There's a significant underinsurance of flood risks in Malaysia

Photo: FAIHAN GHANI/The Star

FLOODING in Malaysia has displaced over 50,000 people according to the country’s disaster management agency and reports reveal that there is at least one fatality in every 10 missing people. The magnitude of the disaster is not determined by floodwaters alone but also by the pattern of vulnerability in which people live. The lives and livelihoods of poor people are hardest hit by flood disasters.

Arguably, of all disasters in Malaysia, floods are the most frequent and do the greatest damage annually. In 1996, floods brought by Tropical Storm Greg in Keningau, Sabah, claimed 241 lives, caused more than RM300mil in damaged infrastructure and property, and destroyed a few thousand homes. The December 2006 floods in Johor caused 18 deaths and RM1.5bil in damage. In 2008, floods occurred in Johor again, killing 28 people and causing an estimated RM65mil in damage.

With the government allocating RM200mil in efforts to address the impact of the current disaster, it is obvious that flood disaster management in Malaysia is over-focused on a top-down, government-centric approach. This has worked in the past when the population was sparse and citizens were not as advanced. Now, it is time for a radical change towards a more “bottom up”, “risk spreading” approach.

Given the perceivably high level of exposure to flood risks (and actual losses from flooding), flood insurance is undeniably one of the most crucial risk transfer tools that can make an important contribution to the financial management of flood risks by spreading the risk across domestic and international (re)insurance and capital markets, and reducing the share of losses absorbed by households, businesses and governments.

However, according to a study conducted by insurers Zurich Malaysia, 74% of homeowners in Malaysia are not covered against flood risks although the National Disaster Management Agency (Nadma) believes that 4.8 million people nationwide live in flood-prone areas. This means that only two out of 10 households in flood-prone areas are insured.

The statistics tell us that there are underlying challenges faced by private insurers attempting to introduce flood insurance in Malaysia. The low penetration rate is the most important reason why flood insurance is not broadly available, notwithstanding the challenge to model actuarially-sound insurance premiums that are affordable. This has led to significant underinsurance of flood risks, leaving the government with difficult decisions on how to best protect vulnerable populations without exacerbating moral hazards or reducing households’ incentive to reduce their risk.

There is a wide variety of approaches across countries to protecting households and businesses against flood risks. In many countries – Japan, Turkey and Switzerland, for instance – private insurance companies offer coverage for flood-related damage and losses, either as part of standard property and business interruption policies or as an optional add-on to such policies. In some countries – South Korea and the United States – coverage for flood damage may only be available from a public insurer, especially for properties deemed to be at high-risk of flooding. In other countries – Australia and Canada – government assistance may be the only source of compensation available for losses from flood events.

From this spectrum of flood insurance solutions, a public-private partnership (PPP) could potentially provide a more sustainable option over the long-term.

One example of a flood insurance model anchored in the PPP approach is Flood Re, which was established in 2014 in Britain. Flood Re, which is a not-for-profit fund, is privately owned and operated by the insurance industry albeit with public accountability to Parliament. It is uniquely designed to simultaneously support the insurance industry and promote the affordability of flood insurance.

One appealing aspect of this structure is the fact that the government’s role is limited. Unlike other disaster insurance schemes where the government absorbs losses beyond a defined threshold, the government in this case bears no financial liability. Importantly, Flood Re is intended to be an interim measure. The scheme will end in 2039 beyond which there will be a free market for flood insurance in Britain. From 2039 onwards, policyholders are expected to pay premiums based on their level of flood risk, without any subsidies.

Closer to home, following devastating floods in 2011 in Thailand – by far one of the country’s worst disasters – the Thai government introduced the National Catastrophic Insurance Fund (NCIF) to provide additional reinsurance capacity at subsidised rates to enable domestic insurers to continue offering coverage against natural disaster risks at affordable rates, not only to households and SMEs (small and medium enterprises) but also to the industrial sector.

However, despite the fund’s focus on affordability, media reports indicated that premiums rose later, after the disaster; the NCIF then faced the prospect of being closed when other insurance funds’ premiums normalised – closing the fund would potentially relieve the government of the financial burden. While the NCIF continues to exist, it is important to note the inherent challenges in running such schemes viably.

Considering the recent catastrophe in Malaysia, it is timely for the Malaysian government to take a serious look at designing a robust flood insurance scheme, ideally with a collaborative PPP structure to ensure that more affordable flood insurance can be offered.

Targeted flood insurance subsidies for B40 (lower income group) families living in high-risk areas should be introduced, and insurance companies should be incentivised to provide more optional add-on policies to minimise financial losses from these events.

One might argue that reducing flood risks through financial management alone is not sustainable. Yes, that is certainly true! Hence the need to integrate structural and nonstructural measures as part of a holistic flood-risk management approach. Structural measures such as building dams, barriers, and evacuation shelters need to be intensified while nonstructural measures such as early warning systems and public awareness programmes must be put in place. The initiatives would have to be carefully managed by the appropriate agencies to target reducing fatalities and damage and increasing the speed of recovery.

WAN NAJWA WAN SULAIMAN

Ampang, Selangor