CHALLENGES OF NAT CAT INSURANCE

The frequency and severity of natural catastrophe (Nat Cat) events showed an increase from year to year. The number of Nat Cat disasters in the world almost tripled in the last 30 years.

In Indonesia, rapid development in major cities has created a concentration of value in the form of buildings and infrastructures. MAIPARK latest earthquake (EQ) insurance statistic report shows that around 50% of exposure located in CRESTA Zone 3 (Western part of Java, i.e.: DKI Jakarta, West Java, and Banten provinces). Looking at Jakarta region only, the phenomenon of multi-stories building was begun around 1960 with the establishment of Hotel Indonesia in Jalan Thamrin. 50 years thereafter, there are 576 high-rise buildings plus 152 others under construction. Similar concentration of value has also been taking place in other major cities such as Surabaya, Bandung, and Medan. Consequently, if any disaster occurs in such concentrated area, the loss would be enormous.

Measuring Nat Cat, Limitation of CAT Model, Black Swan
In Nat Cat management we are dealing with a complicated complex set of risks. Many of the risks are expected but unpredictable, but there are also some risks that are unexpected unpredictable; some we know and some we do not have knowledge of. As Donald Rumsfeld, the US defense minister in president George W. Bush government, put it: “There are known knowns; these are things we know that we know. There are known unknowns; that is to say, there are things that we know we don't know. But there are also unknown unknowns; there are things we don't know we don't know.” As insurance requires insurable risk to be quantifiable, insurance companies use various methods in trying to measure the unpredictability of risks. One of such tools to measure Nat Cat risks is Catastrophe Model (CAT Model), which increasingly has become a necessity in dealing with Nat Cat risks such as EQ, tsunami, volcanic eruption, flood, windstorm.  The use of CAT Model is not restricted to insurance industry only. It is widely used by government offices as well as scientific research bodies for various purposes, inter-alia to measure the magnitude of fiscal risk in state budget. 

A CAT Model can only be developed from a good reliable database. Here lies the first problem in Indonesia, as in many other developing countries, which normally has a problem in availability and quality of data. Nowadays, data has a very strategic value for the businesses, but we should understand that data without further process to make it information is meaningless. Data should be processed and improved following its hierarchy, viz.: Data ?Information ? Knowledge ? Creativity ? Wisdom. A CAT Model is a manifestation of hierarchy of data which ultimately produces wisdom. In this connection, insurance industry of Indonesia is among very few countries in Asia-Africa that have taken steps forward in the right direction by establishing the national central Nat Cat insurance database in 2003. With its ten-year insurance database and research on Nat Cat risks, the insurance industry of Indonesia through PT Asuransi Maipark Indonesia has been able to develop a CAT Model that covers earthquake risk with an earthquake catalogue of 450-year old, and is now finishing the first phase of Flood Model for Jakarta.

The availability of good quality and reliable database is of prerequisite to develop CAT Model, but the ability of CAT model to measure the probability of magnitude of Nat Cat risk accurately requires more than that. Research to incorporate science and state-of-the-art knowledge into the model is also necessary. New generation of risk may increase probability of occurrence or magnitude of risk; new method of risk reduction, on the other hand, may reduce the consequences of risk.

Even the inclusion of state-of-the-art knowledge in CAT Model may not be enough to produce accurate prediction about the consequences of Nat Cat risk, as witnessed in the event of Tohoku earthquake and tsunami 2011 where the tsunami went beyond the height of the tsunami barrier and caused massive destruction amid magnitude of the earthquake exceeded the maximum level predicted.

The most serious challenge in managing Nat Cat comes from the “unknown unknown”, popularly known as the “Black Swan” phenomenon, which relates to risks that are beyond our current state of knowledge and science. Liquefaction following Christchurch earthquake 2011 that caused vast economic and insured losses and prompted the government to review regulation on zones in building code is an example of “black swan” phenomenon.

Other Challenges: Mindset, Belief, Culture, Economic Consideration
Because CAT Model has limitations as described above, the users are advised not to be totally dependent on the outcome of the model but concurrently using subjective judgment of the risks including local wisdom. Local wisdom of people in Nias, North Sumatera, to be on higher ground as soon as they saw a drawback or super low-tide following earthquake is an example of local wisdom that contributes positively in management of Nat Cat.  There are, however, a number of problems that come along with local belief, culture, mindset, or economic consideration.

There are groups of people who believe that disaster is something given and there is nothing they can do about it, and they just give in. Mbah Maridjan and some other victim of Merapi volcano eruption 2010 fall within this category.

There are groups of people who deny being in an area that exposed to Nat Cat, and do nothing about it. Our experience in dealing with insurance practitioners in other Asean countries, Thailand and Malaysia in particular, fall within this category. Both countries were affected by boxing-day tsunami 2004, and Thailand suffered even worse loss in Thai flood 2011/2012.

There are people living in Nat Cat prone area who insist of having heavy roof for their homes or religious building to show their love, pride, or prestigious standing. Large number of homes destroyed in Yogyakarta earthquake 2006 showed how costly this kind of culture or mindset can be in the event of a Nat Cat occurrence.

The biggest challenge in managing Nat Cat risk’s consequences on lives and property probably comes from the economic consideration of government and public at large. At the other side of the coin, Nat Cat, such as earthquake and volcanic eruption, brings about prosperity through mineral resources and fertile lands which attract people to live nearby.

Conclusion
The first and most important measure in managing Nat Cat should be the elimination or change of mindset or reasons behind the sources of all the challenge factors mentioned above. As individuals we have the choice to live or not to live in a Nat Cat prone area. If we choose to do so, or cannot choose otherwise (as is the case for government), we have to recognize, embrace, and live with the Nat Cat. This is the first and most important step in managing Nat Cat. Nat Cat cannot be prevented from happening, but its impact can be minimized through disaster mitigation.