Posted on Dec 01, 2012 by Sergio Ulloa
Hong Kong's economic development over the last few decades has led to improved measures for dealing with natural disasters. With the installation of the Hong Kong Observatory in 1883, early storm warnings and procedures were gradually established to handle the region's seasonal typhoons. The numbered Signal System, 'T1, T3, T8 & T10', promoted public awareness of typhoons and arranged a platform to notify residents of each storm's potential severity. (When T8 is hoisted workers are released and encouraged to go home.) Now Hong Kong residents handle five or six typhoons annually, but there are growing concerns that many of them are severely underinsured for the long term effects of a natural catastrophe.
Lloyd's, the British insurance market, is now suggesting that low levels of insurance in a country could result in the state having to cover losses sustained from natural catastrophes. To avoid this issue, they believe a 1 percent increase in insurance penetration could deliver a 13 percent reduction in uninsured losses within seventeen high growth countries that are dangerously exposed to the long-term costs of natural disasters. China, as the largest underinsured country, has an estimated $79.57bn shortfall according to Lloyd's, but out of all the high income economies (measured by GDP per capita) Hong Kong is the only one to make the list.
Devastating effects to local communities from recent natural disasters like Superstorm Sandy in the US and severe flooding in the UK have left hundreds of victims reliant on their insurance for security. Hong Kong's 1999 typhoon York (only the twelfth typhoon number 10 signal hoisted since 1957) left 3 people dead and 500 injured, yet people still remain underinsured today.
The relationship between insurance and disasters was further scrutinised this week, when over 300 flood alerts and warnings were raised in the UK as flood defences failed to control the heavy rain. The torrential weather left homes in chaos and future insurance policies in limbo. An agreement between the insurance industry and the UK government ensured that high-risk homes would be covered by insurance plans while nation-wide flood defences continued to be installed. The agreement will end in June 2013, and the Association of British Insurers says that if current talks fail to find a solution, premiums will rise and leave 200,000 homes without affordable insurance.
Despite the Hong Kong government appointing the 'Insurance Authority' to 'encourage the provision of better services to the insuring public and [a] greater transparency in an insurer's operations', there are still questions as to whether Hong Kong citizens are financially prepared to absorb damage from similar catastrophes.
With a reputation for good security, and regularly enforced fire and building regulations, the priority of home insurance for Hong Kong residents is low. Widespread reluctance to seek out insurance may have to do with an historical context. The Chinese have traditionally relied on their family for all levels of support; taking care of the elderly was the responsibility of the family and the system only worked by raising children as a form of insurance. This cycle secured resources, and ensured income would continue after retirement. With family structures changing however, that responsibility has gradually shifted away from society and moved towards more reliance on the government. Without the 'insurance' of a larger family, citizens are finding it increasingly difficult to receive sufficient care, or indeed 'cover' in case of accidents.
These shifts have led the government to initiate schemes like the 'Emergency Relief Fund' that provide immediate financial assistance in case of natural disasters. The fund exists purely to combat critical needs however, and was never intended as a means of compensation.
If disaster were to occur, some Hong Kong residents would have little provision to alleviate the financial consequences. Poor benefit schemes are not to blame either, as local and international insurance providers cover natural disasters fairly comprehensively. Most home insurance plans in the city cover damage from: fire, typhoon, explosion, burglary, flood, burst water pipes, landslides and other accidental losses.
The costs of natural catastrophe damage increase worldwide every year, and the insurance shortfall for Hong Kong and several other countries will eventually affect jobs, homes and businesses. Government initiatives like the implementation of an 'Insurance Intermediaries Quality Assurance Scheme' in Hong Kong are essential, but Lloyd's is calling for governments to open up markets to private insurers, creating more space to underwrite risks. The insurance industry is also urged to take steps to better understand risks by developing new products and models in underinsured economies.