Insurers consider likelihood of catastrophic storm in the Pearl River Delta

There is pain in rain for insurers that must pay out millions in claims as companies cast a wary eye at the industries in flood-prone areas of China

PUBLISHED : Monday, 07 July, 2014, 5:26am
UPDATED : Monday, 07 July, 2014, 1:21pm

Here is a scenario for the not too distant future. Global warming has raised sea levels and the extra heat is powering strong winds and driving an ocean of moisture into the atmosphere. A typhoon as potent as Superstorm Sandy, which walloped the US east coast in 2012, hits the Pearl River Delta, knocking out power, bridges and roads, and levelling buildings.

It takes weeks to get the region's factories back into operation. This upends global supply chains, similar to how Bangkok floods in 2011 crippled the Japanese car industry for months.

The humanitarian impact is massive. Millions go without fresh water, power, sanitation and food, resulting in the loss of thousands of lives.

That a major, catastrophic storm will hit the delta in the years ahead is not so much a probability as an inevitability. Climate change is amplifying world weather conditions. With much of the southern part of the Pearl River Delta just 30 to 40 centimetres above sea level, and with a population of 42 million and an economy half the size of Australia's, the region is the world's most-exposed flood zone, according to Swiss Re.

"Clearly one of the vulnerabilities is the Pearl River Delta, where you have huge gross domestic product … [The risks are] both precipitation causing flooding, rising sea levels and increased wind, and if you have increased wind with rising sea levels, you can write the script," said John Nelson, the London-based chairman of the insurance firm Lloyd's.

The Pearl River Delta is the most flood-prone place on earth, facing multiple catastrophe risks of storm surge, wind storm and river flooding. Swiss Re estimates major flooding of the delta would result in insurance payouts of US$35 billion. The total economic cost would be "at least double, probably even more", said Caspar Honegger, who analyses flood risk at Swiss Re.

Climate change is raising the temperature of the planet's oceans and atmosphere and increasing the volume of precipitation held in clouds, resulting in more frequent, and more severe, flood and storm damage.

A slight rise in sea level can dramatically increase the impact of storm surge disasters, as the higher seas can quickly overwhelm flood infrastructure during typhoons.

"So, for example if you take Superstorm Sandy, the sea height off Manhattan was a few centimetres higher than it had been 10 years before," Nelson said. "And it caused much more damage as a result of that than it would have 10 years before."

While the United States has captured the headlines for flood risk in recent years, with storms Katrina and Sandy showing that even the world's richest nation was unequipped to deal with flood catastrophes of that scale, Asia is far more at risk. This is because much of Asia is in the tropics, with all the weather that a hot climate brings. Asia, and in particular China, also has a lot of people who have recently moved en masse to coastal cities, many of which do not have the infrastructure to deal with storm surges or related flood risks.

The rapid rise in Asian industrialisation has meant people and factories have spread to regions well known to be at risk for flooding, just because the land is flat, convenient and available. The 2011 Bangkok floods - which covered an area the size of Switzerland and caused economic losses of US$47 billion, equal to 12 per cent of Thai gross domestic product, making it the most expensive freshwater flood in history - were so damaging because many factories and infrastructure had been built in known flood zones.

Industries built on this flat land and when the floods came, there were losses
John Wilkinson, Munich Re

"People start building factories and homes on flood plains … it's population explosion and the spread of industry," said John Wilkinson, Munich Re's head of Greater China. "The best example was the Thai floods. Certain industries built on this flat land and when the floods came, there were these losses."

Lloyd's syndicate members lost money in 2011 as a remarkable confluence of disaster conditions delivered the Bangkok floods, the Japanese tsunami, floods in Australia and earthquake in Christchurch, New Zealand. Syndicate members paid out US$20 billion in claims that year, a loss of US$800 million.

The March 2011 Japanese tsunami, triggered by an earthquake, caused about US$235 billion in damage, making it the costliest natural disaster in history, according to Swiss Re.

Sandy, the third-costliest storm in US history, hit the next year. Nelson said that storm resulted in insurance claims of about US$500 million for damaged fine art alone, mostly expensive paintings hanging in beachfront homes.

Indeed, the increasing intensity and frequency of storms have pushed some private insurers out of major markets. Storm insurance is so expensive in Florida and Louisiana that they have had to create government-backed insurers of last resort for homeowners, filling a large, high-risk void vacated by private firms.

So why are insurers rushing to do business in the Pearl River Delta, one of the five most-catastrophe-prone places on earth in terms of potential economic damage and lives lost?

As they say about bank robbers going to where the money is, specialist insurers go to where the disaster is. While the potential payouts are enormous, the income streams from premiums are also robust.

"We expect that China will be one of the biggest natural catastrophe insurance markets in the world," Wilkinson said. "It's the fourth-largest primary [direct] insurance market in the world with volumes of €210 billion [HK$2.2 trillion] … and this will double again by 2020.

"Up to 50 per cent of growth in the insurance industry will come from Asia-Pacific … That's the potential and that's what makes it very exciting."