occurred, ty-phoons claimed the largest number of lives with Ty-phoon Morakot in Taiwan, the Philippines and Chinaclaiming 900 victims followed by Typhoon Ketsanain the Philippines, Vietnam, Cambodia and Lao re-sulting in 850 missing or dead.

The implications for the reinsurance industry regard-ing climate change are summarised as housing thenegative consequences associated with incalculablerisks and subsequent losses as well as the implica-tions for future liability issues. However, there arealso significant human security implications regard-ing climate change and the reinsurance industrywhich are most prevalent, currently, in the SouthEast Asian no-go zones.

HUMAN SECURITY

uman security, along with humandevelopment, surpasses traditionalnotions of security to comprehen-sively include environmental, polit-ical, social and economic aspectsand is associated by the increasing

role non-state actors play (Shaw, 2004). In the case ofenvironmental security, the threat thereto is not iso-lated to a particular individual or community, butrather an intensified affected core with global reper-cussions. Risk management, as in the case of insur-ance risk, credit risk, market risk, and operational risk,is the cornerstone of re-insurance with underwritingcontrolling the limits of insurance and identifying in-formation such as in the case of natural catastrophesand environmental threats (Swiss Re, 2004). Re-insur-ance is not a philanthropic concept or support net-work, but rather an industry interdependent with theglobal economy and market trends whereby weak-ened global financial markets and investor pessimismare critical factors (Thumpp, 2002).

Human security and human development have beenstrongly advocated with a particular surge since the1990s as the influence of non-state actors becomesmore prominent (Shaw, 2004). Fernandes (2004) per-tains the changing political and economic rhythms inAsia to globalisation and the rising middle class witheconomic prosperity, improved standards of livingand education contributing to more democratic po-litical movements and proactive behaviour in unitingthe modern and the traditional. However, the SouthEast Asia region still houses human security issues re-lated to civil unrest, welfare, political, social and eco-nomic issues.

HRe-insurance is not a philanthropicconcept or support network,but rather an industry interde-pendent with theglobal economyand markettrends wherebyweakened globalfinancial marketsand investor pessimism arecritical factors

SPECIAL REPORTS 38

With the summary aim of the Mil-lennium Development Goals beingto halve poverty by 2015, the im-portance of addressing environ-mental issues and their socialimplications are critical particularlyin South East Asia’s developing no-go zones which would see a majorstep back in the developmentprocess.

The environmental sustainabilityindex benchmarks nations on envi-ronmental stewardship in aim of es-tablishing tools for environmentaldecision making and policy devel-opment, presenting an alternativesource of measurement to GDP andthe Human Development Index,and as an international benchmark-ing mechanism (ESI, 2005). Essen-tially, the higher a nation’s score thebetter their position for favourablefuture environmental outcomeswith high scores often seen in na-tions with a low population density,economic prowess and a stable,quality government (ESI, 2005).

In the case of South East Asia, theESI cluster analysis splits the regionin different groups including Group2 (Moderate system and stressscores; high vulnerability and lowcapacity; above average steward-ship) and Group 7 (Low systemscore; moderate stresses, vulnera-bility, capacity and stewardship)(ESI 2005). Interestingly, the reportshows no distinct correlation be-tween the development of a nationand its score.

Whilst this report demonstrates the stewardship ofdifferent nations and provides somewhat of abenchmark, the disparity in the South East Asian re-gion demonstrates the diversity in environmental is-sues and their importance to policy makers. The Commitment to Global Development (CGD)Index examines the efforts of nations to assisthuman development and human security by partic-ularly examining the relationship between devel-oped nations and developing nations. Notably,current members of the CGD Index are developedwestern nations with the CGD Index data demon-strating Australia and New Zealand to be the promi-nent players in the south east asian region.Suggestibly, this is due to the pacific proximity of thenations as well as the development status of Aus-tralia and New Zealand (CGD Index,2009). The CGDIndex indicates that developing nations are at great-est risk with economic imperatives prevailing in theassessment threats, education and proactive initia-tives.

As highlighted by the United Nations DevelopmentProgramme Disaster Reduction Unit (2004), the hin-drance of development due to disasters has impli-cations for the development programme and theability of the participants to achieve the set Millen-nium Development Goals unless risk preventionmeasures are undertaken. These include the human-itarian and economic implications of natural disas-ters with the humanitarian community active inresponse measures rather than through policy de-velopment and proactive initiatives (UNDP, 2004).

ENVIRONMENTAL AND SOCIAL SUSTAINABILITY

DEVELOPMENT AND DISASTER RISK MANAGEMENT

Indeed, the UNDP Reducing Disas-ter Risk Report (2004) suggests dis-aster risk as being an unresolvedproblem of development and thatit is the challenge of the globalcommunity to address these risks.In particular, natural disasters andthe accumulated risks in relation toclimate change need the responseof the international community toaddress, as well as the balancing ofthe reinsurance industry in ‘countryrisk management,’ public authori-ties, and mitigating the develop-ment of no-go zones. The nations of South East Asia areclassified predominantly in DisasterRisk Index groups 7-4 with 7 indicat-ing the highest disaster risk. Fur-thermore, the region is surroundedby other high risk areas (Figure 3)(Peduzzi, Dao, Herold & Mouton,2009).Essentially countries aregrouped in their geographical ex-posure to natural disasters, the risklevel of these disasters occurring aswell as the severity of the effects onthe population. The Philippines, al-though commended by their ESI ef-forts, are considered as a category 7group nation therefore having thehighest quote of risk in South EastAsia (Peduzzi et. al., 2009).The Catastrophe Risk Evaluatingand Standardizing Target Accumu-lations (CRESTA) is an independent

organisation focusing on uniformglobal data on aggregated expo-sure for risk control and modellingspecifically for the insurance andreinsurance industry. As an inde-pendent body, the information col-lated, processed and provided ispublically exhibited and predomi-nantly used by the insurance andreinsurance industries. CRESTA-zones are a visual depiction of riskrelated regional data providing in-formation on exposure in specificareas. In a CRESTA survey con-ducted in 2009, 51.2% of respon-dents belonged to the reinsuranceindustry demonstrating the value ofCRESTA in risk assessment with68.% of respondents doing busi-ness globally and an additional6.1% specifically in Asia (CRESTA,2009). According to respondents,the CRESTAzone data is used for in-house accumulation control andrisk management, for pricing toolinput, to send exposure data toreinsurance firms and for geo-cod-ing (CRESTA 2009). Recently,CRESTA has indicated the possibilityof updating this information as re-gional figures have changed andthe industries seek more detailedrisk exposure descriptions specificto areas which will result in a highand low resolution information dis-play (CRESTA, 2009).

However, critique suggests that thetwo options will create confusion inanalysis as well as limited data avail-able in some areas remaining a keyissue (CRESTA, 2009). Noting the in-troduction of the earthquake tariffaccording to Aon Benefield (2010)and the CRESTA (2009) adjustments,it may be suggested that the newdata collation efforts and price ad-justments are not only due to eco-nomic concerns but also asresponses to climate change anddisaster risk management.

Assessing Global Exposure and Vulnerability to Natural Hazards (Peduzzi et al, 2009)

SPECIAL REPORTS 40

NO-GO ZONES

he reinsurance industry, particularlyinternationally, is marginally transpar-ent with the safety net not extendingto all areas. According to Swiss Re(2010) most nations in South East Asiawould not qualify for reinsurance as

they are dealing with basic welfare issue includingpoverty, food and water issues as well as security con-cerns. Notably, emerging or developing economiesare often less sophisticated regarding risk manage-ment whilst holding the highest vulnerability to nat-ural disasters due to high population growth,environmental degradation, and negligent urbanplanning (Swiss Re, 2010). Subsequently insurancemarkets in these areas are often underdeveloped andtherefore not at the capacity for reinsurance to enterthe market. Further issues are related to lack of dataand risk awareness. Consequently, the lack of reinsur-ance in these areas is not due to climate change itself,but rather risks exacerbated due to these climaticconditions as can be seen in the example of Indiawhich, with 40mn hectares of flood prone, whereby8% of the total land mass is prone to cyclones and ap-proximately 68% of the area is susceptible to drought,cannot receive reinsurance (Swiss Re, 2010).For the purpose of this paper, the plight of the pacificregion also be considered provide case for subse-quent replicas in the South East Asian region. Al-though international data such as the EnvironmentalSustainability Index, the UNDP (2004), the IPCC (2007)and the CGD Index have indicated that South EastAsia is at risk of similar environmental challenges,there has been limited discussion or publications inthis area. For this reason, the data of noted interna-tional bodies, research institutes, non-government or-ganisations and government publications will beused to examine this issue.

Tinsurance markets in these areas are often underdevelopedand therefore not at the capacity for reinsurance toenter the market

‘No-go zones’ are specific geo-graphic regions considered toohigh risk for reinsurance and subse-quently insurance companies to in-sure. The discussion of no-go zonesis limited, stakeholders providinglimited data and refraining from thedefinition thereof. Thus, the plightof these areas is dependent on ef-fective fiscal policy and a strong na-tional welfare system to mitigaterisks associated with climatechange. The series of ‘no-go zones’demonstrates the economic imper-ative and business rationalismwhich conducts the insurance, andindeed protection, of regions.Although not illicitly expressed, cli-mate change is producing no-gozones for the reinsurance market inwhich areas pose too high a riskwith minimal to no economic re-turn or too great a liability. The im-pact of climate change on thereinsurance market has thus farseen an increase in purchases andgrowth in the South East Asian mar-ket; however the risk of disaster isonly economically viable if the lawsof probability ring true.

As discussed by Klein (2009), cli-mate change’s greatest currentthreat to the reinsurance industry isthe impairment in data calculationand effectively assessing the prob-ability and associated estimatedscale of the risk. For the purpose ofthis paper, no-go zones are consid-ered geographic areas, regions orsovereign nations with an incalcu-lable or disproportionately high in-surance risk due to their highpropensity for disaster, high risk forhumanitarian loss, and at risk of be-coming unliveable.

In the case of the South East Asianregion, particularly in coastal areasand islands, the ‘no-go zones’ willhave a profound effect on humansecurity as inhabitants to seek pro-tection and welfare support. Fromthis it can be suggested that envi-ronmental peril may be grounds onwhich seek and be granted asylum.This may lead to newmigration trends andsubsequently straininter-regional relations,immigration policiesand welfares systemsas well as settingprecedents for future‘no-go zones’ and otherun-protected areas.

In colloquial language‘no-go’ zones is a com-mon term for danger-ous areas particularly incases of crime, war orcivil unrest. However,climate change is creat-ing new ‘no-go’ zonesas some areas are con-sidered too high risk forsettlement let alone se-cured by reinsurance.In South East Asia,these no-go zones aretypified by: a.High propensity fornatural disaster b.Negative effectsof climate change leading to ‘un-liveable’ conditions c.High risk forhumanitarian lossFor example, certain island nationsof the pacific are scientifically as-sessed to be sinking meaning cli-mate change is leading to increasednatural disasters and negative ef-fects making the area ‘uninhabit-able.’

NO-GO ZONES IN SOUTH EAST ASIA

SPECIAL REPORTS 42

According to Paduzzi et al. (2009) there are a signifi-cant number of island nations with insufficient datato acquire an accurate analysis however that is notto say that these nations are all no-go zones. Rather,it illustrates the difficulty in evaluating all regions inSouth East Asia region. The implications of no-gozones are difficult to estimate due to the lack of offi-cial data available on these actual regions compli-mented by the fact that no official ‘no-go’ zones havebeen declared for public debate. Understandably,the declaration of no-go zones would have signifi-cant immediate political implications. To estimatethe repercussions of the regions officially declared‘no-go zones’ and the currently estimated conse-quences of climate change ringing true, issues ofhuman security including welfare, security and pro-tection and migration are core implications.

As noted by the UNDP (2004), migration is a devel-oped survival strategy with seasonal or permanentmigration used in risk aversion. Migration is causedby the individual’s drive to improve their quality oflife including the exercise of fundamental humanrights, health and education with the risk associatedwith the migration itself often seen as the necessarysacrifice for the potential gains upon arrival at thechosen destination (UNDP, 2004). As discussed bythe UN Refugee Agency (2009), the population dis-placement due to climate change is immense in cor-relation with disaster risk areas and scarcity ofresources.Currently, it is estimated that there are po-tentially 25 million environmental refugees currently(Goffman, 2006). The definition of environmentalrefugees is debateable with Myers (2005 cited inGoffman, 2006) stating it to be:“People who can no longer gain a secure livelihoodin their homelands because of drought, soil erosion,desertification, deforestation and other environ-mental problems, together with associated prob-lems of population pressures and profound poverty.”

In response, reinsurance firms willnot be able to support primary in-surance suppliers as the risk is ei-ther too high making the productunaffordable or the key insurancecriteria cannot be met meaning theproduct cannot be supplied. As-suming the island nation has a frag-ile and limited economy, this hasdirect consequence with the abilityfor the region to be economically vi-able and be socially sound as theeconomic imperative ensureshealth services. In consequence,three options are available to the is-land nation: to seek internationalaid, to stay or to go. Notably, allthree possibilities significantly af-fect the human security of inhabi-tants.

Currently, national initiatives maybe supported through internationalaid or reinsurance as seen in the ex-ample of Swiss Re’s Country RiskManagement product. However,this product will only remain aslong as it is economically viable dueto the commercial nature of thereinsurance industry. Critique to-wards the industry is withheld, as itconsists of commercial enterprisesrather than public institutions.However, when the financial safetynet is no longer on hand, thesecases of missing funding will be-come humanitarian issues for theinternational community.

MIGRATION

IMPLICATIONS AND VULNERABILITIES OF NO-GOZONES ON THE SOUTH EAST ASIAN REGION

However Black (2001 cited in Goff-man 2006), argues that: “Although environmental degrada-tion and catastrophe may be impor-tant factors in the decision tomigrate, and issues of concern intheir own right, their conceptualiza-tion as a primary cause of forceddisplacement is unhelpful and un-sound intellectually, and unneces-sary in practical terms.”

Migration is one of the key issues inthe development of no-go zonesand relates to the third cited optionof ‘leaving’ which, depending on thecircumstances, may result in massexodus. For the south east asian re-gion, the inhabitants of no-gozones will follow current migrationpatterns of moving, out of neces-sity, to other nations on hope of se-curity, protection and a newbeginning. In reference to the CGDIndex, it can be seen that Australiaand New Zealand hold the highestmigration levels of listed developedcountries in receipt of migrants forSouth East Asia (CGD Index, 2009).When considering Australia andNew Zealand’s geographic proxim-ity to South East Asia, the tradelinks, security, aid, and the overallhigh CGD indicators it would sug-gest that these nations would bethe logically primary movers in themigration movement of the no gozone population. Furthermore, ascategorised ‘developed nations’with a lower disaster risk factor Aus-tralia and New Zealand would befirst ports of call (UNDP, 2004; CGD2009).

In the case of migration as an op-tion, it is assumed that the possibil-ity of living in the no-go zoneremains however the non-voluntarymovement from this area wouldmean a case for asylum. Article 14of the UN Declaration of HumanRights 1948 declares that all peoplehave the right to seek and enjoyasylum in another country free fromprosecution. In South East Asia, theinhabitants of no-go zones will in-deed go somewhere.

Climate change perhaps becomingthe newest ground for asylum. Thisposes significant problems as cli-mate change is a global issue, thusnot the responsibility of a single na-tion or community suggesting thatasylum free from environmental riskis the criteria for this status. Indeed,the plight associated with eco-nomic deterioration, infrastructureloss, and crumbling welfare systemsas well as inadequate governancedue to the inability to finance initia-tives creates a hostile living environ-ment. The no-go zones are setcreate climate change asylum seek-ers and orphans of global warming.

SPECIAL REPORTS 44

Cases of environmental refugeeshave already confronted Australiaand New Zealand from their pacificneighbours. As signatories to theUnited Nation 1951 Conventionand/or 1967 Protocol relating to theStatus of Refugees, Australia andNew Zealand agree to the status ofa refugee as defined by the conven-tion as:-People outside their country ofusual residence or nationality-People unable to or unwilling to re-turn or to seek protection of thatcountry due to well founded fear ofprosecution for reasons of race, re-ligion, nationality, membership of aparticular social group or politicalopinion-People who are not war criminalsor have committed serious non-po-litical crimes (Australian Immigration Fact Sheet61 - Seeking Asylum within Aus-tralia, Australian Department of Im-migration and Citizenship 2009).

The Australian Immigration FactSheet 61 also highlights that signa-tories to the convention are not ob-ligated to provide protection tothose who do not meet the statedcriteria or who, “have left their coun-try of nationality or residence onthe basis of war, famine, environ-mental collapse or in order to seeka better life for themselves or theirfamily.

Notably this specifically excludes environmental col-lapse or environmental refugees. The federal gov-ernment’s recent policy paper ‘Our DrowningNeighbours’ is expected to see Australia move intoa new direction of immigration policy particularlyconsidering the harsh international criticism the na-tion’s immigration has received in the past decade.Additionally, it has been noted by the internationalpress that Australia has indeed taken on refugeesfrom nearby pacific islands.According to the CGD Index, New Zealand outgrowsAustralia in its migration policy in the South EastAsian region and was markedly the first country toaccept environmental refugees. It is expected thatthe pacific cases of Kirribati and Tuvalu amongst oth-ers, will set a precedent for environmental migrationpolicy and will be replicated across the South EastAsian region due to the number of island conglom-erate and predominantly coastal landscapes. Ac-cording to Peduzzi et al (2009) the South East Asianregion boasts predominantly nations of the high riskcategory with many small island areas missing dataand therefore undefined, similar to the pacific cases.

Welfare is a key predicament in the case of no-gozones internationally. As noted by Swiss Re (2010),the level of development is critical in enabling rein-surance with basic welfare needing to be addressedprior to products becoming available. As the areas,regions or nations transcend from stable or in somecases even prosperous areas to deserted habitats,welfare is a ground for the population to move andthe international community to be called to atten-tion. The welfare issue in climate change affectedareas, particularly small islands, include decompos-ing eco-systems, lack of fresh water sources, extremeweather events, and rising sea levels (ALP, 2006). Inessence, the basic physiological needs cannot bemet. The case for welfare issues depends on thestarting point of the area, region or nation with wel-fare considered either a the responsibility of thestate (often supported by reinsurance) or the re-sponsibility of the individual (in the case of primaryinsurance).

WELFARE

IMPLICATIONS FOR AUSTRALIA AND NEW ZEALAND

As examined, South East Asia hostsa great diversity in welfare stan-dards often exhibiting distinct classsystems therefore influencing theprimary access to welfare. Welfareconsiders the quality of life bymeeting physiological needs as wellas education and healthcare withaccess thereto diverse in the regionand again gapped by socio-eco-nomic strata.

The process begins in an area whereextreme weather conditions are be-coming more intense or more fre-quent often disruptingdevelopment or economic activity(UNDP, 2004). Conversely, forms ofagricultural production or naturalresource dependent industries de-teriorate creating economic and so-cial problems. The government,depending on the region, may ormay not act in response to such is-sues by using national funding,reinsurance products, or interna-tional aid. These issues lead to civilunrest as the population moves incloser proximity to remaining avail-able resources, which in some caseswill see a form of urbanisation lead-ing to an eruption of civil unrest re-garding resources and adeterioration of welfare due to lack-ing economic means and increasedpopulation density. The increasedpopulation density is expected to,see a strain on infrastructure andwelfare systems such as healthcarewith an increased population orspread of diseases (for examplewater borne diseases) or both.

At this point, areas will start to be-come ‘unliveable’ with the propen-sity for risk too high for thereinsurance industry to support na-tional governments with areas thusseeking the aid of the internationalcommunity as it becomes a human-itarian issue. In the US Department of DefenceReport (Schwarz & Randall, 2003),global future scenarios are depictedfor the global community with ex-amined country cases closest toSouth East Asia being Bangladeshand China, which are both pre-dicted to be plagued by humanitar-ian issues due to lack of naturalresources and famine (Schwarz &Randall, 2003). Furthermore, theissue of development and mortalityin relation to high risk areas and re-gions with a significant propensityfor natural disaster have been de-termined (UNDP, 2004;Peduzzi et al, 2009).The 25 nations bear-ing the highest figuresfor disaster mortality,demonstrated in Fig-ure 4, host numerousSouth East Asian na-tions. As outlined bythe Australian ‘OurDrowning Neighbours’(ALP, 2006) report onthe plight of the pa-cific and the case ofe n v i r o n m e n t a lrefugees, the assis-tance of these peopleis not only in environ-mental interests andhumanitarian obliga-tion, but also for thewelfare and security ofAustralia.

Here, reinsurance stands as an influential factor witha security needed for economic stability. This secu-rity of livelihood is integral to the ability of the sov-ereign state as an independent body. Human security is greatly influenced by the abilityof the governing bodies of these risk imbeddedareas to manage the needs of their populations. Asthe lack of economic progression leads to a declinein income and subsequently of national finance, thestate comes to rely on reinsurance plans or foreignaid. As expressed, the reinsurance industry at such alate stage bears no interest in supporting areaswhich may cease to exist. The issue of protection isanother key factor in security. Whilst the welfare is-sues associated with food systems and living condi-tions deteriorating cause civil unrest in dispute overresources, the threat to national security also exists(Schwarz & Randall, 2003; ALP, 2006). Schwarz & Ran-dall (2003) suggest that disputes related to energyand food resources will replace the ideological con-flicts common today although the nature of the con-flict is debateable as is which weathers will surfaceas attackers and which as victims.

In the case of no-go zones, the security issues willpredominantly focus on regional human security is-sues as it is assumed these areas are not desirable byother nations due to the propensity for disaster andthe possibility that these areas may cease to exist.However, the forced fleeing of the population toother areas will create civil unrest in the new vicinitydue to increased population in contrast to the lim-ited carrying capacity. The carrying capacity refersto the ability of the earth’s ecosystem to support thepopulation with areas differing in their ability tomeet these needs (Schwarz & 2003). In the case ofno-go zones, the propensity for disaster decreasesthe carrying capacity of the area therefore threaten-ing human security. As long as the carrying capacityof the eco system exceeds the population peace willremain, whereby the opposite would cause signifi-cant conflict (Leblanc cited in Schwarz, 2003).

Indeed, the fear of waterborne dis-eases and the incapacity to act me-thodically in addressing migrationissues sees the welfare of not onlythe nations in plight but also thesupporting nations to be of concern(ALP, 2006).

Climate change presents a chal-lenge to regional, national andhuman security with the potentialto destroy development gains aswell as to dramatically hinder futuredevelopment as well as possibly de-stroying food systems, deteriorat-ing living conditions and causingconflict and disruption (ALP, 2006;UNDP, 2004; Schwarz & Randall2003). The security issue in SouthEast Asia is to emerge strongest in2020 when the impact of climatechange on the region congregatesand subsequently creates regionalconflict (Schwarz & Randall, 2003).

As civilisation is based on the abilityof humans as a group to rely on theresources of their habitat to addressphysiological needs as well as pro-vide elements with which to foragepolitical, economic and social iden-tity, the lack thereof proposes thedisintegration of human securityand subsequently of the popula-tion.In the case of no-go zones, theability to maintain a mode of eco-nomic security is reliant on thecombination of resource endow-ment, the supply and demandmovements of the market, and in-deed the assurance of futureprospects.

SECURITY

The reinsurance industry supplies fi-nancial support and advice to gov-ernment or organisations regardinga wide range of risk issues. In thecase of human security, two promi-nent concepts in the past decadeinclude terrorism and disaster risk.South East Asia has a low reinsur-ance penetration with the reinsur-ance products in these areasprominently seen in the US and inthe European markets (Guy Carpen-ter, 2006). The role of reinsurance incontrast to the responsibilities ofgovernment is continuously exam-ined with fiscal policy oftenfavoured over the commercial rein-surance industry, however it is alsoacknowledged that the lacking cap-ital base makes reinsurance a playerin the health equation with govern-ments opting for fund pooling solu-tions particularly in areas of welfare(Dror, 2001).

Country risk management is seen asa product with which nations cancounter these risks through reinsur-ance to manage natural disasters,health issues, war, assets, infrastruc-ture, energy, property and security(Swiss Re, 2009). These can be seenas consequences of climate change,however there is no insuranceagainst climate change as such. Fur-thermore, the economic argumentprevails with the financial implica-tions of un-insured consequencesfalling on government, businessand the private sector creating sig-nificant economic, political and so-cial implications (Swiss Re, 2009).

Essentially, rein-surance in thecase of negativec o n s e q u e n c e sdue to the risksassociated withclimate change(such as increas-ing frequency orferocity of naturaldisasters) securedby country riskmanagement is atransfer of riskfrom the publicsector to the rein-surance industry.Naturally, the reinsurance industryis a commercial sector which meansthat the interest in supplying rein-surance products must sustain alevel of profitability. As discussed by Palmer (2007) thereis an innate conflict in the notion ofbestowing welfare and human se-curity on the reinsurance as a com-mercial industry as these issues areclearly in the public sphere of re-sponsibility. As the representativebody of the population, it is the roleof the government to ensure thatthe needs of the population are ad-dressed. These needs are com-monly addressed throughlegislative measures and fiscal pol-icy, yet if the government does nothave the sufficient funds or if thegovernment is not trusted by thepopulation, as often the case in de-veloping nations, alternative meas-ures such as reinsurance or foreignaid may be taken.

REINSURANCE v GOVERNMENT

SPECIAL REPORTS 48

Reducing disaster risk is considered of interest to theinternational community to due to the conse-quences it bears on development as well as furtherrepercussions on the international realm includingclimate change policy, financing, international trade,foreign aid, and migration policy (UNDP, 2004). Asthe IPCC (2007)notes, south east asia is at the threatof climate change with the majority of these nationscategorised in the top 25 disaster risk exposed na-tions (Peduzzi et al, 2009). The linkages with the in-ternational community have been integral to thedevelopment of South East Asia in recent decadesparticularly in relation to trade. The internationalcommunity may support eachother through politi-cal and economic endeavours as well as through for-eign aid, often in the form of loans rather than grantsand is provided by either the private or the publicsector (Mango, 2003).

In the case of no-go zones specifically, the responsesare mixed as the debate of whether climate changeexists wages and if so, when, where and how it willbe experienced. Political agendas and sovereign in-terests still outweigh the voices of such no-go zoneswhich are notably smaller players and economicallyand politically seen as less significant in the interna-tional community. This ‘insignificance’ is affirmedthrough the lack of action undertaken to addressthese issues. Reflecting on the case of the pacific,proactive measures must be taken to address thepossible consequences prior to their actualisation.In particular, the South East Asian no-go zones willhave significant impact on the neighbouring nationsin immediate vicinity having limited resources to ef-fectively address the social, economic and politicalconsequences.

In the case of no-go zones, reinsur-ance is no longer an option leavingforeign financial assistance and in-ternational financial institutions asthe remaining funding avenue.However, as the no-go zone is con-sidered uninhabitable and the re-gion or state is expected to cease toexist, the willingness of the interna-tional community to provide finan-cial assistance, particularly forredevelopment, is impossible. Fur-thermore, the economic impacts ofdebts have implications for the no-go zone as well for the supplyingnation, which may lose the investedfinance permanently.

The role of the international com-munity regarding no-go zones ismixed as currently there is no publicconsensus of this concept, howeverthe role in regards to climatechange seems obvious. In consider-ing the pacific cases currently beingdiscussed by the international com-munity, the states as sovereign en-tities are focusing on reactivestrategies including disaster protec-tion structures, strategies to man-age food and resource shortages,and migration policy to ensure thatinhabitants have a safe haven oncethe area is indeed uninhabitable. Asnoted by the UNDP (2004), thefocus of humanitarian issues by theinternational community in disasterrisk areas focuses on post factumaid rather than proactive measures.

INTERNATIONAL COMMUNITY AND FOREIGN AID

With Australia and New Zealand ac-knowledging the desirability oftheir nations, these states havenoted that aid and migration assis-tance are not the only solution inaddressing these problems with ed-ucation and training programs im-plemented in the pacific to ensurethe new population will be assistedin the integration process as well asnot becoming an economic burdento their new host nations (ALP,2006). However, the actions of the interna-tional community in response to cli-mate change, the issues for changehotspots becoming no go zones, lit-tle international activity has comeabout. This can be seen in the lead-ers of international hotspots such asDarfur, Bangladesh, Tuvalu, Kirribati,and Palua seeking assistance in theinternational arena (UNHCR, 2009).In the assistance of the interna-tional community, the efforts areaimed at ensuring the inhabitantsare able to remain in their countryof nationality or residence throughdevelopment aid, financial assis-tance, peacekeeping forces, or inthe case of refugees in repatriation.

No-go zones, however, become un-inhabitable therefore the currentstrategies applied by the interna-tional community under the head-ing of humanitarian assistancemust be re-defined with new poli-cies developed to address thischanged situation.

In conclusion, the symbiotic rela-tionship of climate change and rein-surance has a profound effect onthe human security issues of SouthEast Asia’s no-go zones. Whilst cli-mate change has been disputedover decades, the internationalarena today leaves little room fordiscussion of ‘if’ climate change ‘will’occur, and has been overrun by thecommencing effects taking place.The role of international organisa-tions in monitoring climate change,as well as the wealth of scientific lit-erature, demonstrates the possibleeffects of climate change with cur-rent situations mirroring these pre-dictions.

In the discussion of reinsurance, it isevident that the commercial sectordedicated to business and privateinterests, has become the realm ofpublic policy with governmentbudgets and risk management ef-forts backed by reinsurance firms.The reinsurance industry is a case ofsupply and demand with changingenvironmental conditions provid-ing an opportunity (China) and arisk with too high a burden to un-dertake (India/Bangladesh).

As the industry moves to new catas-trophe modelling systems, reviseddisaster risk indexes and an adjust-ment of risk zones, it is undeniablethat climate change is affecting theindustry and its risk calculation.Based on probability, the industry iscautious in its acceptance of risk,therefore adopting green initiativesand country risk managementproblems to cater to market de-mand.

CONCLUSION

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As demonstrated in the literature,there is ample scepticism for gov-ernment’s reliance on reinsuranceto safeguard human security, par-ticularly as the reinsurance industryhas enunciated its dedication tocommercial and shareholder inter-ests. As noted in the case of South EastAsia, the climatic conditions hold ahigh propensity for natural disasterswith the increased frequency andseverity estimated as a conse-quence of climate change. The re-gion’s diversity is exemplifiedthrough the best practice exampleof Singapore in contrast with thecase of Indonesia and the lack ofdata on the smaller South EastAsian areas. The region’s high pop-ulation growth and diverse level ofwelfare as well as dispersed eco-nomic development demonstratesthe difficulty in ensuring human se-curity for the entire region. Asnoted, the marginally transparentsafety net of reinsurance does notextend to all areas. The lack of ade-quate governance, reinsurance andinternational funding leaves a bat-tlefield for no-go zones. In essence, perhaps an examinationof the dependence on the reinsur-ance industry by sovereign states isto be examined, particularly due tothe human security issues related tothe emergence and developmentof no-go zones. As exemplified,human security issues relating tothe development of no-go zonesthrough the effects of lacking rein-surance and climate change includemigration, security and welfare is-sues as well as the internationalcommunity and the need to exam-ine the role of government in thisequation.

Although human security is a sovereign issue, it is ofinternational interest. In the parallels drawn be-tween the current pacific cases, it can be assumedthat South East Asia will experience similar issues infuture decades leading to critical human securityconcerns by the states and region as well as the in-ternational community. In order to do so, it is recom-mended that the development of no-go zonesforemost be publically acknowledged by the inter-national community in order to create a context orpro-active cooperation rather than hoping to ad-dress the issue after the fact. Furthermore, the datacollated on the South East Asian reinsurance marketas well as on climatic change and human security is-sues in the area must be conducted in further depth.Critically, the dependence of governments on rein-surance must be reviewed. The cooperation of theinternational community is critical, however SouthEast Asia as a region must first come to a level of con-sensus particularly due to the disparity in levels ofdevelopment and human security issues within theregion. This must be supported by policy develop-ment and proactive risk management.

International law and policies enshrine the valuesand commitments of the international communityhowever this law of consensus is subject to criticismdue to the limited power it holds over the decisionsof sovereign nations. Furthermore, the internationalsanctions employed in an attempt to force conform-ity to the prescribed laws by signatories are oftenseen to have ulterior motives and limited influence.In the case of human security, international policyhas been developed, yet it is the responsibility ofeach community, state, and region to focus on theircommitment in order to facilitate this concept on aninternational level.

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