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MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia MARCH 2024 World Bank and Bank Negara Report Led by Tatiana Didier (World Bank) and Katie Lee Sheah Tsan (Bank Negara Malaysia) Inclusive Growth & Sust in ble Fin nce Hub in M l si Contents Acknowledgments ............................................................................................................................................................................................11 Acronyms and Abbreviations..................................................................................................................................................................12 Abstract .................................................................................................................................................................................................................14 Executive Summary .......................................................................................................................................................................................16 CHAPTER 1 A Framework for Flood Risk Management..................................................................................................................................................................................... 24 1.1 Introduction..................................................................................................................................................26 1.2 Conceptual Framework................................................................................................................................26 1.3 Objectives of this Report..............................................................................................................................28 CHAPTER 2 The Economic Impact of Floods in Malaysia..................................................................................................................................................30 2.1 Characterizing Flood Risks in Malaysia.........................................................................................................32 2.2 The Macroeconomic Impact of Floods ............................................................................................................40 2.2.1 The Modeling Approach............................................................................................................. 40 2.2.2 Scenarios..................................................................................................................................... 41 2.2.3 The Direct Impacts of Floods...................................................................................................... 41 2.2.4 Estimating Aggregate Impacts.................................................................................................... 42 2.2.5 The Role of Climate Adaptation Measures in Reducing Flood Damages................................... 46 2.2.6 The Role of Private Sector Resilience.......................................................................................... 47 2.3. Conclusions....................................................................................................................................................50 CHAPTER 3 The Impact of Floods on Malaysian Businesses..........................................................................................................................................52 3.1 Exposures and Vulnerabilities to Floods......................................................................................................55 3.1.1 Which Businesses Were Hit by Floods over the Past Three Years?............................................. 55 3.1.2 The Extent of Flood-related Losses for Businesses .................................................................... 56 3.2 Adaptation Strategies among Businesses....................................................................................................57 3.3 Challenges in Developing Adaptation Strategies........................................................................................63 3.3.1 Limited Access to Finance........................................................................................................... 63 3.3.2 Limited Uptake of Flood Insurance............................................................................................. 64 3.3.3 Limited Awareness and Capabilities........................................................................................... 64 3.4 Conclusions...................................................................................................................................................66 6 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 Perspectives from the Financial Sector............................................................................................................................................................68 4.1 Financing Adaptation...................................................................................................................................70 4.2 Emergency Financing...................................................................................................................................72 4.3 Flood Risk Insurance Markets.......................................................................................................................73 4.4 Supply-Side Challenges ...............................................................................................................................75 4.4.1 Limited Availability and Accessibility to Flood-related Data....................................................... 75 4.4.2 Inability to Adequately Price and Diversify Risks and Serve High-Risk Businesses..................... 77 4.4.3 Lack of Demand and Other Demand-Side Factors..................................................................... 78 4.4.4 Lack of Capabilities..................................................................................................................... 78 4.5 Conclusions...................................................................................................................................................78 CHAPTER 5 Public Sector Policies to Support the Management of Flood Risks for Businesses...............................................................80 5.1 Challenges of Financing Investments in Adaptation to Flood Risks...............................................................83 5.1.1 The Lack of Business Case for Investments in Flood Risk Adaptation........................................ 83 5.1.2 High Uncertainty amidst Limited Capabilities............................................................................. 84 5.2 Challenges of Developing the Insurance Markets for the Management of Flood Risks.............................86 5.2.1 Inability to Accurately Quantify Flood Risks................................................................................ 87 5.2.2 Lack of Risk Randomness and Limits to Risk Diversification........................................................ 88 5.3 Public Sector Policy Support to Enhance the Role of Financial Markets.....................................................89 5.4 Conclusions.................................................................................................................................................110 CHAPTER 6 Roadmap for Policy Action..................................................................................................................................................................................... 112 References............................................................................................................................................................................................................117 Annex 1 ................................................................................................................................................................................................................120 Annex 2..................................................................................................................................................................................................................121 Annex 3.................................................................................................................................................................................................................125 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 7 List of Figures FIGURE 1.1 Conceptual Framework 27 FIGURE 2.1 Precipitation Trends in Malaysia 33 FIGURE 2.2 Frequency and Severity of Floods in Malaysia 34 FIGURE 2.3 Floods across Regions in Malaysia 38 FIGURE 2.4 Flood Hazards in Peninsular Malaysia 39 FIGURE 2.5 Climate Change Impacts on Output 43 FIGURE 2.6 Impact of Floods on Employment 44 FIGURE B2.1 Estimated Potential Exposure Losses in the Banking System 45 FIGURE 2.7 Climate Change Impacts on Output Conditional on the Implementation of Adaptation Measures 47 FIGURE 2.8 Impacts of Floods on Output 48 FIGURE 2.9 Impacts of Longer Floods on Output 49 FIGURE 3.1 Profile of Businesses Affected by Floods in the Last Three Years 54 FIGURE 3.2 Losses and Disruptions Associated with Floods 55 FIGURE 3.3 Flood-Hit Businesses and Flood Risk Awareness 57 FIGURE 3.4 Flood-Hit Businesses and Perceptions about Availability of Information 58 FIGURE 3.5 Flood Risk Awareness and Adoption of Disaster Preparedness Strategies 59 FIGURE 3.6 Flood Insurance Uptake 60 FIGURE 3.7 Motivation to Purchase Flood Insurance 61 FIGURE 3.8 Constraints in Access to Finance for Adaptation Strategies 64 FIGURE 4.1 Financial Product Offerings 71 FIGURE 4.2 Perceptions of Flood Insurance or Takaful Coverage for Businesses in Malaysia 74 FIGURE 4.3 Challenges for the Financing Adaptation and Resilience 76 FIGURE 4.4 Challenges for the Expansion of Flood Insurance 77 FIGURE 5.1 Role of Policies in Adaptation to Flood Risks 82 FIGURE 5.2 Developing Insurance Markets 102 FIGURE 5.3 Countries’ Flood Risk Profile and Government Intervention 103 8 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia FIGURE A2.1 Profile of Businesses Affected by Floods in the Last Three Years 121 FIGURE A2.2 Losses and Disruptions Associated with Floods 121 FIGURE A2.3 Flood-Hit Businesses and Flood Risk Awareness 122 FIGURE A2.4 Flood-Hit Businesses and Perceptions about Availability of Information 122 FIGURE A2.5 Flood Risk Awareness and Adoption of Disaster Preparedness Strategies 123 FIGURE A2.6 Flood Insurance Uptake 123 FIGURE A2.7 Motivation to Purchase Flood Insurance 124 FIGURE A3.1 Uptake of Flood Risk Insurance (Unweighted) 125 FIGURE A3.2 Uptake of Flood Risk Insurance (weighted) 126 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 9 List of Tables TABLE 2.1 Estimates of Climate Impacts 41 TABLE 2.2 Estimated Asset Exposures to a 1-in-20-year Flood Event 42 List of Boxes BOX 2.1 The Macroeconomic Impact and Response on Flood in 2021 35 BOX 2.2 Institutional Arrangements in the Management of Flood Risks in Malaysia 36 BOX 2.3 The MINDSET Model 40 BOX 2.4 Production Shares in Malaysia 43 BOX 2.5 Banking System Exposures to Floods 45 BOX 4.1 Emergency Financing and Relief during the 2021-22 Floods in Malaysia 73 BOX 5.1 The Government Response to the 2021-22 Floods 85 BOX 5.2 The Value of Hydro-Meteorological Data and Early Warning Systems 91 BOX 5.3 Managing the Legal Risks of the Publication of Flood Maps around the World 92 BOX 5.4 Emergency Relief 100 BOX 5.5 Examples of Parametric Insurance for Flood Risks 105 BOX 5.6 Fostering Supply Chain Resilience 109 10 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Acknowledgments This report was prepared through a joint collaboration between the World Bank and Bank Negara Malaysia, led by Tatiana Didier (World Bank) and Katie Lee Sheah Tsan (Bank Negara Malaysia), with contributions from: Adriana Asmaa Binti Mohd Ezane, Soraya Azhar, Antoine Coste, Ira Irina Dorband, Michael Fuchs, Gilang Hardadi, Yohan Iddawela, Kai Kaiser, Aruhvi Krishnasammy, Son Le, Fionne Lim Jing Wen, Tuan Phan, Hector Pollitt, Haris Syahir Bin Mohd Zulkifli Tiew, Philbert Tiki Yong, Mariana Vijil (World Bank), Suraya Sani, and Mohamad Faizal Mohd Faudzi (Bank Negara Malaysia). This report was developed under the supervision of Cecile Thioro Niang (World Bank) and Madelena Mohamed (Bank Negara Malaysia). The team thanks Stefan Apfalter, Alvaro Gonzalez, Dara Lengkong, Katherine Stapleton, Hang Thu Vu, Gonzalo Varela, Anna Wellenstein (World Bank), Zarina Bt Zainal Abidin, and Sharmila Devadas (Bank Negara Malaysia) for very useful comments to this report. The report benefitted from constructive discussions with staff at Bank Negara Malaysia, Ministry of Natural Resources and Environmental Sustainability (NRES), and several private financial institutions, all of whom provided useful feedback. The team is grateful to Ndiame Diop, Yasuhiko Matsuda (World Bank), and Norhana binti Endut (Bank Negara Malaysia) for their overall guidance. This report was supported by the Climate Support Facility Whole-of-Economy Program, administered by the World Bank. Production and design of this report was superbly managed by Eunice Ng and her team at Good News Resources Sdn. Bhd., based on commissioned artwork by Gerald Chong. Azlina Ahmad provided invaluable editing assistance and Marie Stella Ambrose provided effective administrative support. The views, thoughts, and opinions expressed in the text belong solely to the authors, and not necessarily to the authors’ employer, organization, committee, or other group or individual. Inclusive Growth & Sust in ble Fin nce Hub in M l si MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 11 Acronyms and Abbreviations AFRIP Australian Flood Risk Information Portal BNM Bank Negara Malaysia CAT DDO Catastrophe Deferred Drawdown Option CCKP Climate Change Knowledge Portal CCPT Climate Change and Principle-based Taxonomy CCTV Closed-circuit Television CDMRC Centre for Disaster Management and Relief Committee CMIP Coupled Model Inter-Comparison Projects CPI Climate Policy Initiative CRED The Centre for Research on the Epidemiology of Disasters CWC Central Water Commission DFI Development Financial Institution DID Department of Irrigation and Drainage DOSM Department of Statistics Malaysia DRF Disaster Risk Finance E&E Electrical and Electronics EM-DAT Emergency Events Database EMDE Emerging Market and Developing Economy ESG Environmental, Social, and Governance FEMA Federal Emergency Management Agency GDP Gross Domestic Product GHG Greenhouse Gas GVC Global Value Chain ICT Information and Communication Technology IDFC International Development Finance Club IMD India Meteorological Department IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change ITO Insurer and Takaful Operator JC3 Joint Committee on Climate Change KL Kuala Lumpur KM Kilometer KOICA Korea International Cooperation Agency 12 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia LT Long Term M&E Monitoring and Evaluation METMALAYSIA Malaysian Meteorological Department MIDA Malaysia Investment Development Authority MINDSET Model of Innovation in Dynamic Low-Carbon Structural Economic and Employment Transformations MKN National Security Council MLIT Ministry of Land, Infrastructure, Transport and Tourism MM Millimeter MRV Measurement, Reporting, and Verification MSME Micro, Small, and Medium Enterprise MT Medium Term MyCIF Malaysia Co-Investment Fund NADMA National Disaster Management Agency NPL Non-performing Loan NRES Ministry of Natural Resources and Environmental Sustainability OECD Organization for Economic Co-operation and Development P2P Peer to Peer PCG Public Credit Guarantee PIAM Persatuan Insurans Am Malaysia PUB Public Utilities Board SC Securities Commission Malaysia SDMRC State Disaster Management and Relief Committee SEADRIF Southeast Asia Disaster Risk Insurance Facility SFHA Special Flood Hazard Area SMART Stormwater Management and Road Tunnel SME Small and Medium Enterprise SMS Short Message/Messaging Service SRI Sustainable and Responsible Investment ST Short Term TCFD Task Force on Climate-related Financial Disclosures VBIAF Value-based Intermediation Financing and Investment Impact Assessment Framework MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 13 Abstract Building resilience to flood risks is imperative for Malaysia’s sustainable private sector development and growth. Estimates in this report show that floods can cost Malaysia up to 4.1 percent of GDP by 2030. Yet, empirical evidence on the vulnerability of Malaysian businesses to flood risks is scarce. Little is known about which businesses are most vulnerable and the most significant challenges hindering greater adoption of risk mitigation strategies, both ex-ante preparedness and ex-post coping strategies. This makes it difficult for policy makers—namely, the Government of Malaysia, including the Ministry of Finance and relevant line ministries and their respective agencies, financial sector regulators (Bank Negara Malaysia and Securities Commission Malaysia), and development financial institutions—to identify and prioritize support policies to strengthen private sector adaptation and resilience. Financial institutions, including banks, insurers, and takaful operators, can also be an important enabler of business efforts to manage flood risks. This report is a step toward bridging this knowledge gap to shed light on how policy makers in Malaysia can support and foster private sector resilience to floods, emphasizing policies to strengthen the role of the financial sector in supporting business adaptation and resilience to flood risks. This report looks holistically at the challenges of adaptation to climate change for businesses, exploring the complementarity among the public sector, the financial sector, and the private sector. To set the stage, the report starts with the profile of floods in Malaysia, benchmarking it against countries worldwide, and an estimation of the aggregate impacts of future floods for Malaysia. This macro-modeling assessment aims to highlight the importance of greater resilience by the private sector. Drawing on a novel business-level survey conducted among 1,500 Malaysian businesses, this report explores vulnerabilities to flood risks and the factors discouraging businesses from investing in adaptation and resilience. The demand-side assessment is complemented by an analysis of the challenges faced by financial institutions, namely commercial banks and insurers and takaful operators, in providing financial services to support adaptation and resilience of businesses. Finally, the report discusses the range of public sector policies that recognize and act upon the barriers preventing businesses from adopting more resilient and sustainable practices while creating an enabling environment that encourages private capital flows toward these investments. It concludes with a roadmap for policy action, with concrete recommendations for policy makers in Malaysia. 14 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 15 Executive Summary Floods Can Cause Significant Impact on Jobs and GDP Malaysian businesses are increasingly vulnerable negative impacts of floods on employees, suppliers, to climate change through physical risks, primarily customers, and infrastructure. floods, impacting business operations, and in turn, affecting their ability to grow and create jobs. Floods The increasing frequency of floods can have a sizable have been Malaysia’s most frequent natural disaster, impact on the Malaysian economy. The impact of floods accounting for 85 percent of all natural disasters since on businesses can lead to substantial macroeconomic 2000. Malaysia has one of the world’s highest levels effects. The analysis in this report based on historical of exposure to flood-related disasters, ranking 12th in flood hazard data shows that a 1-in-20-year flood can the world in terms of the frequency of events but 78th cost Malaysia up to 4.1 percent of GDP in 2030, in in terms of the average annual damages. Recurring the absence of adaptation efforts. The estimates also floods mean that businesses are constantly recovering indicate a significant impact on jobs from floods that from and bracing for new events, which significantly could lead to up to a 2.2 percentage point increase constrain their economic prospects. Floods can directly in Malaysia’s unemployment rate. Climate change is impact businesses through losses and damages in projected to increase the frequency of precipitation, inventories, machinery, equipment, facilities (including and consequently, raise the likelihood of floods in buildings), and assets more broadly. Businesses can Malaysia, which could lead to even more significant also incur indirect losses due to business disruptions impacts on output and employment. and supply chain interruptions, for instance, due to the Private Sector Adaptation Efforts Can Reduce Flood- related Costs The impact of floods could be reduced significantly by other and are fundamental to understanding private private-sector adaptation efforts. Conceptually, the sector resilience to floods. A business may be highly effect of floods on businesses depends on a combination exposed to floods, but its vulnerability may be low if it of three factors: hazard (the probability of floods and their has developed effective coping strategies. For example, intensity), exposure (including both direct exposures to the estimates show that by building resilience in supply hazard, such as the share of assets exposed to floods, and chains, thereby ensuring the continuity of production, indirect exposures associated with business disruptions), businesses can reduce their expected losses due to and vulnerability (the degree to which businesses and floods by more than 50 percent. The estimates also show their assets would be adversely impacted, given hazards that such adaptation efforts are instrumental in mitigating and exposures). These three elements interact with each the impact of frequent but less severe floods. 16 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Executive Summary However, the business case for investments in flood the private sector, and the financial sector. The risk adaptation and resilience might be tenuous, public sector has a crucial role to play as the primary especially for small and medium enterprises (SMEs). provider of large-scale flood control infrastructure. It is Such investments often require significant upfront also responsible for ensuring that critical infrastructure expenditures but returns tend to have longer and and service delivery are resilient to flood risks, and for more uncertain payback periods when compared to strengthening urban planning and land use restrictions conventional investments. Moreover, the benefits in flood-prone areas, among other responsibilities. of these investments can be particularly complex to In doing so, the public sector can reduce businesses’ quantify as, in practice, they are avoided losses. They exposures and mitigate their vulnerabilities to floods. may not even be internalized by businesses due to But these actions are unlikely to completely mitigate externalities and their public good nature. This is further the impacts of floods on businesses in Malaysia. compounded by the high uncertainty and deficiencies Residual risks would remain, and ultimately, the ability in the information environment surrounding not only of businesses to reduce the impact of floods hinges on flood risks but also the effectiveness of adaptation their capacity to adapt. Notably, private sector actions and resilience strategies. All these factors hinder should build on and complement those of the public the willingness of both businesses and financiers to sector, which puts a premium on transparency about invest in flood risk adaptation and resilience. These public sector policy priorities and strategies. In this challenges can be particularly constraining to SMEs— context, the financial sector can be an important enabler. they often face significant barriers to access to finance Access to financial products can support businesses for adaptation and resilience that hamper their ability in coping with floods by financing ex-ante adaptation to invest more broadly. Moreover, the benefits of efforts and enabling ex-post financial resilience. Hence, investments in flood risk adaptation and resilience may constraints in access to finance for businesses can not be material to them in the short to medium term, eventually increase the fiscal burden of floods for the as they may not be operating when the risks these public sector, especially as it is compelled to step in investments seek to address materialize. to provide relief in the aftermath of floods. Overall, an Adaptation efforts by businesses should not be viewed integrated, coherent, and proactive approach by the in isolation; an effective management of flood risks public sector, the private sector, and the financial sector entails complementary roles for the public sector, is paramount in building a flood-resilient economy. This Report Looks Holistically at the Management of Flood Risks for Businesses This report focuses on the management of flood gap to shed light on how policy makers in Malaysia can risks for Malaysian businesses. Building resilience support and foster private sector resilience to floods, to flood risks is imperative for Malaysia’s sustainable with emphasis on policies to strengthen the role of the private sector development and growth. Yet, empirical financial sector in supporting business adaptation and evidence on the vulnerability of Malaysian businesses to resilience to flood risks. flood risks has been scarce. Little is known about which This report is the first of its kind to look holistically businesses are most vulnerable, and what are the most at the challenges of adaptation to climate change significant challenges hampering greater adoption of for businesses, exploring the complementarity among risk mitigation strategies, both ex-ante preparedness the public sector, the financial sector, and the private and ex-post coping strategies. This makes it difficult for sector. Drawn from a novel business-level survey policy makers to identify and prioritize support policies conducted on 1,500 Malaysian businesses, this report to strengthen private sector resilience. An evidence- explores vulnerabilities to flood risks among Malaysian driven approach to designing and implementing policy businesses and the factors discouraging them from support is essential to ensure effective outreach to the investing in adaptation and resilience. The demand- most vulnerable businesses. Only then can public sector side assessment is complemented by an analysis of policies support private sector resilience efficiently and the challenges faced by financial institutions, namely sustainably, improving the odds of credible impact. commercial banks and insurers and takaful operators This report is a step toward bridging this knowledge (ITOs), in providing financial services to support MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 17 Executive Summary adaptation and resilience of businesses. Finally, the environment that encourages private capital flows report discusses the range of public sector policies toward these investments. The report concludes that recognize and act upon the barriers preventing with a roadmap for policy action, with concrete businesses from effectively adopting more resilient recommendations for policy makers in Malaysia. and sustainable practices while creating an enabling Which are the Most Vulnerable Businesses in Malaysia and Why? The business-level analysis reveals three key findings. as discussed below. The results also indicate a risk First, SMEs are particularly vulnerable to floods in awareness gap between large businesses and SMEs. Malaysia, through both direct and indirect impacts.1 For example, SMEs are less likely to have sufficient The survey analysis shows that although flood impacts information about future flood risks. While 80 percent over the past three years were more prevalent among of large businesses stated that they had sufficient large businesses, SMEs were more likely to experience information about their future flood risk exposures, damages and disruptions associated with floods. For only 69 percent of SMEs (and within SMEs, 40 percent example, SMEs were 50 percent more likely to report of small businesses) stated so. The survey results also asset damages than large businesses. SMEs were also show marked differences between large businesses more likely to cite indirect losses due to the impact of and SMEs in awareness that vulnerability to flood risks floods on their customers and employees. While supply can impact their competitiveness, including in foreign chain disruptions affected more than half of all surveyed markets. businesses, smaller businesses were more likely to be affected. About 75 percent of small businesses, Third, limited access to finance for adaptation and comprising those with up to 30 employees, stated resilience and insurance is a significant barrier for that supply chain bottlenecks were the main cause Malaysian businesses, especially SMEs, hampering for delays in return to operations. SMEs typically took their ability to manage flood risks. Among businesses about a month to fully resume operations after being that consider floods a recurring risk for their business, affected by floods. The evidence suggests that SMEs 43 percent of SMEs (and 34 percent of large businesses) tend to have less developed coping mechanisms. SMEs cited limited access to finance for adaptation and are less likely to have disaster preparedness strategies; resilience as a primary barrier for the implementation they are also less likely to have insurance than large of flood risk preparedness, 10 percentage points businesses, even after considering differences in risk more than the second-most cited barrier (namely, lack exposure and risk perceptions.2,3 of awareness and knowledge). Notably, businesses with limited access to financial resources for flood Second, flood risk awareness is a crucial factor preparedness had three times greater revenue losses underlying the extent of preparedness among associated with floods than businesses that did not businesses, but there are marked awareness gaps for mention it. Limited access to insurance can also thwart SMEs. The survey results show that businesses that recovery efforts as insurance payouts represent an perceive flood risks as recurrent risks are more likely to important source of funding for such expenditures, have disaster preparedness strategies and to purchase especially for SMEs. For example, 37 percent of SMEs flood insurance. Consistently, 33 percent of businesses mentioned insurance payouts as their primary source of that consider floods a recurring risk mentioned the lack funding for recovery and reconstruction, compared to of risk awareness and knowledge among their top- 24 percent of large businesses. 3 barriers hindering the adoption of flood resilience practices. This is higher than all other potential barriers but access to finance for adaptation and resilience, 1 Large businesses are defined as those with revenues above RM50 million ($11 million), and those with smaller revenues are classified as SMEs. 2 Disaster preparedness strategies range from simply monitoring weather forecasts and disaster risk news to buying pumps and power generators to more complex ones involving investments in resilient inputs and acquisition of better vehicles, retrofitting buildings and relocating production to premises in less flood-prone areas. 3 For simplicity, this report adopts the term insurance to refer to both insurance and takaful protection. 18 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Executive Summary What Constrains Access to Finance and Insurance for Vulnerable Businesses? Evidence from a survey of financial institutions restrictive data gatekeeping (e.g., tight constraints in Malaysia reveals that banks and ITOs indeed in access to information). The underdevelopment of have limited engagement in supporting businesses’ financial infrastructure for climate-related adaptation adaptation and resilience. Financing for flood risk investments further complicates this already intricate adaptation and resilience, especially ex-post emergency informational environment. Policies such as taxonomies financing, remains relatively small, with a limited range and disclosure and reporting requirements have of financial products available to businesses.4 About focused primarily on climate change mitigation 40 percent of banks stated that they do not provide efforts rather than adaptation. In Malaysia, there is a any emergency support to businesses,5 and about 20 lack of clarity around the standards and definitions percent of banks stated that they have no products for adaptation investments, including standardized related to adaptation financing. Consistent with the reporting frameworks with well-defined metrics that results of the business-level survey, financial institutions would allow financial institutions to better monitor also believe that insurance coverage is skewed toward and report flood risks. In addition, limited capabilities larger businesses, with the uptake of flood insurance to assess and manage flood risks seem to compound among smaller businesses being less widespread. these challenges. In fact, over half of the ITOs and 75 percent of banks stated that micro-business coverage is “poor.” At This lack of information exacerbates the already high the same time, there is a perception among financial uncertainty surrounding private investments in flood institutions of limited demand from businesses for risk adaptation and resilience. Flood risks are inherently financial products to manage flood risks, consequently difficult to measure. There is a high degree of uncertainty reducing the incentives for greater engagement by in quantifying complex climatic and other natural these financial institutions. In the case of insurance, processes (including hydrological and meteorological the expectation of ex-post compensation by the factors, among others) and the effectiveness of risk government can explain, at least in part, a limited mitigating factors (including the capacity of drainage demand for insurance coverage. The low penetration of systems and flood protection infrastructure, among flood insurance among businesses puts pressure on the others). The impacts of climate change add an important government for ex-post compensation, which arguably additional layer of uncertainty to these assessments. In places Malaysia in a so-called “disaster syndrome.” addition, investments in preparedness and adaptation to flood risks are marked by high uncertainty stemming At the core of the constraints on financing and from limited information related to: (i) technologies insurance for businesses to manage flood risks are (e.g., uncertainty about the technical feasibility and significant gaps in flood-related information that effectiveness of new, sometimes untested, technologies); hinder effective measurement of flood risks. There (ii) markets (e.g., augmented uncertainty about evolving is limited reporting on exposures and vulnerabilities demand and competitiveness in the marketplace due to flood risks from businesses themselves, and the to the growing impact of floods); and (iii) policies and availability and accessibility of information from regulations (e.g., lack of clarity, predictability, or even public sources are also limited. In addition, access to consistency in government policies). In Malaysia, the latter proprietary data from private sources, when available, is an important source of uncertainty. There is limited can be costly. The information available to financial information on the government’s capital investments in institutions in Malaysia has partial coverage of certain flood adaptation projects (actual or planned) and public floods (e.g., flash floods are not tracked by the public sector interventions are marked by a fragmentation of sector), limited temporal relevance (e.g., short responsibilities, lack of coordination, and insufficient historical information and lack of projections), lack implementation capacity. Together, these factors limit of spatial granularity (e.g., information only available the effectiveness of the disaster risk management at the postal code level which is too aggregate framework at the country level, especially during large- for an accurate assessment of flood risks), and scale disasters, and compound uncertainties faced by 4 Throughout this report, “emergency financing” refers to financing for unplanned and unexpected expenses incurred due to the negative impact of floods. 5 Financial institutions can provide emergency support to businesses through a range of temporary measures, such as, deferment of loan repayment, minimum payment waiver or reduction, interest rate reduction, and waive of fees and penalties on early withdrawals, among others. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 19 Executive Summary the private sector, thus limiting efficient coordination the non-mandatory nature of flood insurance and the between private and public sectors’ efforts. All these limited depth of the insurance market in Malaysia makes factors make adaptation investments riskier than more it challenging for ITOs to build a sufficiently large pool conventional investments for both businesses and of uncorrelated risks, as clients more highly exposed to financiers. risks (such as those in high-risk geographical areas) are the ones more likely to purchase insurance protection. Partly due to the data gaps and an inability to adequately quantify flood risks, financial institutions In this context, financial institutions fail to serve in Malaysia face challenges in adequately pricing, Malaysian businesses, especially high-risk ones, monitoring, managing, and diversifying flood risks. adequately. Indeed, the evidence in this report Risk management practices related to floods are not points toward a de facto exclusion of a set of high- yet widespread, especially among banks. While many risk, vulnerable businesses from access to financial banks use screening to assess flood risks of business products. The evidence indicates that a set of high-risk clients, flood risks are not consistently embedded in businesses, especially smaller ones, are either priced credit risk assessments, and such risks are not priced out or outright excluded from the insurance market. For into financial services. The inability to accurately assess example, about 17 percent of businesses affected by risk exposures and quantify potential losses limits floods over the past three years were refused insurance risk-based pricing, including for insurance premiums, quotes. Another 32 percent of SMEs and 27 percent and limits the scope for risk transfers, for instance, to of large businesses affected by floods were asked insurance and re-insurance companies. There is also to retrofit their premises to obtain further insurance limited monitoring and reporting of banks’ exposures coverage. Doing so can be particularly difficult when to flood risks, which can be partly explained by businesses face constraints in access to finance banks not tracking flood risks among their clients. for adaptation and resilience. And depending on Furthermore, there are limits to potential flood risk businesses’ past exposure to floods, banks may require diversification. Because flood risks are not random— them to purchase flood insurance or develop and that is, significant losses tend to occur simultaneously implement adaptation plans as prerequisites for access and in geographically clustered areas—financial to financing. These results suggest that there might be institutions face concentrated and correlated risks. A a vicious cycle between bank financing and insurance, large and diverse client base is crucial for their ability in which limits in access to one source of external funds to diversify away from flood risks. In the case of ITOs, can further curb access to other sources of finance. The Role of Policies to Support Private Sector Adaptation and Resilience to Flood Risks The findings in this report show that there is scope intervention. Tackling these challenges will require a to strengthen the role of the public sector to further deliberate and holistic approach by the public sector to support private sector adaptation and resilience catalyze private capital while incentivizing businesses to flood risks, which ultimately would lead to more to manage flood risks. This report outlines a range of sustainable and resilient economic development for complementary policy actions in six key areas, focusing Malaysia. As noted above, the public sector has a on how policy makers in Malaysia can support and crucial role to play as the primary provider of large- foster private sector resilience to floods, with emphasis scale flood control infrastructure as well as ensuring on policies to enhance the role of the financial sector. that critical infrastructure and service delivery are This report leaves a more in-depth assessment of the resilient to flood risks, among other responsibilities. range of actions that businesses can undertake and In doing so, the public sector can reduce businesses’ their effectiveness for future research. exposures and mitigate their vulnerabilities to floods. However, other public sector policies can also play RECOMMENDATION 1 a vital role. For instance, the landscape for financing investments to enhance private sector resilience to Enhance data availability, accessibility, and flood risks is marked by a range of market failures, affordability to support flood risk assessments, which frictions, and inefficiencies that call for policy are vital for risk management, informed investment 20 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Executive Summary decisions, and the development of financial markets. noted above, private sector adaptation and resilience In Malaysia, public sector support is needed to close efforts should build on and complement those of critical data gaps related to flood risk information. The the public sector. In the absence of a clear definition government’s role is critical in building the appropriate of the responsibilities of the public sector, effective climate information infrastructure for flood risks to intergovernmental coordination, and transparent mobilize private investment in adaptation activities. policy priorities—critical elements currently lacking Flood risk maps are among the most essential tools in Malaysia—private sector efforts risk being to provide information in support of climate change fragmented and misaligned with the critical needs of adaptation decisions. This information is crucial to both businesses and the entire country. Therefore, it risk modeling and pricing of products as well as the is important that the Government of Malaysia signals structuring of financial solutions by the financial sector and commits to the direction of future policies to the and can also benefit the public and the private sectors. largest extent possible, to enhance transparency and Without appropriate and timely information, neither provide crucial information for the private sector and private nor public stakeholders can adequately assess financiers alike. their exposures, and consequently, understand the investments needed to mitigate risks and minimize • In the short term, an immediate important losses. Because significant positive externalities foundational step for Malaysia is the articulation are associated with sharing credible and timely of a national adaptation strategy with a prioritized climate-related information, governments should be action plan that outlines clear adaptation responsible for providing this information. goals toward flood risks. The strategy should also: (i) strengthen institutional structure and • In the short term, the Government of Malaysia arrangements for disaster risk management; should publish flood hazard maps to expand (ii) establish effective cooperation and public access to information and develop legal and coordination mechanisms across the various regulatory frameworks to support the collection stakeholders; (iii) establish in the legal framework and dissemination of data to manage the legal the responsibilities and liabilities of national, risks. In the medium term, the Government regional, and local government authorities and should also improve the quality of the primary other relevant stakeholders about flood risk data on flood hazard risks to address concerns management in its entirety, encompassing the with limited time horizons, frequency of updates, periods before, during, and after floods; and (iv) limited coverage, and geographical comparability encompass robust governance arrangements by investing in hydro-met services and exploiting to promote transparency and accountability new technologies. The Government should also in public sector policy action—for example, promote the development of technologies and by conducting an effective public consultation expertise in monitoring and assessing flood process and establishing regular monitoring and risks not only in the public sector, but also in the reporting against set targets. In the medium private sector and the scientific and academic term, complementing these, the national and communities. Moreover, the Government could sub-national governments should issue detailed consider establishing partnerships with private adaptation investment plans, outlining their stakeholders to complement and enhance public portfolio of high-priority projects, thereby sector initiatives, leveraging their capabilities and expertise in the development of risk models, facilitating the identification of residual risks while reducing fiscal costs. associated with floods for the private sector. By recognizing that climate change poses a significant threat to the long-term sustainability RECOMMENDATION 2 of public sector finances, the Government should Develop a long-term national adaptation strategy, also consider developing a disaster risk finance clearly outlining and communicating the priorities for framework to institutionalize disaster response the Government of Malaysia and defining the scope and recovery systems while leveraging innovative of action for the public sector. A national adaptation contingent financing instruments. Such a strategy has first-order importance by establishing framework would outline comprehensive ex-ante the level of risk retention by the public sector, thereby financial protection strategies for managing the reducing policy uncertainty and facilitating the costs associated with disasters like floods, aimed assessment of flood risks for the private sector. As at limiting their impact on public sector finances. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 21 Executive Summary RECOMMENDATION 3 businesses. Adopting an evidence-driven approach for designing and implementing targeted policy support Strengthen the enabling environment for the financial would ensure effective outreach. The evidence in this sector to foster adaptation and emergency financing. report indicates that targeted interventions should While Recommendations 1 and 2 aim to facilitate the focus on enhancing access to finance for SMEs, which quantification of flood risks by closing data gaps and tend to be among the most vulnerable and under- reducing uncertainty, the third recommendation goes resourced, partly because of more constrained access one step further. Policy actions should also foster the to finance and lower capacity to adopt resilience mainstreaming of such risks for the financial sector strategies to help them adapt to floods. to enhance accountability, ensure adequate risk management, and foster financing toward adaptation • The Government of Malaysia with the financial and resilience. Harnessing investment opportunities sector regulators should consider developing a should go closely together with risk management. policy framework outlining priorities in supporting Financial institutions can only mobilize finance to access to finance for adaptation and recovery. adaptation and resilience if they can effectively manage Greater efforts are needed to strengthen the flood risks in their portfolios. In addition, effective coordination of public sector policies to enhance flood risk management is essential to preserve financial the effectiveness and impact of interventions stability. Financial sector regulators should thus develop and prevent duplication of efforts. The policy a robust climate information architecture conducive to framework could establish priorities and specific the management of flood risks. strategies (including specific policy instruments) to address the financing gaps for the most vulnerable • In the short term, financial sector regulators should businesses (especially SMEs), drawing from the rebalance the focus of the climate information principles discussed in the report about the use architecture by placing greater emphasis on climate of concessionality, de-risking instruments (such change adaptation, for instance, by (i) raising as credit guarantees), and the adoption of robust awareness and strengthening the policy discourse monitoring and evaluation (M&E) frameworks. To and advocacy for adaptation and emergency enhance the effectiveness of policy support, policy financing related to flood risks, and (ii) publishing makers should adopt M&E frameworks across implementation guidance for taxonomies and the range of targeted support currently available climate-related disclosure frameworks focused on to businesses, including existing financial relief investments and activities related to adaptation and mechanisms provided by financial regulators. The resilience to flood risks. In the medium term, as deployment of targeted support should leverage data availability and quality improve, the regulators public entities, such as development financial should undertake flood risk assessments for the institutions, and existing financial support schemes financial sector to inform other prudential policy for businesses. actions required to preserve financial stability. The frequency of such assessments should improve as RECOMMENDATION 5 information on flood risks and capabilities develop. The regulators also should carefully monitor the Deepen insurance markets to enhance the range of implementation of new policy tools and financial financial instruments that can support the financial sector responses to guard against unintended resilience of businesses in Malaysia. In Malaysia, ITOs consequences for financial inclusion and financial face significant challenges to adequately quantify, stability. price, and diversify flood risks, which hampers their ability to provide flood risk protection to businesses, RECOMMENDATION 4 especially vulnerable ones such as SMEs. The increasing prevalence of floods and their associated costs suggest Deploy targeted interventions to support access the need for more active support by the public sector to finance for adaptation and recovery efforts, to further develop the segment within insurance especially targeting the most vulnerable businesses, markets. Harnessing the capacity for risk diversification such as SMEs. Support to the enabling environment of the insurance industry toward flood risks could yield is necessary, but it is not sufficient to foster adaptation considerable upsides. However, doing so will involve and emergency financing related to flood risks, so consideration of a range of potential pathways for targeted financial interventions are still needed. Such policy support to expand insurance market depth while interventions should focus on the most vulnerable ensuring affordability. The status quo for Malaysia is that 22 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Executive Summary vulnerable businesses largely shoulder the financial risks when flood-related data become more widely available, of floods. Solutions could aim to either transfer financial businesses may face difficulties using the information risks to the public sector or to cross subsidize such to assess the risks and impacts on their operations. risks across a wider pool of insured assets, for instance, Business may also be unable to properly assess the through some form of requirement for insurance uptake cost-effectiveness of different adaptation and resilience across lower-risk businesses, where permissible and strategies. Furthermore, the large indirect impact of appropriate. The different solutions would thus affect floods through supply chain disruptions shown in this incentives for businesses, ITOs, and the public sector, report highlights the need for the design of policy with consequences for market dynamics. While having support programs to build the capacity of businesses to the potential for significant distributional impacts enhance the resilience of their supply chains. depending on the extent to which different parties effectively bear the financial costs associated with • In the short term, the Government of Malaysia floods, solutions could be designed to incentivize an could leverage the publication of flood risk maps enhanced role for the private sector with well-crafted with awareness raising, for example, by using public policy and interventions. Ultimately, the level interactive platforms with information on flood of insurance protection available in the marketplace hazards, exposures, and adaptation efforts. The should reflect the Government of Malaysia’s position Government could also develop well-targeted on the distribution of the costs associated with floods awareness campaigns to mainstream flood risk between the private and the public sectors. management for businesses, especially among vulnerable segments. In the medium term, the • The Government of Malaysia and the financial Government of Malaysia should also deploy sector regulators should conduct an in-depth programs specifically designed to strengthen assessment of arrangements for public sector the capacity of businesses to map and assess support for the insurance market, examining the the resilience of their supply chains, providing relevant trade-offs of specific solutions in light of guidance in identifying vulnerable links for which the challenges faced by Malaysian businesses and preventive action may be warranted. Interventions Malaysia’s climate risk profile. These authorities supporting capacity building for both businesses should also consider establishing a framework for and financial intermediaries can be deployed collaboration between the public sector and the alongside directed financial support to improve insurance industry and defining the scope for public the likelihood of impactful outcomes. Financial sector funding and other policy support. Because sector regulators can also enhance their capacity this assessment will take time, in the short term, building efforts to foster the mainstreaming the authorities should conduct a more in-depth of flood risks into business operations, risk and granular diagnostics assessment to identify management practices, and investment decisions critical vulnerabilities among businesses and gaps of financial institutions. in insurance coverage, especially among vulnerable SMEs, and consider adopting temporary, targeted public sector policies to support financial resilience for vulnerable businesses. RECOMMENDATION 6 Strengthen policy efforts to enhance flood risk awareness and build capabilities to foster greater efforts toward adaptation and resilience. Public sector intervention should focus on closing awareness gaps, particularly for businesses with lower capabilities and those prone to greater information asymmetries, such as SMEs. As flood risks evolve due to climate change, public sector interventions should also target businesses in areas where the frequency of flooding is not historically high but might be on the rise. Policy makers should also prioritize capacity building as an integral element of the policy agenda to enhance private sector resilience to flood risks. For instance, even MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 23 CHAPTER 1 – A Framework for Flood Risk Management CHAPTER 1 A Framework for Flood Risk Management 24 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 1 – A Framework for Flood Risk Management Key Messages • Building resilience to flood risks is imperative for sustainable private sector development and growth in Malaysia. Yet, empirical evidence on the vulnerability of businesses to flood risks has been scarce in Malaysia. Little is known about which businesses are most vulnerable and the most significant challenges hindering greater adoption of risk mitigation strategies, both ex-ante preparedness and ex-post coping strategies. • The impact of floods on businesses depends on a combination of three factors: hazard, exposure, and vulnerability. These three elements interact with each other and are fundamental to understanding private sector resilience to floods. • Hazard reflects “where and when” shocks might occur. It is the probability of a flood event and its physical characteristics, including intensity and duration. • Exposure reflects “who and what” would be affected if floods were to occur. It comprises not only businesses and their assets but also infrastructure, such as roads, water, sanitation, drainage, flood protection infrastructure, and other public infrastructure such as health care and school facilities. • Vulnerability reflects the “how and how much.” It refers to the degree to which exposed businesses and their assets would be adversely affected by floods, taking as given hazards and exposures. Vulnerability can vary substantially depending on the adaptation and financial resilience measures in place to protect exposed businesses and their assets. • While businesses have limited ability to address hazards and exposures, they can adopt a range of coping strategies to mitigate their vulnerabilities. Businesses can strengthen their resilience by planning and investing in both precautionary measures and emergency responses and recovery efforts. Such efforts minimize business risks and strengthen their resilience. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 25 CHAPTER 1 – A Framework for Flood Risk Management 1.1 Introduction Recent large-scale floods have caused significant to flood risks has been scarce, not only in Malaysia but damage and disruptions to businesses in Malaysia. across emerging market and developing economies Flood-related disasters are the most common natural (EMDEs). Little is known about which businesses are disaster in Malaysia. Such events result in economic most vulnerable and the most significant challenges losses and may pose significant financial risks to hindering greater adoption of risk mitigation strategies, businesses. At the national level, the Department of both ex-ante preparedness and ex-post coping Statistics Malaysia (DOSM) estimates that damages strategies. In addition, in Malaysia there is a lack of data caused by the flood events in December 2021 and and research in this area that is comprehensive and January 2022 alone at RM6.1 billion (about $1.35 updated on a regular basis. Therefore, it is difficult for billion and equivalent to 0.4 percent of the country’s policy makers to identify and prioritize support policies nominal GDP), with business premises, manufacturing, to strengthen private sector resilience. An evidence- and the agriculture sector accounting for RM1.5 billion driven approach to designing and implementing policy (about $330 million) or 25 percent of total damages.6 In support is essential for an effective outreach to the most addition, the federal government allocated RM1.2 billion vulnerable businesses. Only then can public sector (about $260 million) in financial aid and other forms of policies support private sector resilience efficiently and relief associated with the flood events. The 2021 floods sustainably, improving the odds of credible impact. were by no means an isolated event. Climate change This report is a step toward bridging this knowledge alongside rapid economic development is threatening to gap to shed light on how policy makers in Malaysia— increase the frequency and intensity of floods. Recurring namely, the Government of Malaysia, including the floods also mean that businesses (and households) are Ministry of Finance and relevant line ministries and constantly recovering from and bracing for new flooding their respective agencies, financial sector regulators events, thus affecting their economic prospects. (Bank Negara Malaysia and Securities Commission Malaysia), and development financial institutions—can This report focuses on the management of flood support and foster private sector resilience to floods, risks for Malaysian businesses. Building resilience with emphasis on policies to strengthen the role of the to flood risks is imperative for sustainable private financial sector in supporting business adaptation and sector development and growth in Malaysia. Yet, resilience to flood risks. empirical evidence on the vulnerability of businesses 1.2 Conceptual Framework The impact of floods on businesses depends on a refers to the degree to which exposed businesses and combination of three factors: hazard, exposure, and their assets would be adversely affected by floods, vulnerability (Figure 1.1). Hazard is the probability of a taking as given hazards and exposures (Cardona et al., flood event and its physical characteristics—including 2012). That is, the “how and how much.” Vulnerability the type of floods (e.g., fluvial, pluvial, or storm surges) and can vary substantially depending on the adaptation its intensity. This factor reflects “where and when” shocks and resilience measures in place to protect exposed might occur. Exposure reflects “who and what” would businesses and their assets. Hazard, exposure, and be affected if floods were to occur. It comprises not only vulnerability are not static concepts; they can vary over businesses and their assets but also infrastructure, such time. While there is some predictable natural variability as roads, water, sanitation, drainage, flood protection in the occurrence of floods, there is a high degree of infrastructure, and other public infrastructure such as uncertainty in measuring the hazard of floods, especially health care and school facilities. Finally, vulnerability in a changing climate, as discussed later in this report. 6 See DOSM (2022) and Box 2.1 for more details. 26 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 1 – A Framework for Flood Risk Management Businesses’ vulnerabilities depend on the various transport networks and other essential services channels through which floods can impact them. like electricity, gas, and telecommunication. Such Businesses can be directly impacted by floods through disruptions affect the availability, quality, and cost of losses in inventories or damages to machinery, inputs, thereby impairing businesses’ ability to produce equipment, or facilities (including buildings). and deliver goods and services. Floods can also lead to Businesses can also incur indirect losses, such as reduced customer demand. More broadly, value chain those associated with the disruption of businesses. linkages can amplify the impacts of floods, though Floods can negatively impact suppliers, customers, this transmission channel depends on their sector and and infrastructure. For example, floods can disrupt position in the chain. FIGURE 1.1 Conceptual Framework Hazard Exposure Vulnerability Flood Risks Where Who How When What How Much Probability of oods and Businesses and their Degree to which their characteristics assets, and infrastructure businesses and their assets (e.g., intensity, duration) exposed to oods are affected by oods While businesses have limited ability to address Limited access to financial services, both credit and hazards and exposures, they can adopt a range of insurance or takaful protection, can hinder efforts to coping strategies to mitigate their vulnerabilities. strengthen business resilience, particularly for small Individual businesses have virtually no control over and medium enterprises (SMEs).7 Constraints in access hazards, and few strategies are available to reduce to finance can exacerbate businesses’ vulnerability to exposures. Relocation away from high-risk locations flood risks by constraining both ex-ante investments in is potentially the only viable option to reduce their preparedness and ex-post recovery and reconstruction exposures. The scope for business action is broader in efforts, thereby reducing their ability to cope with terms of mitigating their vulnerability to floods. Businesses adverse shocks. Insurance can also provide invaluable can strengthen their resilience by planning and investing financial resources if risks materialize. Constraints in in both precautionary measures (for example, ex-ante access to flood insurance might also limit the range investments in preparedness) and emergency responses of funding sources for businesses’ recovery efforts, and recovery efforts (for example, by purchasing insurance and affect businesses’ financial resilience. Ultimately, and developing business continuity plans that can speed limited access to financial services can hamper the up recovery time, among others). Such investments private sector efforts to enhance their resilience and, minimize business risks and strengthen their resilience. consequently, increase the fiscal burden of floods on Thus, it is fundamental to encourage businesses to the public sector, especially as it is compelled to step in invest in adaptation and build resilience to flood risks, and provides relief in the aftermath of floods. both to reduce their ex-ante exposures and vulnerabilities and mitigate the impact of floods if they are affected. 7 For simplicity, this report adopts the term insurance to refer to both insurance and takaful protection. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 27 CHAPTER 1 – A Framework for Flood Risk Management 1.3 Objectives of this Report The report starts with a characterization of in providing financial services to support adaptation Malaysia’s flood risk profile. Within the framework and resilience for Malaysian businesses. As discussed presented above, Chapter 2 discusses the hazards above, access to relevant financial services and and exposures of Malaysian businesses to flood products can improve the ability of these businesses risks, discussing differences across geographical to cope with adverse shocks, including those linked to locations within the country. The chapter discusses floods, and reduce the fiscal burden on the government. the frequency and severity of floods at the country Specifically, drawing from a novel supply-side survey level in a comparative setting against other countries conducted on financial institutions in Malaysia, this worldwide. The chapter then provides estimates of chapter evaluates the factors constraining the provision the aggregate impacts of future floods in Malaysia, of financial services by commercial banks and insurers discussing the differing effects across sectors and the and takaful operators (ITOs) to support adaptation and extent to which a range of adaptation measures can resilience efforts by businesses. help reduce potential losses. The chapter also provides an assessment of the possible risk exposures of the Chapter 5 brings together the findings from both banking sector to flood risks. The assessment provides the demand and supply assessments to discuss the estimates of the potential costs and benefits of broad range of public sector policies to strengthen private public sector policy strategies for managing flood risks sector resilience and enhance the management of in Malaysia while highlighting the importance of greater flood risks for businesses, zooming in on policies for resilience in the private sector. the financial sector. The chapter focuses on policies that recognize and act upon the barriers preventing Chapter 3 assesses the challenges for Malaysian businesses from effectively adopting more resilient businesses, especially SMEs, in managing flood risks. and sustainable practices while creating an enabling The chapter draws on a novel business-level survey environment that encourages private financing toward conducted on 1,500 businesses to explore the factors these investments. discouraging businesses from investing in adaptation and resilience to flood risks. Specifically, this The report concludes in Chapter 6 with a roadmap demand-side survey provides evidence of challenges for policy action. Notably, the roadmap focuses on related to climate risk knowledge and awareness, strengthening adaptation and resilience for the private the identification and availability of cost-effective sector. As such, it offers a partial view of the range mitigation and adaptation measures, and the financial of policies needed to strengthen flood risk resilience capacity to implement these measures. The assessment in Malaysia. Effective flood risk management entails also discusses the management of the recovery process complementary actions aimed at reducing hazards, when floods hit businesses. The chapter zooms in on exposures, and vulnerabilities, not only by businesses the challenges in access to finance and the uptake of but also by households and the government. Hence, flood insurance. effective policy action based on this roadmap should be viewed as needed and welcome, but remains Switching perspective to the supply-side, Chapter 4 insufficient to address all the challenges posed by discusses the challenges the financial sector faces floods in Malaysia. 28 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 1 – A Framework for Flood Risk Management MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 29 CHAPTER 2 – The Economic Impact of Floods in Malaysia CHAPTER 2 The Economic Impact of Floods in Malaysia MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia Key Messages • Floods have been Malaysia’s most frequent natural disaster, accounting for 85 percent of all natural disasters since 2000. Compared with other countries around the world, Malaysia experiences relatively frequent but not necessarily severe floods. For example, Malaysia ranks 12th in the world in terms of the frequency of floods, but 78th in terms of the average annual damages associated with large-scale floods. • Malaysia has experienced high and increasingly frequent rainfall, and projections indicate further increases in precipitation in Malaysia. If not mitigated, higher precipitation will expose the country to higher flood risks. The projected increase in precipitation means that what would historically have been a 1-in-100-year flood event could become a 1-in- 50-year or 1-in-25-year event. • This study is a first attempt to assess the macroeconomic and financial sector impact of flood events, despite the limited availability of granular data. • Floods can have a sizable impact on the economy. The macroeconomic analysis shows that the impact of a hypothetical 1-in-20-year flood is expected to cost Malaysia up to 4.1 percent of GDP in 2030. The estimates also indicate a significant impact on jobs from floods that could lead to up to a 2.2 percentage point increase in Malaysia’s unemployment rate. There is however significant heterogeneity in the potential impact across sectors. • Floods can also have an impact on the banking sector. Because of its large relative size in the banking system loan portfolio, 44 percent of the total potential losses would occur in the services sector. However, the proportion of loans for the service sector potentially impacted by floods is relatively low at 3 percent. • Adaptation efforts could significantly reduce the macroeconomic and financial impact of floods. The estimates indicate that a comprehensive combination of regulatory measures, climate resilient infrastructure investments, and ecosystem improvements could reduce the economic impact of floods by more than 40 percent. • Businesses also have an important role in strengthening flood risk resilience in Malaysia. For example, supply chain resilience can reduce the potential impact of floods by more than 50 percent for less severe events, but it has a more limited role during severe floods. • The findings in this chapter highlight the necessity of flood risk management for both the public sector and the private sector. While adaptation and resilience efforts by the private and public sectors can go a long way in reducing the potential losses associated with floods, residual risks are likely to remain, and they could still entail sizable economic costs. For businesses, this puts a premium on efforts to strengthen their adaptation and resilience efforts. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 31 CHAPTER 2 – The Economic Impact of Floods in Malaysia Climate change pose challenges to Malaysia’s While the Government of Malaysia has increasingly developmental aspirations, with potentially sizable focused on the need for adaptation and resilience to impacts on growth and employment. In the coming flood risks, there is limited evidence on the economic years, Malaysia aims to become a high-income country costs and benefits of potential adaptation strategies or through good governance, sustainable development, on the role of the public sector and the private sector in and harmony. Such aspirations, however, are threatened undertaking such critical adaptation investments. This by climate change. Malaysia already has one of the chapter focuses on the disruptive effects of floods on world’s highest levels of exposure to floods, and the Malaysia’s economy, including its potential impact on risks posed by such disasters are only expected to financial stability through an assessment of flood risk rise, possibly leading to significant economic damage exposures in the financial sector. and affecting many people and businesses every year. 2.1 Characterizing Flood Risks in Malaysia With its tropical climate, Malaysia has experienced are consistent with national estimates and also indicate high and increasingly frequent rainfall. The average marked increases in precipitation over time. Although a annual precipitation is 3,085.5 millimeters (mm), and the majority of models project an increase in precipitation level of precipitation is relatively constant throughout over time, there is a large uncertainty around precise the year, ranging between 200 mm in June and July point estimates, with significant variation depending and 350 mm in November and December (Figure 2.1, on model assumptions. For example, panel C in panel A).8 Malaysia experiences two monsoon seasons Figure 2.1 shows the heterogeneity in projected between May and September (Southwest Monsoon) changes in the annual distribution of precipitation and November and March (Northeast Monsoon).9 between 2020 and 2099 for two scenarios of varying Between 1951 and 2020, precipitation levels in Malaysia GHG emissions: SSP1-2.6 in which temperatures stay persistently increased (Figure 2.1, panel B). Within 30- below 2°C warming relative to the median 1850-1900, year windows, the average precipitation was 2,698 mm with implied net zero GHG emissions after 2050, and per year during 1951 to 1980. It increased to 2,748 mm SSP2-4.5 which is a scenario approximately in line with during 1971 to 2000, and further to 2,887 mm during the upper end of the world’s aggregated Nationally 1991 to 2020. Determined Contribution GHG emission levels by 2030 and represents temperature warming of around Projections indicate further increases in precipitation 2.7°C during the same period.11 Independently of the in Malaysia. The Ministry of Natural Resources and chosen scenario, projections consistently show an Environmental Sustainability (NRES) estimates an increase in annual precipitation. If not mitigated, higher increase in average annual precipitation between 14 precipitation will expose Malaysia to higher flood and 25 percent and an increase in sea level of about risks, especially flash floods, according to the CCKP 0.7 meters in Malaysia by the end of the 21st century.10 projections. The projected increase in precipitation Projections reported in the Intergovernmental Panel on means that what would historically have been a 1-in- Climate Change (IPCC) Working Group I Atlas and the 100-year flood flow could become a 1-in-50-year or World Bank Climate Change Knowledge Portal (CCKP) 1-in-25-year event in Malaysia. 8 See World Bank’s “Current Climate: Climatology – Malaysia.” 9 The Northeast Monsoon brings heavy rain especially to the states on the east coast of Peninsular Malaysia, west of Sarawak and east of Sabah, while the Southwest Monsoon relatively shows drier weather. The transition period between these two monsoons is known as the inter-monsoon phase. See https://www.met.gov.my/ en/pendidikan/fenomena-cuaca/. 10 See United Nations’ “Flood Management and Climate Change Adaptation in Malaysia.” 11 The projections are based on global climate model compilations of the Coupled Model Inter-Comparison Projects (CMIPs) overseen by the World Climate Research Program. Data is derived from the Sixth phase of the CMIPs, which form the data foundation for IPCC’s Sixth Assessment Report. 32 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia FIGURE 2.1 Precipitation Trends in Malaysia A. Malaysia’s Monthly Climatology of B. Change in the Distribution of Precipitation Min-Temperature, Mean-Temperature, in Malaysia, 1951 – 2020 Max-Temperature & Precipitation, 1991 – 2020 32 °C 480 mm 0.00175 30 °C 400 mm 0.0015 0.00125 28 °C 320 mm Temperature Precipitation Distribution 0.001 26 °C 240 mm 0.00075 24 °C 160 mm 0.0005 22 °C 80 mm 0.00025 20 °C 0 mm 0 2000 2500 3000 3500 n b ar r ay n l g p ct v c Ju Ap No De Ja Ju Fe Au Se O M M Precipitation (mm) Min-Temperature Mean-Temperature Max-Temperature Precipitation 1951-1980 1971-2000 1991-2020 Source: World Bank CCKP Source: World Bank CCKP C. Precipitation Projections according to the World Bank Climate Change Knowledge Portal Projected Change in Distribution, Precipitation, SSP1-2.6 Projected Change in Distribution, Precipitation, SSP2-4.5 Malaysia, Multi-model Ensemble Malaysia, Multi-model Ensemble 0.01 0.012 0.01 0.008 0.008 Distribution Distribution 0.006 0.006 0.004 0.004 0.002 0.002 0 0 2700 2800 2900 3000 2700 2800 2900 3000 Precipitation (mm) Precipitation (mm) Historical Ref Period, 1995-2014 2020-2039 Historical Ref Period, 1995-2014 2020-2039 2040-2059 2060-2079 2040-2059 2060-2079 2080-2099 2080-2099 Source: World Bank CCKP MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 33 CHAPTER 2 – The Economic Impact of Floods in Malaysia Floods have been Malaysia’s most frequent natural large-scale floods per year on average over 2000- disaster, accounting for 85 percent of all natural 2022 (Figure 2.2B). Among countries with more disasters since 2000. According to data from EM- frequent large-scale floods are several Southeast Asian DAT, a global database with information on over economies such as Indonesia, Philippines, Thailand, 26,000 mass disasters from 1900 to the present day, and Viet Nam. Although the frequency of floods in Malaysia has experienced, on average, 1 to 2 large- Malaysia is higher than the average flood occurrence scale flood events per year since 2000, with more globally, the severity of large-scale flood events—as frequent flooding occurring about once every seven measured by the average annual affected population years (Figure 2.2A).12 Large-scale floods have occurred or annual damages—is relatively low compared to more frequently since 2020. Historical records show other countries. Malaysia is ranked 78th, with annual that Malaysia has been more affected by floods than average damages associated with large-scale episodes other natural disasters; other disasters include storms of 0.13 percent of GDP during this period and 0.19 (7 percent of all disasters) and landslides (6 percent). percent of the total population affected by such Data from EM-DAT also reveals that floods constitute events. The countries with the most severe damages the most significant source of economic damage, faced losses averaging over 2 percent of GDP. In most affecting the greatest number of people compared to countries, large-scale floods tend to be low-frequency, other natural disasters in Malaysia. For example, the high-severity events. In recent years, the most severe EM-DAT database shows that in 2021 alone there were large-scale flood events occurred at the end of 2021 eight large-scale flood events, affecting about 165,000 and the beginning of 2022 and resulted in RM6.1 billion people in Malaysia.13 (about $1.35 billion) in losses, equivalent to 0.4 percent of Malaysia’s GDP. Box 2.1 provides a brief discussion Compared with other countries around the world, of the 2021-22 Floods, and Box 2.2 discusses the Malaysia experiences relatively frequent but not institutional arrangements regarding the emergency necessarily severe floods. Malaysia ranks 12th in high response and relief efforts by the public sector in frequency of floods from 174 economies included in Malaysia. the EM-DAT database, with slightly more than two FIGURE 2.2 Frequency and Severity of Floods in Malaysia A. Over time B. Across Countries, Average Annual Damages 10% No. of flood events (RHS) Affected people (% population) (LHS) Damages (% GDP) (LHS) 9% Avg. Annual Damages (% of GDP) 0.8% 9 8% 0.7% 8 7% Severity of Floods 7 No. of Flood Events 0.6% 6% Impact of Floods 6 0.5% 5% 5 0.4% 4% 4 0.3% 3% 3 0.2% 2 2% 0.1% 1 1% 0.0% 0 Malaysia 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 2 4 6 8 10 Frequency of Floods No. of Events per Year Source: EM-DAT database, downloaded in May 2023. Source: EM-DAT database, downloaded in May 2023. 12 EM-DAT is the International Disaster Database, compile by the Centre for Research on the Epidemiology of Disasters (CRED). The database is compiled from various sources, including UN agencies, nongovernmental organizations, re-insurance companies, research institutes, and press agencies. The CRED distributes the data in open access for non-commercial use. The database includes mass disasters with at least ten deaths (including dead and missing), at least 100 affected (people affected, injured, or homeless), or events with a call for international assistance or an emergency declaration. Less severe events are not included in the database. More details are available at https://www.emdat.be/. 13 Internal displacement refers to the forced movement of people within the country they live in. The Internal Displacement Monitoring Centre shows that 129,000 people were internally displaced by the end of 2021 due to floods. See https://www.internal-displacement.org/countries/malaysia/#displacement-data. 34 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia BOX 2.1 The Macroeconomic Impact and Response on Flood in 2021 In December 2021, Malaysia experienced 1-in-100- The government revived the National Security Council year rainfalls, which resulted in disastrous flooding (MKN) to coordinate relief efforts and flood relief events across many parts of the country and caused packages in response to the disaster.15 In addition, significant economic losses, almost 50 deaths, and Bank Negara Malaysia established the Disaster the evacuation of about 400,000 people. The floods Relief Facility with RM500 million ($110 million) to affected 11 states—Kuala Lumpur, Selangor, Pahang, alleviate the financial burden of micro, small, and Kelantan, Terengganu, Perak, Johor, Negeri Sembilan, medium enterprises (MSMEs) affected by the floods. Melaka, Sabah and Sarawak.14 One of the worst affected Additionally, several financial institutions offered loan areas in Selangor, Taman Sri Muda, experienced moratoriums on housing or property financing, car floodwaters reaching four meters in depth, causing up financing, credit cards, and personal financing of up to to 95 percent of the area to be under water. Many roads six months to flood victims.16 leading to the flood areas were submerged, making evacuations and assistance by government agencies About a third of the losses, equivalent to RM2.2 billion challenging. ($490 million), were covered by insurance. About 82 percent of the gross insured losses were from the Losses were widespread. According to estimates by commercial sector, mainly from large corporates with the Department of Statistics Malaysia (DOSM), losses high insurance coverage for commercial premises. to business premises amounted to RM0.5 billion ($110 Residential homes accounted for another 11 percent of million), manufacturing plants suffered losses estimated the insured losses. The 2021 flood events led to the at RM0.9 billion ($200 million), and the agriculture sector largest claim payout in Malaysia’s insurance and takaful had losses of about RM90 million ($20 million). Selangor industry for flood events in the past decade.17 Despite was the worst affected state, with the highest losses on the large payout, the losses incurred by insurers and manufacturing sector assets at RM884.5 million ($197 takaful operators (ITOs) did not pose risks for the million) and business premises at RM396.4 million ($88 industry because ITOs had sufficient liquidity and part million), especially in the Petaling and Klang districts. of the risks had been transferred to re-insurance/re- takaful operators. 14 See DOSM (2022). 15 See Rahman (2022). 16 See New Straits Times (2021a). 17 See Bank Negara Malaysia. (2022b). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 35 CHAPTER 2 – The Economic Impact of Floods in Malaysia BOX 2.2 Institutional Arrangements in the Management of Flood Risks in Malaysia The Government of Malaysia plays a vital role in DID also develops structural and non-structural flood prevention and preparedness for flood risks through mitigation measures and manages flood management budget allocations and resource mobilization. For systems such as the Stormwater Management and Road example, the federal government has initiated several Tunnel (SMART Tunnel) in Kuala Lumpur, flood control flood mitigation projects nationwide and has announced dams, river bunding, land use zoning, restriction of an allocation of RM22 billion ($4.9 billion) during 2022- development, and resettlement of population.23,24 For 2025 in the 12th Malaysia Plan toward such projects example, when the water flow in the Klang River reaches as part of a long-term strategy to adapt to climate a certain threshold, DID activates the SMART Tunnel to change since the 2021 flood disaster.18 For 2024, the divert large volumes of water to prevent floods.25 government allocated a budget of RM11.8 billion ($2.6 billion) for 33 flood mitigation projects.19 The flood There are several agencies involved in the deployment mitigation projects comprise nature-based solutions, of early warning systems. NADMA provides early structural measures to mitigate river and flash floods, warning systems through media and short-messaging and non-structural measures, including upgrading systems to the public in affected areas, supported by the national weather forecast and flood warning forward-looking data provided by agencies such as the systems.20 Federal budget has also been allocated Malaysian Meteorological Department (MetMalaysia), to various agencies, such as the National Disaster DID and the Public Works Department.26 MetMalaysia, Management Agency (NADMA) and the Malaysian an agency under the Ministry of Natural Resources and Armed Forces, to improve preparedness and provide Environmental Sustainability (NRES), is responsible flood relief assistance. Some of the projects have been for providing weather forecasts and warnings on completed—for example, as of August 2023, 25 out of thunderstorms and heavy rain based on continuous 85 flood mitigation projects in Selangor worth RM1.1 monitoring of atmospheric patterns, including rainfall, billion (about $245 million) had been completed.21 In wind direction, and speed. MetMalaysia issues an addition to the allocation by the federal government, alert with ‘Alert,’ ‘Severe,’ and ‘Danger’ categories to the Selangor state government allocated RM615.1 indicate the amount of rainfall within a specific period 27 million ($137 million) for the Department of Irrigation to gauge the severity of thunderstorms and rainfall. and Drainage (DID) to implement 73 flood mitigation This information helps state governments, the federal projects by 2025, while the Shah Alam City Council government, NADMA, and the public prepare for allocated about RM300 million ($67 million) to upgrade potential floods and other disasters. DID, a department drains and water pumps over the next five years.22 under NRES, also provides warnings of river floods based on hydrological data, such as river water flow DID conducts studies on river basins to help identify and the amount of rainfall that feeds into rivers, using riverine flood mitigation projects in flood-prone areas. flood forecasting models. 18 See Ministry of Finance (2022). 19 See The Star (2023). 20 See United Nations’ “Flood Management and Climate Change Adaptation in Malaysia.” 21 See Malay Mail (2023). 22 See Bernama (2023). 23 Bunding of rivers prevents overtopping and flooding of the low-lying adjacent areas. 24 See Department of Irrigation and Drainage’s “Managing the Flood Problem in Malaysia.” 25 See https://smarttunnel.com.my/operational-modes/. 26 See NADMA (2022). 27 See MetMalaysia’s “Continuous Rain Warning Issuance Criteria.” 36 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia Emergency response and disaster relief operations (CDMRC), chaired by the Deputy Prime Minister at associated with floods are managed as a the federal level; the State Disaster Management and collaborative effort involving the federal and Relief Committee (SDMRC), chaired by the secretary of state governments, government agencies such as state; and the District Disaster Management and Relief NADMA, the Malaysian Armed Forces, and social Committee, chaired by the district officer.29 organizations. Disaster risks, including flood disasters in Malaysia, are managed by the National Disaster Relief Overall, adaptation, preparedness, and emergency Committee, chaired by the Prime Minister and with the response involve a complex set of actors, and National Security Council (MKN) as the secretariat. responsibilities seem to overlap across different The Committee is empowered to declare a state of public sector entities, which can lead to uncertainty disaster to obtain financial assistance from the federal and hamper actions by the private sector. Such government for flood disaster relief efforts, subject to a complex environment, especially for ex-post the Prime Minister’s approval. It is also empowered emergency response and disaster relief, can be prone to mobilize additional resources for relief operations. to coordination failures, especially when actions are Members of the Committee include government not closely coordinated across the different actors. In agencies, such as NADMA, and social organizations, the context of unclear allocation of responsibilities, which provide shelter, rescue, and food supplies businesses in a high-risk flood zone may assume during disasters.28 NADMA, an agency under the Prime that different flood management actions are the Minister’s Department, manages and coordinates responsibility of the local or national government, so flood relief efforts. NADMA is managed by three they do not need to make their investments to reduce committees at the federal, state, and district levels: the risks or adapt to climate change. These issues are Centre for Disaster Management and Relief Committee further discussed in Chapter 5. 28 See Department of Irrigation and Drainage’s “Managing the Flood Problem in Malaysia.” 29 See New Straits Times (2019). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 37 CHAPTER 2 – The Economic Impact of Floods in Malaysia The East Coast and the South of Peninsular In recent years, major cities, such as Kuala Lumpur and Malaysia are geographical regions that experience Kuching, and the state of Penang, have experienced more frequent floods associated with the year-end more frequent flash floods. Rapid urban development, Northeast Monsoon season exposures. According which contributed to insufficient drainage capacity and to EM-DAT, the East Coast of Peninsular Malaysia deforestation, has resulted in an increased frequency of experienced mainly severe riverine floods (i.e., fluvial floods in these cities.31 Climate change has also made it floods) over the last 20 years (Figure 2.3, panel A). more challenging to predict floods with a high level of In contrast, the rest of Peninsular Malaysia and some accuracy due to the great uncertainty in the underlying coastal cities in Sabah and Sarawak states have weather patterns. Based on the SwissRe CatNet Map experienced primarily severe pluvial floods (i.e., flash flood hazard maps, there is a higher probability (1-in- floods) (Figure 2.3, panel B). The maps of flood-prone 50-year event) of flash floods occurring in higher GDP areas published by the Department of Irrigation and areas based on property values such as Klang Valley, Drainage (DID), which covers only riverine floods, Alor Setar, Kota Bahru, Kuantan, and Batu Pahat (see indicate similar patterns (Figure 2.3, panels C and D).30 Figure 2.4). FIGURE 2.3 Floods across Regions in Malaysia A. Severe Riverine Flood Events, 2000-2022 B. Severe Flash Flood (Pluvial) Events, 2000-2022 0 to 4 0 to 2 5 to 7 3 to 3 8 to 11 4 to 5 Source: EM-DAT database, downloaded in May 2023. Source: EM-DAT database, downloaded in May 2023. C. Riverine Flood-Prone Areas in Peninsular Malaysia D. Riverine Flood-Prone Areas in East Malaysia Source: DID. Source: DID. 30 See Department of Irrigation and Drainage’s “Flood Management – Programme and Activities.” 31 Department of Irrigation and Drainage. (n.d.). Managing the Flood Problem in Malaysia. https://www.water.gov.my/jps/resources/auto%20download%20 images/584130f6ea786.pdf 38 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia FIGURE 2.4 Flood Hazards in Peninsular Malaysia A. Probability of Fluvial Floods and GDP-based Property Values in Peninsular Malaysia B. Probability of Pluvial Floods and GDP-based Property Values in Peninsular Malaysia C. Probability of Pluvial Floods and GDP-based Property Values in the Klang Valley Source: Swiss Re CatNet Maps. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 39 CHAPTER 2 – The Economic Impact of Floods in Malaysia 2.2 The Macroeconomic Impact of Floods 2.2.1 The Modeling Approach The rest of this chapter presents estimates of the effects in Malaysia. The length of future flood spells macroeconomic impact of future floods in Malaysia. assumed for these estimates is based on historical The analysis is based on a two-stage input-output model averages, with no increases assumed within the analysis which links different data sources on physical risks and window. Estimates of the (average and total) time for economic information. The modeling approach can be economic production to recover from floods are based interpreted as a simulation tool, allowing us to explore on the approach of Tanoue et al. (2020). the impacts of floods of different return periods and the effects of adaptation efforts by the private sector. The second stage of the analysis is based on the MINDSET model, in which the results of the first stage The first stage of the model is a mapping exercise. described above are used to estimate the aggregate This exercise explores hazard data on floods economic impact of floods at the sectoral level. The (measured at granular geographical units) and a spatial different results from the first stage are combined with representation of current and expected future assets flood risk projections, allowing us to calculate each exposed to flood risks in Malaysia. The primary data sector’s total expected annual production losses based source for this analysis is the 2016 flood risk maps on expected flood risks. Such losses are then fed into from the Fathom database, a proprietary database the MINDSET macroeconomic model (see Box 2.3 for of flood risk maps widely used for research on flood details). MINDSET estimates the supply chain effects risks worldwide.32 This mapping exercise provides from losses of demand to estimate the whole economy, estimates of the share of assets at risk for the year 2030 aggregate impacts of floods in Malaysia. The aggregate in Malaysia, shown separately by economic sectors (see impacts capture both direct and indirect impacts. The Section 2.2.3). The estimates are based on expected model also provides estimates of employment losses development patterns and potential climate change by sector, occupation, and gender. 32 Similar analyses as those presented in this chapter were conducted based on flood risk maps from the JBA database. Despite different methodologies, flood map resolutions, and projection scenarios, the analysis yielded quantitatively similar aggregate results. There were, however, some variations in the sectoral and geographical assessments. BOX 2.3 The MINDSET Model The World Bank has developed MINDSET, an input-output uses the GLORIA multi-regional input-output database model designed to estimate the socio-economic impacts of (see Lenzen et al., 2017 and 2021). The estimations in this climate shocks and the climate policy responses. The acronym chapter only consider flood impacts on Malaysia. They do stands for Model of Innovation in Dynamic Low-Carbon not take into account potential cross-border linkages. Structural Economic and Employment Transformations. The MINDSET model allows us to disaggregate the effects of It is important to note that MINDSET is a non-equilibrium climate change by impact channel. One important channel model, and as such, it is particularly well-suited to assess for the analysis is the impact of floods, capturing both direct the short-term impacts of floods and other sudden and indirect effects. economic shocks without giving the economy time to adjust to a new equilibrium outcome.33 The model MINDSET covers the whole economy, with information estimates for flood events represent both the effects disaggregated at the sectoral level, and with 120 sectors of lost factors of production (e.g., factories unable to in the analysis for Malaysia. The sectoral analysis is linked operate) and the effects of disruption that prevent markets to detailed labor-market dynamics calculated from from matching demand and supply (hence, achieving microeconomic data. The current version of MINDSET equilibrium outcomes). 33 MINDSET is a demand-driven macroeconomic model. In its current version, there are no supply-side constraints as the model assumes that there is always spare capacity available to raise production levels if effective demand increases. The approach is therefore complementary to a general equilibrium model. 40 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia 2.2.2 Scenarios The scenarios are designed as “what-if” possibilities the economy in Malaysia. The results show that floods and do not explicitly predict when floods will occur. The are one of the most important channels of impact, as analysis estimates the direct impact of a 1-in-20-year described further below. However, it is not the only one flood on physical assets in Malaysia. That is, a flood and the estimations consider these other channels, as event that has a five percent probability of occurring outlined in Table 2.1. One such channel works through on any given year. Between 2024 and 2030, the 1-in-20 impacts on agricultural yields and prices (World Bank, odds translate into a 30 percent probability that such 2016). A loss of yield for Malaysian agricultural producers flood event will occur. While the results presented in this can be largely mitigated by the higher prices farmers chapter consider this baseline probability, robustness would receive on global markets, partly because other assessments were conducted for more severe events, countries would also see losses of yields due to climate such as 1-in-50-year and 1-in-100-year floods. change impacts. This impact on food prices further affects households that experience losses in real The baseline estimates consider two scenarios, with incomes. Another impact channel is through declines robustness assessments in Section 2.2.6. The two in labor productivity because of heat stress effects, scenarios considered are as follows: (i) Scenario 1 though this channel is independent of any impacts considers a hypothetical 1-in-20-year flood; and (ii) from floods. Lastly, the model also considers potential Scenario 2 considers a hypothetical 1-in-20-year flood, losses of revenues from a combination of infrastructure with the adoption of additional adaptation measures. damages and diversion of tourism flows to countries The scenarios include a range of other channels with cooler climates. through which climate change, more broadly, can affect TABLE 2.1 Estimates of Climate Impacts Impact Channel Quantification in the Model Data Sources Flood Damages 1-in-20-year flood Derived from the Fathom database A small increase in revenues (0.04% Agriculture (farmers) World Bank (2016) of GDP) due to higher prices Loss of real incomes because of World Bank staff estimates based Agriculture (consumers) higher food prices (2% of GDP) on World Bank (2016) Reduced labor productivity 1.7% in all sectors NGFS analysis Loss of tourism 4.5% of output in hospitality World Bank staff estimates 2.2.3 The Direct Impacts of Floods The conceptual framework outlined in Chapter 1 analysis focuses on the sectors that use the different can shed light on the mechanisms underlying the assets rather than the type of asset per se. In this way, estimations of the direct impact of floods. These the analysis relates the direct impacts of the floods to estimates consider Scenario 1, in which a 1-in-20-year production losses. In the baseline estimates, there are flood takes place, hypothetically. In the context of the no actions related to vulnerabilities. That is, the baseline framework presented in Chapter 1, this would be the scenario does not consider the impact of additional hazard adopted in the estimations. The key metric for adaptation measures, such as new investments for flood assessing the direct macroeconomic impacts of floods resilience infrastructure between now and 2030, for is the proportion of assets exposed to flood events calculating the impact of floods on aggregate output because this determines the extent of potential losses and employment. The role of adaptation investments in economic production. This would be equivalent will be explored in the following scenario. to the exposure in the conceptual framework. The MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 41 CHAPTER 2 – The Economic Impact of Floods in Malaysia The results show marked variation across sectors not allow quantifying specific effects working through in the extent to which assets are exposed to flood disruptions in transportation networks. While exposed risks, with significantly greater exposures in the assets in agriculture and transport cover around 30 agriculture and transport sectors (Table 2.2). The percent of the total assets of these sectors, exposures largest exposures are estimated to be on transport are significantly lower in all other sectors, estimated at and agricultural assets, reflecting their diffuse nature. between seven and 10 percent of total assets. Because The loss of essential transport linkages when floods of the larger size of these other sectors in absolute terms, occur is worth special consideration because it can be especially the services and industrial sectors, aggregate an important factor exacerbating the direct economic exposed assets can be sizable. The average estimated impacts of the flood (see Section 2.2.6 below). Transport depth of the potential flooding across different sectors linkages may also be critical in relief operations and is also substantial, suggesting that widespread damages the early stages of clean-up and repairing damaged would be likely. Notably, these sectoral estimates display capital. It is worth emphasizing, that the methodology a high degree of uncertainty, and quantitative results adopted in this chapter is not well-suited to identifying may vary depending on the resolution of underlying specific vulnerabilities in Malaysia. Consequently, it does flood risk maps and projection scenarios. TABLE 2.2 Estimated Asset Exposures to a 1-in-20-year Flood Event Share of Assets Exposed to Average Depth of Flooding for Sectors Flooding (%) Exposed Assets (meters) Services 8.7 2.0 Retail 9.6 1.6 Health 8.8 1.3 Industry 7.1 1.3 Education 8.6 2.4 Tourism 7.9 4.3 Transportation 32.1 2.3 Agriculture 28.6 3.9 2.2.4 Estimating Aggregate Impacts The estimates show that floods are the main channel with a theoretical 1-in-20-year flood in 2030 estimated through which climate change can lead to production at up to 4.1 percent of GDP.35 losses in Malaysia by 2030, with flood-related losses estimated at up to 4.1 percent of GDP. The total impact Floods are the largest source of climate change of climate change on output, as outlined in Scenario 1 impact across most sectors of the economy. The (flood event, without adaptation measures), is estimated impact of floods on the assets of mining and quarrying, to be a loss of around 9 percent by 2030 (Figure 2.5).34 and services sectors account for about 53 percent of The impacts from floods are estimated to be slightly the estimated total losses for these sectors. Production less than half, at up to 4 percent in total output losses losses associated with floods are also significant by 2030. Because intermediate demand of different for the agriculture and the manufacturing sectors, sectors does not directly accrue in GDP, output losses representing 46 percent and 38 percent, respectively, tend to be larger than GDP losses. Total GDP losses of the estimated aggregate losses associated with associated with climate change are estimated at 8.4 climate change in these sectors. In relative terms, percent. Floods account for almost half of the total the losses of the agriculture sector account for 11.5 climate-related impacts, with total losses associated percent of the total output losses in Malaysia, whereas 34 For robustness, we conducted a similar analysis considering in Scenario 1 more severe floods. When Scenario 1 considered a 1-in-50-year flood instead of a 1-in- 20-year flood event, the total output loss associated is estimated at 20 percent. For a scenario considering a 1-in-100-year flood event, the estimations show a total output loss of 23 percent. 35 These results consider both direct losses from floods (such as damages to physical assets) and indirect losses (such as losses in revenues due to business disruptions). The results however do not consider reconstruction and rebuilding efforts which would likely moderate impacts on output and GDP. 42 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia together the manufacturing and service sectors sectors. The manufacturing and services sectors are account for more than 82 percent of the output losses also impacted by climate change effects with losses in due to floods, largely due to their relative size (see labor productivity and, to a lesser extent, losses from Box 2.4 for a discussion of these effects). The impact higher food prices. The former accounts for about 25 of floods on the assets of the transport sector account percent of the total estimated losses for these sectors, for about 73 percent of the estimated total losses for arguably because of the relatively high labor intensity the sector. While the direct impact on the transport of production. Higher food prices have a marked direct sector is relatively small, at less than 10 percent of effect on the food production industry, in part due to the total losses due to floods, all other sectors may higher input costs. This channel also accounts for a be indirectly impacted by disruptions in transport significant share of the output losses in the agriculture services, as discussed above. Similar effects can occur sector in Malaysia. The tourism channel and spillover for utilities and other services. These sectors account effects channel, such as those associated with foregone for a small fraction of total output losses, but lack of investments, are estimated to have more subdued access to power, water, sewage services, and other impacts on aggregate output. utilities could substantially impact production in other FIGURE 2.5 Climate Change Impacts on Output Agriculture Mining and Quarrying Construction Manufacturing (incl. agro-based) Services 0% -1% -2% -3% Output Change (%) -4% -5% -6% -7% -8% -9% -10% Labor Flood Tourism Food Prices Adaptation Spillover Total Impact Productivity Damages Investments Effects BOX 2.4 Production Shares in Malaysia The 120 sectors used to estimate the MINDSET model Other Agriculture are aggregated into seven broad sectors to simplify services 5% Food the interpretation of the results. However, as the chart 33% shows, these sectors have different weights in total Hospitality 8% output for Malaysia. The industry and services sectors (tourism) account for over three-quarters of the total output. 3% The estimation results discussed in the main text Construction reflect these relative weights, where sectors with larger Industry weights account for a larger share of the impact of Transportation (Excl. food) floods on total production and employment. 3% 43% MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 43 CHAPTER 2 – The Economic Impact of Floods in Malaysia The model also allows us to estimate the impact of on output yields some rough estimates. Such a “back floods on employment by occupation and gender. 36 of the envelope” calculation suggests that a 1-in-20- The results are similar to those for output impacts. Flood year flood could account for up to 318,000 impacted risks are primary source of risks for employment when jobs by 2030, or up to a 2.2 percentage point increase compared to the other channels through which climate in Malaysia’s overall unemployment rate. The most change could impact jobs in Malaysia. The model significant impact on employment would occur in the estimates that up to 685,000 jobs would be affected, agriculture sector, with estimates of nearly 10 percent possibly lost, due to overall climate change effects. impacted jobs directly resulting from floods (Figure 2.6, Assuming a baseline unemployment rate of 3.7 percent, panel A). More than 6 percent of jobs in elementary this could lead to up to a 4.4 percentage point increase occupations, once again linked to agriculture and in Malaysia’s unemployment rate.37 Although the model transport, are also estimated to be impacted by floods. does not yield a specific estimate of job losses due to Because of the higher weight of labor in agriculture in floods, assuming that the relative impact of floods (vis- Malaysia, male employment is affected slightly more à-vis other channels) on jobs would be similar to that than female employment under Scenario 1. FIGURE 2.6 Impact of Floods on Employment A. By Occupation (% from baseline) B. By Gender (% from baseline) Managers Professional Male Technicians Clerical support Service and sales Skilled agricultural Craft workers Female Machine operators Elementary occs. -10 -8 -6 -4 -2 0 -6 -4 -2 0 Impact on Employment (%) Impact on Employment (%) It is important to note that the model is not designed for example, associated with financial instability or to capture indirect effects associated with the disruptions in the provision of financial services, would financial sector. The financial sector itself is included in need to be estimated through a different model, “services” in Figure 2.5. However, the current estimates specifically designed to capture such effects from through MINDSET do not capture the indirect effects financial sector portfolio exposure levels. Box 2.5 associated with disruptions in the financial sector. The provides an assessment of banking system exposures estimates only capture actual production losses, such to floods. as damages to office premises. Financial linkages, 36 The MINDSET results for the impact of climate change on employment are based on output-employment elasticities observed in the GLORIA multi-regional input-output database, calculated at the sector-country level. These elasticities capture how employment would change in each sector in response to production losses. One important caveat for the analysis in this chapter is that the elasticities are calculated from historical data based on permanent changes in output. In the case of flood impacts, output changes are likely to be more transitory. The statistics reported can thus be interpreted as the number of workers affected by floods. To the extent that the effects linger and become more permanent, impacted jobs would translate into job losses. 37 Robustness analysis considering more severe floods yield larger increases in unemployment. When Scenario 1 considered 1-in-50-year and 1-in-100-year flood events, the estimations show that the impact of floods on jobs could lead to an increase in the unemployment rate of up to 8.7 and 10 percent, respectively. 44 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia BOX 2.5 Banking System Exposures to Floods As discussed above, the estimations show that Malaysia is Figure B2.1, panel B, shows the results of such estimations. expected to suffer up to 4 percent in total output losses Because of its large relative size in the banking system by 2030, based on the impact of a theoretical 1-in-20-year loan portfolio, 44 percent of the total potential losses flood. A “back-of-the-envelope” calculation, exploring the would occur in the services sector (Figure B2.1, panel A). sectoral impact of floods estimated through MINDSET, However, the proportion of loans for the service sector sheds light on the distribution of potential losses for the potentially impacted by floods is relatively low at 3 percent banking system from such a flood event by 2030. (Figure B2.1, panel B). In contrast, the agriculture sector To estimate the potential impact of floods in the banking would account for 12 percent of total potential losses, but sector, the estimated impact on gross output (i.e., 4 the sectoral share of impacted loans would be higher at percent) is applied to total outstanding bank loans. The 11 percent. composition of bank loans across sectors that could be impacted in this scenario is shown in Figure B2.1, panel This represents a conservative estimate of the impact A. Figure 2.5 above shows the differentiated impact of of floods given the lack of granular data. BNM intends floods across sectors. These losses are then distributed to refine its methodology for the computation of flood- across sectors according to the sectoral impact of floods related impacts to provide greater precision and estimated through MINDSET (reported in Figure 2.5). granularity in future estimations. FIGURE B2.1 Estimated Potential Exposure Losses in the Banking System A. Banking System Loan Portfolio and Potential Exposure Losses 900,000 Services 800,000 700,000 Manufacturing RM Million 600,000 (incl. agro-based) 567,503 500,000 96% Construction 400,000 Not affected 300,000 Mining and 131,180 Quarrying 200,000 100,000 102,589 Agriculture 10,055 - 35,056 Composition of Bank Loans Absolute Sectoral Exposure Losses B. Sectoral Exposure Losses Absolute Losses Relative Sectoral Exposure Losses (% of total banking system loans) (% of bank loans to the sector) 4.5% 12% 11% 4.0% Services 10% 10% 10% 3.5% 1.8% Manufacturing 8% 3.0% (incl. agro-based) 2.5% 6% Construction 2.0% 4% 1.5% 1.6% Mining and 3% Quarrying 2% 1.0% 1% 0.1% 0.5% 0.1% 0% Agriculture 0.5% Agriculture Mining Construction Manufacturing Services 0.0% and Quarrying (including agro-based) Source: Calculations based on the MINDSET estimations and the aggregate banking system loan portfolio as of December 2023. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 45 CHAPTER 2 – The Economic Impact of Floods in Malaysia 2.2.5 The Role of Climate Adaptation Measures in Reducing Flood Damages The estimations based on Scenario 2 assume that implemented. Within the context of the analysis in this Malaysia will undertake climate adaptation measures. chapter, the estimates should be interpreted as an upper In the simulations, the impact of adaptation measures bound for the potential benefits of adaptation measures. is only applied to losses associated with floods. As described in a World Bank report (World Bank, 2017), The overall cost of adaptation measures for managing the potential climate adaptation measures include flood risks is estimated to cost around 0.2 percent improvements to land use planning, enforced building of annual GDP. 38 In the estimations, these costs are standards and norms, more resilient infrastructure, assumed to be funded by increased taxes. It is important and improvements to natural ecosystems. Early to note that global experience reveals that some of warning systems can also play a role in mitigating the most impactful adaptation measures are “softer” losses because they allow businesses and households in nature, which would have little cost compared to to prepare for the impact of floods (further discussed new infrastructure investments (such as the building in Chapter 5). World Bank (2017) notes that land use of flood walls). The measures considered in these planning improvements could be especially effective at estimates would cover only new infrastructure and do reducing the impacts of floods and, as a result, could not consider the needed investments to adapt existing be particularly relevant to Malaysia. assets. For instance, land use planning would apply only to new infrastructure. In practice, the adaptation However, the lack of detailed information on a measures considered here must be complemented specific set of adaptation measures for flood risks with investments to improve the resilience of existing in Malaysia constrains the scope of the analysis areas and assets at risk from floods. Such investments presented in this section and warrants some would lead to further reductions in potential damages; caution when interpreting these results. The lack of although the adopted framework here is unable to information arguably reflects the lack of an integrated, estimate their overall impact. A more in-depth study of coordinated approach to the management of flood the cost-benefits of potential adaptation measures in risks in the country, as briefly discussed above. To Malaysia is left for future research. overcome this challenge, while still providing relevant evidence for policy making, the analysis in this section Such adaptation investments could reduce the explores regional and global data of a similar nature. In economic impact of floods by more than 40 percent, as other words, the data on adaptation measures, a critical shown in Figure 2.7. Losses associated with a theoretical input for the estimations, are not specific to individual 1-in-20-year flood in 2030 are estimated to cost up 2.3 projects in Malaysia. They entail to a large extent percent of GDP, compared to up to 4.1 percent in the measures that are softer in nature, such as preventing absence of adaptation efforts. By assumption, these new construction in flood-prone areas. adaptation measures effectively reduce only the losses from flood events. For instance, the total production The modeled scenario assumes that there is effective losses associated with climate change are reduced by implementation of these hypothetical adaptation around two percentage points from implementing such measures. That is, for the full benefits to be realized, adaptation measures to about 7 percent of output (or all adaptation measures would need to be fully 6.4 percent of GDP). 38 World Bank (2010) provided an estimate for the average costs for adaptation investments across emerging economies and developing countries at 0.2 percent of annual GDP. 46 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia FIGURE 2.7 Climate Change Impacts on Output Conditional on the Implementation of Adaptation Measures Agriculture Mining and Quarrying Construction Manufacturing (incl. agro-based) Services 0.0% -1.0% -2.0% Output Change (%) -3.0% -4.0% -5.0% -6.0% -7.0% -8.0% Labor Flood Tourism Food Prices Adaptation Spillover Total Impact Productivity Damages Investments Effects 2.2.6 The Role of Private Sector Resilience It is important to emphasize that the analysis Following a similar example, if floods prevent the reported in this chapter is subject to significant production of car engines, they could lead to reduced uncertainty. Estimations need to consider complex production of cars, which in turn would affect other interactions between economic development and businesses, including some that provide inputs into the climate change, especially floods. These interactions production of car engines. In this section, the analysis are subject to high uncertainty, and dependent on introduces such indirect, downstream supply chain policies (not only Malaysia’s national policies, but also linkages to shed light on the potential macroeconomic global policies). This section explores the primary consequences of floods. sources of uncertainties underlying the estimates to assess the robustness of the findings. These indirect supply chain effects were excluded from the previous estimates due the high uncertainty and One source of uncertainty relates to complex supply complexity in mapping them out. If a supplier is hit by chain linkages. The MINDSET analysis in previous floods that disrupt production, businesses could switch sections includes direct demand-side effects, for suppliers, possibly turn to imports, or use a substitute instance through upstream supply chain linkages. For product (depending on the specificity and availability example, if floods disrupt car production, then providers of the needed inputs). In addition, some inputs may of engines and other car parts will see production not be critical or time-dependent (for example, delays and potential losses as well. However, they marketing activities). For other, perhaps more critical excluded indirect, downstream supply-side economic inputs, businesses may keep reserve buffer stocks effects which can cause cascading economic impacts.39 to compensate precisely for losses or disruptions of 39 The microchip shortage in 2021 showed that the knock-on effects from a loss of access to inputs can be substantial. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 47 CHAPTER 2 – The Economic Impact of Floods in Malaysia supply.40 The impact can also be sizable when critical for less severe events, but it has a more limited role utility services are considered. For instance, lack of during severe floods. Figure 2.8 presents the estimated access to electricity could halt production in almost production losses from a 1-in-20-year and a 1-in-50- all businesses that do not have backup generators, year flood event in Malaysia, conditional on different arguably impacting smaller businesses more severely. degrees of supply chain flexibility. The assumptions about the length of floods remain the same as those To account for these knock-on supply chain effects, the in the analysis presented in the previous sections. The results in this section present estimates conditional on the degree of supply chain flexibility. This section estimates here also do not include the adoption of presents estimates of the impacts under a range of adaptation measures. The additional knock-on supply scenarios of business preparation and supply chain chain effects lead to significantly higher impacts on resilience as measured by the amount of stock held by output than previously reported in Section 2.2.4. businesses. The flexibility in supply chains is thus measured Nonetheless, maintaining supply chain flexibility can as the number of weeks each business can withstand a offset the damaging impacts of floods by more than loss of material inputs while still producing as usual. half, reducing the potential losses of production from 8 percent to about 3 percent. The full impact of the The estimates also consider more variations in the 1-in-50-year flood would be even more damaging, intensity and frequency of floods. The analysis here with losses of production estimated to be around 13 considers flood events as being more severe than the percent. For a flood event this severe, the offsetting 1-in-20-year events covered in previous sections. The role of supply chain flexibility is muted due to more analysis here distinguishes between floods that last for widespread impact of flooding across supply chains— more extended periods or take longer to rebuild from (for instance, due to the speed at which floods happen). businesses would be either directly impacted by floods or would face a decline in demand for their products The results show that supply chain resilience can from widespread economic disruptions, regardless of mitigate the impact of floods by more than 50 percent whether they can maintain production levels. FIGURE 2.8 Impacts of Floods on Output 1-in-20-year ood 1-in-50-year ood 0% -1% -2% -3% -4% -5% Production Losses -6% -7% -8% -9% -10% -11% -12% -13% -14% 0 0.6 1.2 1.8 2.4 3 3.6 4.2 4.8 5.4 6 Supply Chain Flexiblility No. of weeks rms can operate without inputs The estimates vary significantly depending on the than 17 percent in output losses when floods last twice length of floods. Figure 2.9 shows variants of a 1-in- as long as those in the baseline estimates. The effects 20-year flood along their duration spells, considering are non-linear due to the offsetting supply chain coping floods of very short duration to floods that last twice mechanisms. For shorter floods, damages can be as long. The solid line in the figure for 1-in-20-year reduced to direct impact with supply chain resilience flood matches the estimates depicted in Figure 2.8. measures offsetting any knock-on effects. However, the Considering floods of the same severity (1-in-20-year negative impact on output can be significantly larger event), the range of impacts goes from virtually no for longer floods, with longer recovery times, due to impact when floods have very short duration to more cascading effects across various economic sectors. 40 See, for example, Pichler et al. (2020) and Colon et al. (2021). 48 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia The simulations suggest that the effects of longer 90 percent of the losses in aggregate output occur floods can be larger than the effects of more severe, during the recovery phase rather than during the but shorter duration floods. The main reason behind flood itself. The main factors underlying output losses this differential relates to indirect effects through are post-flood disruptions, for example, due to water supply chains. During severe floods, many of the damages or interruptions in supply chains. This effect indirectly impacted businesses are likely to also be is further discussed and validated at the micro level in directly affected by the floods. In comparison, longer Chapter 3 based on a granular business-level survey floods imply extended disruption periods, further analysis. Although not explicitly modeled, it would be delaying recovery and rebuilding efforts. However, reasonable to expect that more severe floods would caution is warranted for this finding as it partly reflects also have an extended recovery period, leading to an assumptions from the modeling framework. About increase in the estimated value of output losses. FIGURE 2.9 Impacts of Longer Floods on Output 0% Shorter duration -2% 1-in-20-year ood event -4% Production Losses -6% -8% -10% Lasts twice as long -12% -14% -16% -18% 0 0.6 1.2 1.8 2.4 3 3.6 4.2 4.8 5.4 6 Supply Chain Flexibility No. of Weeks Businesses Can Operate without Inputs Lastly, the model is assessed against the December growth rate in the following quarter when considering 2021 floods in Malaysia. A comparison of model seasonally adjusted statistics. These patterns suggest simulations with historical data is not straightforward. a reduction of about two percent in total production First, a judgment call is needed to assess how well a in the first quarter of 2022, largely due to the impact specific historical event matches: (i) the theoretical of floods. These losses would be higher if emergency 1-in-20-year occurrence for the estimates throughout relief and recovery efforts could be removed through this chapter, and (ii) the geographical distribution of a counterfactual analysis. Moreover, the baseline impacts. In addition, the model needs to consider other estimates in this chapter consider the impact of floods factors that impacted the economy over the period. in 2030, assuming no new investments in adaptation Actual aggregate output would reflect the mitigating to flood risks. Floods are also expected to be more impact of emergency relief, rebound effects (due to frequent, as indicated above. the quarterly frequency of the statistics), and recovery and reconstruction investments. These effects are not In summary, the sensitivity analyses presented in easily incorporated through the methodology adopted this sub-section highlight the uncertainty around in this chapter. the baseline estimates presented in the previous sections. The sensitivity analyses indicate that the The estimates of up to 4.1 percent of GDP losses baseline results in Section 2.2.4 are, in fact, conservative are broadly consistent with the impact of the 2021 estimates based on cautious assumptions about the floods in Malaysia. As large scale floods took place direct, and especially, the indirect impact of floods on during the last couple of weeks of December 2021, so the economy. Furthermore, the analysis indicated the the impact was largely felt in the subsequent month. significant benefits of preparedness. Significantly larger First quarter real GDP growth in 2022 in Malaysia was socio-economic impacts from floods are possible if 2.7 percentage points lower than growth in the previous adaptation measures are not taken and if businesses quarter and 1.7 percentage points lower than the are not well prepared to withstand the shocks. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 49 CHAPTER 2 – The Economic Impact of Floods in Malaysia 2.3. Conclusions Malaysia experiences relatively frequent floods, the identification of the most cost-effective adaptation and, although not necessarily severe, floods have a options in Malaysia. A more in-depth study that sizable impact on the economy. The macroeconomic considers the complementarities between the different analysis shows that the impact of a 1-in-20-year flood measures, for instance, would be necessary to identify is expected to cost Malaysia up to 4.1 percent of GDP the most cost-effective adaptation options in Malaysia. by 2030 without adaptation efforts. These estimates consider historical data regarding flood hazard risks. The analyses also showed that businesses have a The estimates also indicate that there could be a critical role in strengthening flood risk resilience significant impact on jobs associated with floods. in Malaysia. By developing flood risk management Climate change is projected to increase the frequency strategies and investing in preparedness, businesses of precipitation and, consequently, the likelihood of can ensure operational continuity while protecting floods, which could lead to even larger aggregate their assets from damage. The estimates provide impacts on output and employment. The increase in evidence that by building resilience in supply chains, the aggregate damages by floods would occur simply and ensuring the continuity of production, businesses by the increased frequency of floods, even if floods do can reduce the expected losses due to floods by not become more severe. more than 50 percent. The estimates also show that adaptation investments can be particularly useful in The analysis in this chapter shows that floods mitigating the impact of frequent, less severe floods. are an important source of risks for a broad set of Various projections indicate that such events will businesses. Sectoral analysis revealed that losses can likely continue to increase in frequency in Malaysia, be particularly sizable for the agricultural, services, consequently putting a premium on such investments. and industrial sectors. The vulnerability of transport However, supply chain resilience has a more limited infrastructure and other utilities is particularly role in mitigating the impact of severe floods when concerning because of indirect effects, as other sectors widespread supply chain disruptions are more likely rely on such services for production. Employment to occur. Estimates vary depending on the severity effects could also be substantial, particularly in rural and the duration of future floods—longer floods are and agricultural communities. There is, however, a high associated with more significant losses. degree of uncertainty around the sectoral estimates, with variations in the results related to the resolution of The findings in this chapter highlight the necessity to flood risk maps and variations in flood risk projections. manage flood risks for both the public sector and the private sector. The results indicate that total prevention Adaptation efforts could significantly reduce the of floods may not be feasible. While adaptation and macroeconomic impact of floods. The analysis in this resilience efforts by the private and public sectors chapter indicates that adaptation efforts can have a can go a long way in reducing losses associated with sizable impact in mitigating flood losses in Malaysia. The floods, residual risks are likely to remain, and they could estimates indicate that a comprehensive combination of still entail sizable economic costs. For businesses, this regulatory measures (for example, on zoning, building puts a premium on efforts to strengthen their financial regulations, and early warning systems), climate resilience through adequate planning and ensuring they resilient infrastructure investments, and ecosystem have access to funds post-disaster for an efficient and improvements could offset a significant share of the quick recovery. Access to credit and insurance could be economic damages caused by floods. Moreover, the beneficial in enabling ex-post access to resources that estimates indicate that adaptation costs about 0.2 can be used for clean-up, recovery, and reconstruction percent of annual GDP, making the measures likely efforts. The next chapter explores the role of access cost-effective. But the analysis does not offer enough to financial services, and the broader challenges and granular information about the range of measures that opportunities for businesses in managing food risks. would be most adequate. The analysis does not enable 50 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 2 – The Economic Impact of Floods in Malaysia MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 51 CHAPTER 3 – The Impact of Floods on Malaysian Businesses CHAPTER 3 The Impact of Floods on Malaysian Businesses MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses Key Messages • Based on a novel business-level survey conducted on 1,500 Malaysian businesses, this chapter assesses the vulnerabilities to flood risks among Malaysian businesses and the factors discouraging them from investing in adaptation and resilience. • Small and medium enterprises (SMEs) are particularly vulnerable to floods in Malaysia, through both direct and indirect effects. Although flood impacts over the past three years were more prevalent among large businesses, SMEs were 50 percent more likely to experience financial losses than large businesses. SMEs were also more likely to cite indirect losses due to the impact of floods on their customers and employees—for example, about 75 percent of small businesses stated that supply chain bottlenecks were the main cause for delays in return to operations. • SMEs tend to have less developed coping mechanisms. SMEs are less likely to have disaster preparedness strategies and less likely to have insurance when compared to large businesses, even after taking into account differences in risk exposures and risk perceptions. • Flood risk awareness is a crucial factor underlying the extent of preparedness among businesses. Consistently, the survey shows that Malaysian businesses that perceive flood risks as a recurrent risk are more likely to have disaster preparedness strategies and to purchase flood risk insurance. In fact, two key barriers to flood insurance uptake are the underestimation of flood risks and a lack of understanding of insurance products. • There are marked awareness gaps for SMEs in Malaysia. SMEs are less likely to believe they have sufficient information about future flood risks. For example, 80 percent of large businesses stated that they had sufficient information about their future flood risk exposures, whereas only 40 percent of small businesses stated so. • Limited access to insurance protection and finance for adaptation and resilience is a significant barrier for Malaysian businesses, especially SMEs, hampering their ability to manage flood risks. Notably, businesses with limited access to financial resources for flood preparedness had three times greater revenue losses associated with floods than businesses that did not mention it. Limited access to insurance can also constrain recovery efforts as surveyed businesses, especially SMEs, noted that insurance payouts represent an important source of funding for such expenditures. • These patterns suggest an active, urgent role for public sector policies in supporting greater access to finance and insurance for businesses, especially SMEs. Policy efforts should concentrate on improving access, especially for SMEs, which tend to be more vulnerable to the impact of floods. The results indicate that enhancing access to finance for both ex-ante preparedness and ex-post recovery efforts could significantly enhance business resilience and adaptation. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 53 CHAPTER 3 – The Impact of Floods on Malaysian Businesses As shown in the previous chapter, businesses in This chapter focuses on businesses’ adaptation and Malaysia are increasingly vulnerable to climate financial resilience to flood risks in Malaysia. The change through the impact of floods on their analyses in this chapter shed light on three questions: businesses. Businesses can be directly impacted by (i) which businesses are more vulnerable to flood floods, which can lead to asset damages and losses. risks; (ii) what the direct and indirect costs of floods to Businesses can also be indirectly hit by floods, for businesses are, including those related to supply chain instance, due to supply chain disruptions or from disruptions; and (iii) what are the barriers for businesses infrastructure outages and damages.41 Floods can to manage and mitigate flood risks before floods (that is, also affect their employees and their customers. As to invest in ex-ante preparedness) and after floods (for discussed previously, service delivery and infrastructure example, adopting robust financial resilience practices), disruptions can also negatively impact businesses. As in case they are affected by floods. In exploring these evidenced by the 2021-22 floods, adverse shocks can questions, the analyses in this chapter zoom in on the result in temporary and permanent business closures role of financial markets—access to financial products that, in turn, lead to output and job losses, with and services, such as credit and insurance—in enabling significant aggregate economic and social impact. businesses to manage flood risks better. These risks can be exceptionally high for SMEs than for larger enterprises as SMEs are perceived to have The analyses draw from a novel survey of 1,500 less developed coping mechanisms, leaving them more businesses in Malaysia conducted in the first half vulnerable to potentially large (direct and indirect) of 2023. Respondents are in senior management losses from floods.42 positions at their businesses (such as owners, C-suite, or director level). The sampling methodology is stratified However, there is no comprehensive assessment of random sampling, in which all businesses are grouped the business costs of floods in Malaysia. As a result, within homogeneous groups, and simple random there is limited understanding of how businesses are samples are selected within each group. The strata affected by and cope with floods, including indirect for the survey were business size, business sector, and effects associated with infrastructure damages and geographic regions.43 Within these strata, businesses critical service disruptions such as utilities. This were sampled randomly from an online business panel makes it challenging for policy makers to identify and database of over 100,000 businesses in all sectors and prioritize investments and develop policy interventions sizes across Peninsular and East Malaysia. A minimum to support business adaptation and enhance business sample size was obtained for sectors important to resilience to floods. Such a knowledge gap is not unique Malaysia’s economy while preserving the sectoral and to Malaysia, and the literature exploring the impact of regional shares in the sampling frame. The chapter climate change on businesses remains scarce. presents unweighted statistics, but census weights present qualitatively similar patterns, suggesting that the findings are representative of the business population in Malaysia.44 41 See, for example, Snyder and Shen (2006), Hallegatte et al. (2019), Hallegatte (2019), and Lund et al. (2020). 42 See, for example, IMF (2022). 43 Annex 1 provides a detailed breakdown of the surveyed business across size, sector, and geographic location. The strata for business size focused on small, medium, and large businesses. It did not explicitly sample micro businesses or individual entrepreneurs. 44 Annex 2 presents the same set of tables and figures reported in this chapter using 2015 census weights. 54 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses 3.1 Exposures and Vulnerabilities to Floods 3.1.1 Which Businesses Were Hit by Floods over the Past Three Years? While about 30 percent of Malaysian businesses management) were also affected. The latter indicates were affected by floods over the past three years, the that floods could have had sizable indirect impacts impact was more prevalent among large businesses on businesses due to disruptions in infrastructure and and businesses in the agriculture and manufacturing basic service delivery (see more below). sectors (Figure 3.1). For example, while nearly half of large businesses, defined as businesses with revenues There are also regional differences in the extent above RM50 million ($11 million), were affected by to which businesses have been affected by floods, floods, about a quarter of SMEs stated flood-related consistent with the variation of exposures in the flood disruptions.45 Across sectors, businesses in the hazard maps presented in Chapter 2. Businesses in agriculture sector were particularly hard hit, with 41 Eastern and Southern Malaysia were more likely to be percent of surveyed agri-businesses being affected by affected by floods than businesses in other regions floods. This high exposure to flooding in the agriculture within Peninsular Malaysia. About 40 percent of sector is broadly consistent with results in Chapter 2, surveyed businesses in these regions were affected by which shows a high proportion of agricultural assets floods in the last three years. The flood maps indicated exposed to flooding. A large share of automotive, that these regions were indeed more prone to both machinery, and equipment manufacturing businesses fluvial and pluvial floods (Figure 2.3). and utility businesses (water, sewage, and waste FIGURE 3.1 Profile of Businesses Affected by Floods in the Last Three Years A. Across Business Size B. Across Geographical Locations Share of rms affected by oods in the last 3 years Share of rms affected by oods in the last 3 years KL/Federal 28 64 9 Large 46 46 8 Other Central 31 62 7 Northern 34 56 11 Southern 38 57 5 SME 25 67 7 Eastern 40 53 7 East Malaysia 25 72 3 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don’t Know Don’t Know 45 These results may underestimate the actual SME exposure to floods due to survivorship bias, as many SMEs may not have survived flood incidents and thus would not have been captured in the survey. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 55 CHAPTER 3 – The Impact of Floods on Malaysian Businesses C. Across Sectors Share of rms affected by oods in the last 3 years (%) Share of rms affected by oods in the last 3 years (%) Agri and Mining 41 57 2 Wholesale − motor trade 10 80 10 Manufacturing − Automotive, Machineries 45 50 5 Wholesale − other 26 70 4 & Equipments Manufacturing − E&E, Computers 46 41 13 Transportation & storage 24 64 12 & Softwares Manufacturing − Other 41 52 7 Hospitality, hotel, leisure and tourism 14 84 2 Electricity, Gas, Steam or Information or communication activities 9 91 Air Conditioning Supply 29 50 21 Telecommunications 36 57 7 Water, sewage or waste management 50 50 Financial or insurance services 18 81 1 Construction 23 66 11 Real estate / estate agencies 34 63 3 Retail − food & beverage 14 77 9 Professional / business services 23 68 9 Retail − motor trade 19 81 Education 22 71 6 15 74 11 Healthcare, residental care or Retail − other social work activities 45 48 6 Wholesale − food & beverage 29 61 11 Other 0 80 20 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don’t Know Don’t Know 3.1.2 The Extent of Flood-related Losses for Businesses Although more prevalent among large businesses, damage was also significantly higher among SMEs SMEs were more likely to experience financial losses compared to large businesses—27 percent versus 17 and business disruptions associated with floods, percent, respectively. SMEs were also more likely to suggesting they are more vulnerable to floods. cite indirect losses due to the impact of floods on their Businesses affected by floods reported both direct and customers and employees. While 63 percent of SMEs indirect losses (Figure 3.2).46 Over 60 percent of the mentioned disruptions due to floods impacting their businesses cited direct loss of inventories and about customers, 44 percent of large businesses stated so. 50 percent of affected businesses mentioned (non- Supply chain disruptions affected more than half of all structural) building damages. SMEs were 50 percent businesses, and smaller businesses were more likely to more likely to mention asset damages than large be affected—more than two-thirds of small businesses businesses. For example, 50 percent of SMEs mentioned (a sub-category of SMEs) indicated disruptions in equipment damages due to floods in comparison to 34 supply chains.47 percent of large businesses. The incidence of vehicle FIGURE 3.2 Losses and Disruptions Associated with Floods A. Direct Losses B. Indirect Losses Share of Firms (%) Share of Firms (%) Large (%) SME (%) Large (%) SME (%) 63 63 60 49 49 50 49 52 44 42 45 43 38 38 33 34 33 27 27 17 Loss of Stock Building Building Vehicle Equipment Contract Customers Employees Supply Chains Financial Damage Damage Damage Damage Payment Transactions (Non-structural) (structural) Compensation Note: The survey question was “looking at the worst flooding episode that your Note: The survey question was “looking at the worst flooding episode that company has experienced in the past 3 years, what was the type of damage your company has experienced in the past 3 years, what type of business to your business?” disruptions did you company face as an indirect consequence of floods (e.g., nearby floods)?” 46 Regression estimates show that the reported differences between SMEs and large businesses are statistically significant, even when controlling for differences in the geographical location of businesses. 47 Small businesses are those with up to 30 employees. 56 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses In the aftermath of floods, businesses typically large businesses mentioned a lack of awareness, and took about a month to resume operations fully. The 50 percent mentioned a lack of preparedness, even underlying causes for business disruptions include though they were aware of risks. In other words, while closures to allow for renovation and retrofitting, a the evidence indicates that lack of awareness was a key lengthy clean-up process, and the re-establishment factor underlying the flood losses for SMEs, for large of essential infrastructure, with more than 40 percent businesses, it was a lack of preparedness. Awareness of SMEs mentioning these factors. These results is also mentioned as an important factor for businesses are consistent with the findings in Chapter 2, which downstream in supply chains, such as businesses in the highlighted that an estimated 90 percent of aggregate services and retail sectors. Lack of preparedness was production loss occurred during the clean-up and more often cited among businesses in the agriculture repair period rather than during the flood itself. sector and some in manufacturing. These perceptions Furthermore, consistent with the results in Chapter are relatively robust across businesses, independent of 2, supply chain disruption was cited as one of the whether businesses have experienced relatively high or leading causes of delay in returning to operations low flood-related losses. by about 30 percent of businesses. SMEs, especially small businesses, were particularly vulnerable to such Overall, these survey results indicate that floods indirect effects—75 percent of small businesses cited disproportionately affect smaller businesses supply chain bottlenecks as the main cause for delays compared to larger ones. The differential impact is in return to operations. particularly marked regarding indirect losses associated Businesses affected by floods stated that lack of with supply chain disruptions. Therefore, SMEs are awareness of flood risks (especially among smaller particularly vulnerable to flood risks in Malaysia, even businesses) and lack of preparedness (especially among though the survey indicates that larger businesses large businesses) were the main reasons behind their may be more exposed to floods. Lack of awareness losses. About 40 percent of small businesses stated and preparedness are critical constraints underlying that lack of awareness exacerbated losses from floods, the losses due to floods for Malaysian businesses, whereas 26 percent mentioned not being prepared which highlight the significant space to enhance flood despite being aware of risks. In contrast, 32 percent of resilience among SMEs in Malaysia. 3.2 Adaptation Strategies among Businesses When aware of flood risks, businesses can prepare may also choose to geographically spread production themselves and devise strategies to mitigate risks facilities.49 However, such strategies are likely to come and reduce the impact of floods. Businesses can at a cost, as the impetus for diversification may lead to undertake various coping strategies to mitigate their more expensive inputs, less efficient supply chains, or vulnerabilities by reducing losses, speeding up recovery, more extensive inventories. Hence, businesses need to and spreading expenses over time to ensure robust assess the cost-benefits of specific strategies in light of business performance.48 This may involve investments the risks of floods that they face. Specific solutions and in floodwater pumps, backup generators for electricity, adaptation strategies are highly dependent on business- and water tanks, and building of designated flood-proof specific characteristics, including the geographical storage areas for sensitive machinery and inventories. location of the business. This section sheds light on Strategies may also entail investments to enhance the this theme by providing evidence of the adoption resilience of supply chains. Businesses may choose of adaptation strategies to cope with floods across to diversify their suppliers and even customers. They businesses in Malaysia. 48 See, for example, Dormandy et al. (2017) and Rentschler et al. (2019). 49 See, for example, Rentschler et al. (2021). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 57 CHAPTER 3 – The Impact of Floods on Malaysian Businesses The survey results show that businesses hit by floods 80 percent of both SMEs and large businesses hit by during the last three years are more likely to perceive floods tend to view floods as a growing source of risks, floods as a recurring risk when compared to those that whereas 41 percent of large businesses and 29 percent were not hit, especially among SMEs. For example, of SMEs that are not affected by floods acknowledge businesses located in states more severely impacted by that they are increasingly exposed to flood risks.50 floods—proxied by the share of businesses affected by Being affected by floods also affected the businesses’ floods—are more likely to consider floods as a recurring perception of their resilience and ability to compete risk (Figure 3.3). This finding reaffirms the findings in in foreign markets. For example, 85 percent of all Chapter 2, which attribute recurrent flooding to the businesses affected by floods stated that the exposure annual Northeast Monsoon. Similar patterns hold across to flood risks affect their competitiveness (Figure 3.3, sectors and sizes. Not surprisingly, the perception of panel D).51 In contrast, 48 percent of large businesses floods as a recurrent risk is less widespread among and 29 percent of SMEs not impacted by floods had a businesses that have not been hit by floods. This is similar awareness that their exposure to flood risks can particularly so among SMEs, reinforcing the results affect their competitiveness abroad. in the previous section about lack of risk awareness being a more significant challenge for SMEs. About FIGURE 3.3 Flood-Hit Businesses and Flood Risk Awareness A. Across Geographical Locations B. Across Sectors 70% 70% Water, sewage or Telecommunications waste management % rms considering oods as recurring risk % rms considering oods as recurring risk Melaka Kedah 60% Agriculture & mining 60% Terengganu Manufacturing– Manufacturing– other automotive Johor Wholesale–otherReal estate/estate 50% Kelantan 50% agencies Perak Selangor Manufacturing-E&E, Perlis Wholesale–motor trade Professional / computers and Sabah Pahang business services software 40% Pulau Pinang 40% Information or Education communications Construction Retail – other Healthcare or other Sarawak Kuala Lumpur Transportation & care/social work 30% 30% storage Hospitality, hotel, Wholesale–food & Negeri Sembilan Retail–motor trade leisure and tourism beverage Electricity, gas, steam 20% 20% Financial or insurance Cyberjaya/Putrajaya or AC supply Retail–food services & beverage 10% 10% R² = 0.5164 R² = 0.4814 0% 0% 0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% Share of rms affected by oods in the past 3 years Share of rms affected by oods in the past 3 years C. Across Business Size D. Perceptions about its Competitiveness Perception of increasing exposure to physical climate risk Do you think that Malaysia's exposure to physical climate risks affect your competitiveness in foreign markets and your capacity Share of Firms (%) to compete with imported products? Share of Firms (%) Large 41 39 20 Not ooded/don't know Large 48 37 15 SME 29 52 19 Not ooded/don't know SME 29 49 22 Large 85 10 5 Large 85 9 6 Flooded Flooded SME 79 16 5 SME 84 12 4 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don't Know 50 The share of small businesses is smaller, at 66 percent of surveyed small businesses. 51 The share of small businesses is smaller, at 62 percent of surveyed small businesses. 58 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses Businesses hit by floods are more likely to believe the sectoral level and the geographical level. There are they have sufficient information about future flood also marked differences across businesses of different risk exposures than businesses that were not affected sizes. For example, about 30 percent of SMEs not hit by by floods (Figure 3.4). This perception of insufficient floods stated that they did not have any preparedness information about future flood risks is particularly strategy, whereas only 2 percent of those affected by marked among SMEs that have not been hit in the past floods did so. Similar patterns, though with smaller three years—more than half of SMEs noted so. The risk differences, are observed among large businesses. awareness gap between SMEs and large businesses is While all surveyed large businesses hit by floods had also observed among businesses hit by floods. While preparedness plans, 91 percent of those not affected 20 percent of large businesses stated that they either by floods had such plans. Businesses mentioned a wide did not have sufficient information or did not know, 31 range of coping strategies, from simply monitoring percent of all SMEs (and 60 percent of small businesses) weather forecasts and disaster risk news and buying did so. Interestingly, businesses in Malaysia tend to pumps and power generators to more complex ones rely on public sources of information, such as the involving investments in resilient inputs, acquisition federal or sub-national government, independent of of better vehicles, retrofitting buildings, and shifts in whether they have been hit by floods or not. Another production to other premises. In addition, businesses widespread source of information is the internet, with greater flood risk exposures are also more likely including social media. to buy flood insurance or takaful protection.54 Figure 3.6 shows a positive correlation between flood risk Businesses with larger exposures to flood risks, exposures and insurance and takaful uptake across based on actual or perceived risks, are more likely sectors, geographical locations, and business size. to have a disaster preparedness plan in place, or For example, insurance and takaful uptake is greater to purchase insurance and takaful protection. 52,53 among states or sectors with a larger share of Figure 3.5 shows that adopting flood risk preparedness businesses exposed to flood risks.55 More broadly, strategies generally correlates with both businesses’ there is a positive correlation between flood insurance direct experience with disasters and with their and takaful uptake and the adoption of preparedness expectations of such risks (such as perceptions of floods plans. as recurrent risks). Positive correlations are observed at FIGURE 3.4 Flood-Hit Businesses and Perceptions about Availability of Information A. Across Business Size B. Sources of Information Do you feel you have suf cient information about Top 3 sources of information used to monitor disaster risks future climate or disaster risk exposures? Share of Firms (%) 60 55 Share of Firms (%) 60 58 58 55 5352 5352 44 46 4745 42 433939 3939 3736 36 40 Large 46 41 13 36 383636 29 302929 33 Not ooded/don't know 26 23 2523 25 21 26 22 19 20 1816 SME 33 52 15 16 13 1313 10 10 3 2 0 0 0 Large SME Large SME Not ooded/don't know Flooded in past 3 years Large 80 16 4 Flooded Internet State/Local Government SME 69 26 5 Federal Government Social Media TV Malaysia Investment Messages from apps Development Authority 0 20 40 60 80 100 Radio Local community word of mouth Newspaper Yes No Warnings by Employees SMS Don't Know None of the above 52 This relation among past own experience, greater awareness, and future disaster preparedness is well documented in the literature, including for businesses. See, for example, Tierney (1997), Dahlhamer and Souza (1995), and Josephson et al. (2017). 53 The survey results do not indicate that the severity of the impact of floods—for instance, as measured by actual losses—significantly alters business behavior. Businesses tend to display similar behavior, largely independent of the extent of their losses during previous flooding episodes. 54 Patterns on insurance uptake documented in this chapter are similar across different types of assets–business premises, vehicles, inventories, and equipment. 55 See Annex 3 for disaggregated results, portioning businesses hit by floods versus those not affected by floods across estates and sectors. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 59 CHAPTER 3 – The Impact of Floods on Malaysian Businesses Interestingly, perceived exposure to risks is associated controlling for business size, sector, and geographical with more significant action toward strengthening location. For instance, the estimates suggest that flood risk resilience than actual exposures. The businesses that have been hit by floods but do not scatter plots in Figures 3.5 and 3.6 provide evidence perceive floods as a recurrent risk are less likely to that a larger share of businesses that perceive flood purchase insurance than those that believe that floods risks as recurrent risks have adaptation strategies are a recurrent risk for their business. Furthermore, the than businesses that have been affected by floods. regressions indicate that sector and geography do not Regression results shown in Figure 3.6 panel D also affect the likelihood of insurance uptake once individual support this assessment. The estimates show that risk exposures are controlled for. The regressions perceptions of flood risks as a recurrent risk have indicate no marked gaps in insurance uptake within a larger marginal effect on the probability of flood specific regions or sectors. However, the results vary insurance uptake than past experience with floods after across business sizes. FIGURE 3.5 Flood Risk Awareness and Adoption of Disaster Preparedness Strategies A. Across Geographical Locations B. Across Sectors Percentage of rms with disaster preparedness strategies Percentage of rms with disaster preparedness strategies Share of Firms (%) Share of Firms (%) Firms considering oods as a recurring risk Firms affected by oods Firms considering oods as a recurring risk Firms affected by oods 70% 70% 60% 60% Actual or Expected Flood Exposure Actual or Expected Flood Exposures 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 40% 50% 60% 70% 80% 90% 100% Share of rms with disaster preparedness strategies Share of rms with disaster preparedness strategies C. Outward Supply Chain Resilience Planning D. Inward Supply Chain Resilience Planning Does your company currently have any kind of Does your company currently have any kind of resilient supply chain planning (outward) in place? resilient supply chain planning (inward) in place? Share of rms (%) Share of rms (%) Large 44 40 16 Large 53 31 17 Not ooded/don't know Not ooded/don't know SME 22 62 16 SME 23 62 15 Large 89 92 Large 89 7 4 Flooded Flooded SME 73 21 5 SME 73 20 6 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don't Know Note: Panels A and B show the share of firms adopting at least one of the following disaster preparedness strategies: reduce financial risk (i.e. buy insurance), keep and monitor weather forecast and disaster risk news, invest in retro-fitting building, invest in better vehicles (SUVs or trucks with higher ground clearance), invest in software/apps that help crisis preparedness, move premise to higher grounds, ensure there is a crisis center, have a crisis preparedness plan, acquire pumps and/or power generators, move equipment and materials to higher ground, shift production/inventories to other premises, invest in more resilient inputs (weather-resistant machineries, resilient seeds in agriculture). SMEs are less likely to have preparedness plans and insurance uptake, which is supported by the regression are less likely to have insurance when compared to analysis as summarized in Figure 3.6 panel D. Among large businesses, even after taking into account their the businesses that have not experienced flooding over risk exposures. This gap is notable, for example, for the past three years, 88 percent of those with revenues 60 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses greater than RM500 million ($110 million) had insurance, with extreme weather events, but only those affected in comparison to 36 percent among businesses with by natural disasters were likely to develop coping revenues less than RM5 million ($1.1 million) (Figure 3.6, strategies to manage risks. Evidence from Thailand panel C). These differentials between large and small and Indonesia shows similar patterns of relative businesses also hold among businesses hit by floods. unpreparedness toward flood risks among SMEs. For All businesses with revenues above RM500 million ($110 example, Neise and Diez (2019) focus on Indonesian million) that have been affected by floods stated having manufacturing businesses in Jakarta and Semarang. insurance, whereas 81 percent of businesses with less They show that larger businesses were adapting more than RM5 million ($1.1 million) in revenues and that efficiently compared to small businesses. A study on have been affected by floods have insurance. Similar SMEs in Thailand by Pathak and Ahmad (2016) also results are observed for the adoption of supply chain finds that SME owners tend to underestimate flood resilience strategies (Figure 3.5, panels C and D). For risks and have inadequate long-term coping strategies instance, large businesses are more likely to have both for recurring floods. inward and outward supply chain resilience planning than SMEs. Although to different degrees, marked In addition to businesses own risk exposures and differences are observed both within businesses hit by perceptions, the actions of other businesses also floods and within those not hit by floods. The adoption seem to impact the extent of business preparedness. 56 of supply chain resilience is particularly low, at around Regression estimates confirm that businesses with larger 22 percent, among SMEs not hit by floods. exposures to flood risks, based on actual or perceived risks, are more likely to have a disaster preparedness The evidence that a history of being affected by plans in place. The results also confirm that SMEs natural disasters is associated with increased are less likely to have such preparedness plans when awareness of risk exposures, and consequently, compared to large businesses, even after taking into greater preparedness for businesses in Malaysia is account their risk exposures. Moreover, the regressions consistent with the experience of other countries. show that the adoption of preparedness strategies by Although research is scarce, the findings for Malaysia “peers” also affect business adaptation and resilience. are similar to other studies conducted for a selected Specifically, businesses are more likely to have ex-ante set of businesses in the region. For example, Verrest et adaptation and ex-post financial resilience strategies in al. (2020) provide empirical evidence that businesses in place when a larger share of businesses in their own Jakarta, Don Mueang, and Pasig City tend to build their sector or in their own geographical location also have beliefs about disaster risks based on past experience similar strategies in place. These results suggest that rather than technical or scientific knowledge. Similarly, competitiveness pressures can be a driver for business Kato and Charoenrat (2018) provide some evidence adaptation and resilience efforts. that SMEs in Thailand were not only unprepared to deal FIGURE 3.6 Flood Insurance Uptake A. Across Sectors B. Across Geographical Locations Firms considering oods as a recurring risk Firms affected by oods Firms considering oods as a recurring risk Firms affected by oods 70% 70% 60% 60% 50% Actual or Expected Actual or Expected Flood Exposures 50% Flood Exposures 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Insurance Uptake Insurance Uptake Share of rms with insurance against oods Share of rms with insurance against oods 56 The results are based on regression estimates that control for business size, sector, geographical location, and age. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 61 CHAPTER 3 – The Impact of Floods on Malaysian Businesses C. Across Business Size D. Probability of Insurance Uptake57 Share of Surveyed Firms with Flood Insurance (%) Estimated Probability of Flood Insurance Uptake Not Flooded Flooded Overall Marginal Effects, Controlling for Geographical Location 100% 35% 80% 25% 60% 40% 15% 20% 5% 0% < RM5 mil RM5 mil - RM50 mil - RM100 mil - > RM500 mil -5% RM50 mil RM100 mil RM500 mil Firm Size (based on revenues) -15% -25% Flooded in last Perception of SMEs Agriculture Manufacturing Construction 3 yrs. Floods as Recurring Risk The primary motivation for Malaysian businesses to of large businesses hit by floods mentioned improved obtain flood insurance rests primarily with access financial conditions (e.g., better loan terms) as the main to ex-post financial resources for recovery and reason for insurance, compared to 28 percent of flood- reconstruction expenses, indicating that businesses hit SMEs. Another auxiliary benefit is the possibility of are aware of the benefits of financial resilience. better financial terms, which is cited as the main benefit This motivation is particularly strong among SMEs, of insurance by a greater share of large businesses than especially small businesses. For example, among among SMEs—37 versus 28 percent, respectively. businesses that have suffered floods over the last three Similar results are observed if businesses are split years, 53 percent of SMEs stated the availability of among those with or without flood insurance. Overall, financial resources after being affected by floods as these results raise the possibility that the impact of their main motivation for obtaining insurance (Figure insurance uptake on access to external finance is 3.7). For some businesses, especially large ones, the different for SMEs versus large businesses. The survey primary motivation was the auxiliary benefits associated does not allow us to shed light on this issue, which is with insurance uptake. For example, almost 40 percent left for future research. FIGURE 3.7 Motivation to Purchase Flood Insurance 60% 53% 50% 48% 46% 42% 40% 36% 37% 30% 27% 28% 20% 12% 13% 9% 11% 11% 12% 10% 6% 8% % Availability of Ex Post Improved Financial Improved GVC Compulsory (eg. due Financial Resources Conditions Relations to mortgage terms) Large Firms Not Flooded Large Firms Flooded SMEs Not Flooded SMEs Flooded 57 The estimated baseline probability is 47.9 percent, applicable to businesses not affected by floods, not considering floods a recurring risk, in the services sector, and located in Selangor. The figure shows the marginal effects over this baseline probability for businesses with different characteristics. 62 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses 3.3 Challenges in Developing Adaptation Strategies 3.3.1 Limited Access to Finance Limited access to insurance and finance for 33 percent of large businesses and 34 percent of SMEs adaptation and resilience is a significant barrier for mentioned using internal resources. About 27 percent Malaysian businesses, especially SMEs, hampering of businesses also mentioned using government grants their ability to manage flood risks. Among businesses or borrowing supported by government programs. that consider floods a recurring risk, limited access BNM’s Disaster Relief Facility was widely mentioned to finance in particular and limited financial resources by businesses as a source of funds for those affected more broadly, are ranked as the main barriers to by floods. At least partly due to the widespread use implementing strategies toward preparedness by 43 of such a facility, a larger number of SMEs have used percent of SMEs and 34 percent of large businesses bank financing for reconstruction (34 percent) efforts (Figure 3.8, panel A). Splitting businesses according than for preparedness investments. to whether they have been hit by floods or not over SMEs cited high costs and, to a lesser extent, lack of the last three years yields similar results. Businesses suitable products as the main reasons for difficulties in the agriculture and construction sectors were more in obtaining financing for disaster preparedness. As likely to mention limited resources than those in other shown in Figure 3.8 panel D, high interest rates were sectors. Notably, businesses citing limited access to mentioned as a top-3 challenge by 29 percent of SMEs financial resources as a barrier to implementing flood (for SMEs that perceive floods as a recurrent risk, 36 preparedness had three times greater losses associated percent cited high interest rates). The inability to find a with floods as a share of revenues than businesses suitable financial product for their needs was cited by that did not state limited access to resources. Limited 20 percent of SMEs and 23 percent of large businesses, access to insurance can also hamper recovery efforts and almost a quarter of large businesses also mentioned as insurance payouts represent an important source short maturities as a constraint. About 15 percent of of funding for such expenditures, especially for SMEs. all surveyed businesses also mentioned the inability to For example, 37 percent of SMEs mentioned insurance renew or obtain new financing for adaptation efforts. payouts as a main source of funding for recovery and reconstruction, compared to 24 percent of large While similar reasons are also mentioned as businesses. constraints to finance recovery and reconstruction efforts, lack of collateral appears as an additional, Consistent with access to finance hindering business key challenge. For businesses affected by floods adaptation and resilience to flood risks, businesses over the past three years (Figure 3.8, panel E), lack of tend to finance the implementation of preparedness collateral is perceived as a top-3 barrier for access to strategies and their recovery and reconstruction finance for recovery and reconstruction expenses for efforts with internal resources. Almost a third of the 34 percent of all surveyed businesses. Despite greater businesses use internal resources as the main source reliance on bank financing for post-disaster expenses, of funds for ex-ante investments (Figure 3.8, panel B). about 15 percent of businesses mentioned rejected For SMEs, especially small businesses, funds from the credit applications; 20 percent, on average, could not owner also feature as an important source of capital.58 extend or renew credit lines; and 19 percent could Only 20 percent of all businesses (and only 12 percent not obtain new leases. These patterns could reflect of small businesses) state that they have used bank that flood-hit businesses likely had asset losses that loans as a source of finance. Businesses also tend to reduced their collateral (for example, damages to rely on internal resources as a critical source of capital machinery, equipment, vehicles, and inventory losses, for reconstruction (Figure 3.8, panel C). For example, as discussed above). 58 An extensive empirical literature shows that SMEs tend to have greater reliance on internal funds, as well as funds from their owners, than larger businesses. See for example Didier and Cusolito (2024). The research largely draws from business surveys, such as the World Bank Enterprise Surveys. The Productivity and Investment Climate Survey for Malaysia, conducted in 2019, reveals similar results for Malaysian businesses. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 63 CHAPTER 3 – The Impact of Floods on Malaysian Businesses 3.3.2 Limited Uptake of Flood Insurance Limited uptake of flood insurance also hinders business cited reason among businesses affected by floods resilience, especially for SMEs for which insurance over the past three years—32 percent of SMEs and payouts represent an important source of funding for 30 percent of large businesses—relates to product ex-post reconstruction efforts. As discussed above, availability and coverage being inadequate for their surveyed SMEs are less likely to purchase insurance business needs. Consistently, among businesses that for flood risks than large businesses—51 percent of were not satisfied with their insurance protection—10 SMEs stated having flood insurance in comparison to percent of businesses that were affected by floods and 74 percent of large businesses.59 At the same time, 37 had insurance—was the mention of the time-consuming percent of SMEs mentioned insurance payouts as their payout process (55 percent of businesses), insufficient main source of funding for recovery and reconstruction, coverage given the extent of losses (40 percent), and compared with 24 percent of large businesses (Figure inability to make a claim (e.g., lack of evidence despite 3.8, panel C). This result is consistent with the results suffering losses) (45 percent). Among businesses not discussed above, which showed that SMEs value affected by floods over the past three years, concerns insurance precisely because access to such resources with the payout process and the complexity of can help them manage post-flood efforts, more so than insurance products were perceived as key challenges large businesses. In addition, businesses also mentioned to getting insurance. that they rely on insurance payouts as a source of funds to implement disaster preparedness strategies. The survey provides evidence suggesting that a set For example, 33 (21) percent of flood-hit SMEs (large of high-risk businesses, especially smaller businesses, businesses) mentioned using insurance payouts for are being either priced out or outright excluded from adaptation investments, the second most-cited source the insurance market. For instance, 31 percent of SMEs of funds for disaster preparedness activities. This result and 27 percent of large businesses affected by floods indicates that businesses, especially SMEs, tend to were asked to retrofit their premises to obtain flood have a reactive approach to flood risk management, insurance coverage, which can be expensive and not often acting only after being hit by floods. feasible within reasonable time frames. Doing so can be particularly difficult when businesses face constraints The main challenges Malaysian businesses mentioned in access to finance. Such requirements can effectively associated with flood insurance are concerns with the exclude some businesses, likely high-risk ones, from payout process and inadequacy of products for their the insurance market. Unaffordability was mentioned business needs (Figure 3.8, panel F). For example, 34 as a key challenge for 21 percent of small businesses percent of SMEs and 33 percent of large businesses that have been affected by floods and 27 percent of flooded in the last three years mentioned difficulties in the those that have not been affected by floods. It was, in claim payout process. This was the most cited obstacle fact, the most cited reason across this latter segment. for businesses to obtain insurance or takaful coverage Arguably due to their high riskiness, about 17 percent for flood risks. In addition, another 29 percent of SMEs of SMEs and 21 percent of large businesses affected by and 21 percent of large businesses mentioned lack of floods over the past three years were refused quotes. information about payout processes. The second most 3.3.3 Limited Awareness and Capabilities Both SMEs and large businesses mentioned a Finally, businesses believe that adaptation strategies lack of awareness, knowledge, and technical they implement would not be effective in reducing capabilities as barriers to adopting flood resilience damages. These perceptions are stronger among practices. Regarding the implementation of businesses that identify floods as a recurrent risk disaster preparedness strategies, about 33 percent than among those that do not as well as among large of businesses that perceived floods a recurring risk businesses in comparison to SMEs. The survey shows mentioned lack of awareness and knowledge, and that 27 percent of SMEs identifying floods as a recurrent about 30 percent cited limited technical capacity to risk do not believe that adaptation strategies that they implement such strategies. Moreover, 28 percent could undertake would be effective, in comparison to 18 of SMEs and 33 percent of large businesses that percent of SMEs not identifying flooding as a recurrent considered floods a recurring risk cited difficulties in risk. Among large businesses, a significant share also identifying cost-effective adaptation measures. considers that adaptation strategies at their level would 59 The Persatuan Insurans Am Malaysia (PIAM), the General Insurance Association of Malaysia, reported that the take up rate for flood optional coverage within the motor and fire policies stood at 12 and 31 percent of the total number of policies, respectively, at the end of 2022. Although these statistics cover all customers (including households), they suggest that the take up of flood insurance among surveyed Malaysian businesses is relatively high when compared to the universe of Malaysian businesses. 64 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses be ineffective—30 percent among those identifying vulnerabilities to flood risks, there is a need for capacity floods as a recurrent risk and 25 percent among those building efforts highlighting the potential benefits (and not identifying floods as a recurrent risk. These results costs) of flood resilience strategies, especially financial provide some evidence that challenges for businesses resilience. These results also highlight the importance are not limited to a lack of awareness about flood risks. of public sector actions to support business resilience. Among businesses with some information about their FIGURE 3.8 Constraints in Access to Finance for Adaptation Strategies A. Top-3 Challenges for Preparedness B. Sources of Funds for Preparedness What are the main barriers hindering investments in business resilience How does or did your company nance these implementation or implementing strategies towards disaster preparedness? strategies to deal with disaster preparedness? Share of Firms (%) Share of Firms (%) 43 40 34 10 20 30 40 32 33 343332 34 30 3030 30 29 30 27 27 26 272725 27 28 27 23 22 22 23 23 24 24 21 21 21 20 20 21 2120 18 17 20 17 1817 16 15 15 14 12 12 11 12 9 10 8 4 3 4 1 1 2 0 0 Large SME Large SME Large SME Do not consider ood Consider ood Insurance/takaful Internal Funds as a recurring risk as a recurring risk compensation/payout Out of pocket expenses Government grants/loans Limited nancial resources Current policies & regulations by owner for disaster recovery to implement (incl. limited access to nancing) Loans by commercial banks Equity injection by owner N/a or None of the above Lack of awareness & knowledge Equity injection by Loans by licensed non-bank Dif culty in identifying cost-effective new business partner adaptation measures nancial institutions Limited technical capacity Loans from family and friends Loans from unlicensed to implement Adaptation measures at our level ineffective money lenders Social constraints Don't Know Offered loan amount is too large C. Source of Funds for Reconstruction D. Top-3 Challenges in Financing Preparedness Sources of nancing for reconstruction or return to operations What are the main challenges in obtaining external sources of nancing for the adoption of disaster preparedness? Share of Firms (%) Share of Firms (%) 29 40 30 37 33 34 34 24 23 27 29 28 22 22 21 20 21 20 30 26 24 24 23 25 20 22 18 18 17 17 17 16 16 16 15 15 20 17 17 16 13 13 13 13 13 13 8 10 10 0 0 Large SME Large SME Insurance Payout Internal Funds High interest rates None of the above Loans (Banks) Government Grant/Loans Unable to nd suitable Lack of company relationship nancial product with a nancial institution Out of Pocket (by owners) Equity Injections Lack of nancial records Leasing not available and/ Equity Injections for the company or inadequate Loans (Non-bank FIs) (New Partners) Lack of collateral Short maturities Loans (Unlicensed) Loans (Family and Friends) Did not need external sources Lack of credit history of nancing Note: Only asked to the rms that were affected by oods Rejected credit application E. Top-3 Challenges in Financing Recovery and F. Top-3 Challenges to Obtain Insurance Reconstruction Expenses Challenges in obtaining nancing for recovery What are the main obstacles to get insurance for your business against special perils, speci cally oods? Share of Firms (%) Share of Firms (%) 40 40 34 35 34 33 34 3231 29 30 2929 30 28 30 25 26 28282827 27 24 24 23 24 2323 21 20 21 21 20 232221 22 18 20 2121 1918 19 20 18 16 19 20 171616 1716 18 17 13 14 131313 11 12 10 10 5 2 2 1 0 0 0 0 Large SME Large SME Large SME Higher than usual interest Lack of collateral Not ooded/don't know Flooded Unable to nd suitable Untimely or delayed processing Hard to claim payout Lack of information on claim payout nancial product of payments Complexity of insurance/ Products and coverage inadequate Lack of relationship with FI Short maturities takaful policies to business needs Unable to extend/renew Had to retro t the company's Unable to obtain new leasing premises to get coverage Cannot afford lines of credit Do not need coverage Do not know where to buy the products Rejected credit applications None/not needed Do not understand the products Refused a quote due to high ood risks Note: Only asked to the rms that were affected by oods and that are insured. Other MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 65 CHAPTER 3 – The Impact of Floods on Malaysian Businesses 3.4 Conclusions To deploy effective public sector support to help are less likely to believe they have sufficient information strengthen businesses’ adaptation and resilience about future flood risks. The survey results also show to floods, policy makers need to understand which marked differences between large businesses and businesses are most vulnerable to flood risk and SMEs in awareness that vulnerability to flood risks why they are vulnerable. This information is essential can impact their competitiveness, including in foreign for the design of policies—for instance, to focus markets. outreach toward the most vulnerable segments and to address the underlying barriers hindering business These findings indicate the need to improve risk adaptation and resilience. Only then can public sector awareness to foster action within the private sector, policies support private sector resilience efficiently especially among vulnerable SMEs in Malaysia. and sustainably, improving the likelihood of credible Policy makers could consider deploying programs impact. This chapter provides evidence shedding light designed to raise awareness and enhance capacity to on these questions. ensure businesses have adequate knowledge of their exposures and vulnerabilities and technical capabilities The survey results reveal three key findings. First, to plan and implement cost-effective disaster SMEs are particularly vulnerable to floods in Malaysia. preparedness strategies. The analysis shows that although flood impacts over the past three years were more prevalent among Third, limited access to finance for adaptation and large businesses, SMEs were more likely to experience resilience is a significant barrier for Malaysian damages and disruptions associated with floods. SMEs businesses, especially SMEs, hampering their ability were also more likely to cite indirect losses due to the to manage flood risks. Among businesses that impact of floods on their customers and employees. consider floods a recurring risk, a significant share of Smaller businesses were more likely to be affected SMEs cited limited access to finance as a critical barrier by supply chain disruptions. Overall, the evidence to flood risk preparedness. SMEs mentioned as specific suggests that SMEs tend to have less developed constraints affordability, and to a lesser extent, the coping mechanisms. SMEs are less likely to have lack of a suitable range of financial products, as well disaster preparedness strategies and less likely to have as limited collateral to finance recovery efforts. The insurance when compared to large businesses, even most cited challenges curbing access to insurance after taking into account differences in risk exposures were the complexity of payout processes and the and risk perceptions. inadequacy of products to meet businesses’ needs. Notably, businesses citing limited access to financial Second, flood risk awareness is a crucial factor resources as a major barrier to flood preparedness had underlying the extent of preparedness among significantly larger losses associated with floods over businesses, but there are marked awareness gaps for the past year than businesses that did not mention it. SMEs. The survey results show that businesses that perceive flood risks as recurrent risks are more likely These patterns suggest an active, urgent role for to have disaster preparedness strategies and purchase public sector policies in supporting greater access to of flood insurance. That is, if businesses do not view finance and insurance for businesses, especially SMEs. floods as a source of risks for their business, they will not The results indicate that enhancing access to finance invest in resilience.60 This result suggests limited risks of for both ex-ante preparedness and ex-post recovery overadaptation (e.g., due to overreaction to sporadic efforts could significantly enhance business resilience past flood exposures). Moreover, research suggests and adaptation. Policy efforts should concentrate on that two key barriers to flood insurance uptake among improving access, especially for SMEs, which tend to businesses are their underestimation of flood risks and be more vulnerable to the impact of floods. Notably, a lack of understanding of insurance products. The the design of policies is crucial for their effectiveness, results also indicate a risk awareness gap between large especially in mitigating moral hazard concerns, in which businesses and SMEs in Malaysia. For example, SMEs policies could reduce the incentives for greater private 60 These patterns are consistent with the evidence in the literature. See, for example, OECD (2016). 66 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 3 – The Impact of Floods on Malaysian Businesses sector efforts in strengthening resilience. The survey past flood response were the lack of timely forecasts evidence suggests that such incentives seem to be (mentioned by 20 percent of businesses) and the limited currently lacking for a significant set of businesses in lead time provided by early warning systems (stated Malaysia, as discussed later in Chapter 5. by 21 percent of businesses). Second, there is room for improvements in coordination and transparency There is a key role for public sector policies to across government agencies. Businesses mentioned reduce flood risk exposures and vulnerabilities. The uncertainty about responsibilities (25 percent of policy implications listed above focus primarily on businesses), lack of effective coordination (20 percent), reducing vulnerabilities for businesses in Malaysia, and lack of transparency in actions (20 percent) as areas according to the conceptual framework outlined in Chapter 1. However, public sector policies focused that were inadequate based on recent flood episodes. on reducing risk exposures can lower uncertainties Finally, businesses also noted marked deficiencies in and help mitigate private sector vulnerabilities. The public infrastructure—such as drainage systems (22 survey points toward several such policies. First, percent of businesses), transport networks in and out businesses indicated there was room for improvements of flooded areas (18 percent), and untimely interruption in forecasts and early warning systems. According of utilities (20 percent). An even higher share of small to the Malaysian businesses surveyed, the two most businesses, about 30 percent, cited reasons related to frequently cited inadequacies in the government’s public infrastructure. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 67 CHAPTER 4 – Perspectives from the Financial Sector CHAPTER 4 Perspectives from the Financial Sector MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector Key Messages • Evidence from a survey of financial institutions in Malaysia reveals that banks have limited engagement in supporting businesses’ adaptation and resilience. Financing for flood risk adaptation and resilience, especially emergency financing remains relatively small, with a limited range of financial products available to businesses. About 40 percent of banks stated that they do not provide any emergency support to businesses, and about 20 percent of banks stated that they have no specific product for the financing of adaptation investments. Although adaptation financing is small, it is an emerging area of focus for Malaysian banks. • The survey also indicates limits to the scope of the insurance market. For example, financial institutions believe that insurance coverage is skewed toward larger businesses, with the uptake of flood insurance among smaller businesses being less widespread. • At the core of the constraints on financing and insurance for businesses to manage flood risks are significant gaps in flood-related information. The limited reporting on exposures and vulnerabilities to flood risks from businesses, and the limited availability and accessibility of flood-related information from public sources constrain the effective measurement of flood risks. • The underdevelopment of financial infrastructure for climate-related adaptation investments further complicates an intricate informational environment. Policies such as taxonomies and disclosure and reporting frameworks have focused primarily on climate change mitigation efforts rather than adaptation. In Malaysia, there is a lack of clarity around the standards and definitions for adaptation investments, including standardized reporting frameworks with well-defined metrics that would allow financial institutions to better monitor and report flood risks. • Partly due to the data gaps and an inability to adequately quantify flood risks, financial institutions in Malaysia face challenges in pricing, monitoring, and managing flood risks. In fact, risk management practices related to floods are not yet widespread, especially among banks. • There are also limits to potential flood risk diversification for financial institutions. A large and diverse client base is crucial for the ability of financial institutions to diversify away flood risks. Yet, financial markets for flood risk management remain relatively small. There is also a perception among financial institutions of limited business demand for financial products for flood risk management, which, in turn, reduces the incentives for greater engagement by financial institutions. • These factors hinder the ability of financial institutions to serve Malaysian businesses, especially high-risk ones, adequately. The evidence points toward a de facto exclusion of a set of high-risk, vulnerable businesses from access to either finance or insurance (or both). For example, about 17 percent of the surveyed SMEs affected by floods over the past three years were refused insurance quotes. Another 32 percent of the surveyed SMEs were asked to retrofit their premises to obtain further insurance coverage. Doing so can be particularly difficult when businesses face constraints in access to finance for adaptation and resilience. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 69 CHAPTER 4 – Perspectives from the Financial Sector The financial sector can play a critical role in in Malaysia. The survey also sheds light on current enhancing private sector resilience in the face challenges hindering greater engagement by the of natural disasters, such as floods, alongside financial sector. In Malaysia, macro and micro solvency government efforts. Access to financial products and stress test conducted by Bank Negara Malaysia services can enable businesses to be better equipped (BNM) indicates that the financial sector remains to face flood events by supporting ex-ante adaptation resilient in the face of severe simulated flood events. efforts and financial resilience, enabling faster recovery Therefore, financial institutions can strengthen their after floods, for example, via insurance payouts and role in enabling greater business resilience. To shed access to finance for emergency relief and recovery light on the main drivers and constraints underlying efforts. However, as shown in Chapter 3, businesses the provision of financial services and products to in Malaysia face challenges in managing flood risks, businesses, we conducted a supply-side survey among especially regarding access to finance and insurance, commercial banks and ITOs in Malaysia. The survey was which are perceived as critical barriers to private sector circulated at the same time as the demand-side survey, adaptation and resilience efforts. during April-June 2023, and a total of 42 responses were received, effectively covering the universe of The survey results provide new insights notably financial institutions in Malaysia. In addition, the survey absent from available data sources on the current was complemented by qualitative evidence gathered involvement of financial institutions with the financing through interviews with a set of financial institutions in of adaptation and resilience efforts by businesses Malaysia. 4.1 Financing Adaptation Adaptation financing is a small but emerging area of infrastructure and mitigation measures. However, about focus for Malaysian banks. According to the Climate 20 percent of the surveyed banks stated that they have Policy Initiative (2023), adaptation finance is dominated no offering related to adaptation financing. by public actors, which account for 98 percent of global While many banks use screening to assess flood risks financial flows, with fragmented financing from the for business clients, flood risks are not consistently private sector. A similar picture emerges in Malaysia, embedded in credit risk assessments, and such risks where financial institutions have just started expanding are not priced in financial services. For example, about their financial offerings on adaptation financing. Banks 60 percent of banks stated that they consider flood risks have begun to offer financing and revolving credit lines when assessing the credit risks of business clients. Such (Figure 4.1, panel A). For example, Maybank Group has an assessment is still in the early stages of development recently launched their Sustainable Product Framework for a large share of banks in Malaysia. There is limited 2022, that outlines a range of financial products tracking by banks of whether businesses have flood and services (such as corporate financing and trade insurance, and banks do not seem to conduct location- financing) dedicated to climate change adaptation based due diligence to assess business prospects. projects, including protection against floods, such Notably, over 30 percent of banks stated that they do as flood barriers and flood warning systems. For not assess flood risks for new or existing clients. More some banks, engagement and advisory services are broadly, flood risks are not embedded in the pricing of also offered to businesses related to the range of financing for businesses. Partly because of the limited adaptation measures that can be taken to manage information on flood risk exposures, banks are unable and mitigate flood risks. Banks have also used financial to price such risks, which in turn can limit their ability to market instruments, like bonds and sukuk, specifically provide finance, as discussed below. to support adaptation investments. For example, CIMB Group offers adaptation financing through their SDG Best practices around managing and mitigating flood Bond and Sukuk Framework, which covers financing risks among banks are still in flux. Although over 60 for projects related to natural disaster prevention percent of banks consider flood risks when assessing 70 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector business clients, less than 30 percent monitor flood exercise is scheduled to be carried out in 2024-2025. risks in their portfolios at least annually. The limited This exercise will provide insights into the industry’s monitoring of banks’ exposures to flood risks can preparedness to measure, manage, and mitigate be partly explained by banks not tracking flood risks climate-related risks. among their clients. There is also limited reporting of flood-related risks—almost 70 percent of the surveyed Cognizant of the risks posed by climate-related banks stated that they do not report their risks on either physical risks, some banks have taken one step further internal or external assessments. Although monitoring and deployed risk mitigation actions when financing and reporting flood risks for banks are still in their businesses. Some banks use screening to determine nascent stages, with banks only starting to develop plans whether the business premises for the financed activity and strategies to assess these risks in their portfolios, are prone to flooding, typically drawing from historical there remains a perception that flood risks have a limited information on past flooding, the latest headline news, impact on financial institutions’ portfolios. flood risk models, or inputs from insurers regarding exposures to flood risks. Based on such an assessment, Nevertheless, climate-related risk management banks may require businesses to acquire flood insurance practices of financial institutions are expected to or develop and implement adaptation plans. Such improve in the near term in line with expectations put efforts are mandatory prerequisite for financing. There in place by BNM. The Climate Risk Management and are instances when banks deny financing to high-risk Scenario Analysis policy document comes into effect, in businesses, especially for new clients, when the risks are stages, between December 2023 and December 2024.61 perceived as incompatible with the bank’s risk appetite. The policy document laid out expectations on financial This finding is consistent with the observations from institutions to integrate climate risk management flooding events in recent years. Banks are supporting into their governance, strategy, risk appetite, and businesses, but coverage remains uneven, and a small risk management, including imposing requirements proportion of high-risk businesses are unable to access surrounding scenario analysis and disclosures. In financial services and products, especially protection addition, an industry-wide climate risk stress testing solutions (see more below). FIGURE 4.1 Financial Product Offerings A. By Banks B. By Insurers and Takaful Operators Business as Usual Emergency Financing Sustainable Investments Determinants of Flood Insurance Offering Coverage of Premises and/or Coverage of Content (incl. inventories) Revolving credit lines Real Estate Coverage for Commercial Vehicles Coverage for Equipment and Machinery Medium-term loans (1-5 yrs. maturity) Short-term loans 90% (<1 yr. maturity) 80% Long-term loans (5 yrs. or more of maturity) 70% Leasing 60% (machines and equipment) 50% Leasing or loans for commercial vehicles 40% Insurance/takaful coverage (e.g. ood) 30% 20% Others 10% Equity nancing 0% Universal Geographical Sector of Business Business No offering/Not Applicable offering to location and/or activity of size preparedness all business exposure to business to oods 0% 20% 40% 60% 80% 100% clients oods 61 See https://www.bnm.gov.my/-/pd-crmsa-2022. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 71 CHAPTER 4 – Perspectives from the Financial Sector 4.2 Emergency Financing There is limited availability of emergency financing for Instead, businesses have been left only with the businesses in Malaysia. The provision of emergency limited range of offerings from financial institutions.65 financing for businesses by banks is even more limited This finding is consistent with the findings in Chapter than adaptation financing in Malaysia, as shown in Figure 3, in which businesses noted a range of challenges 4.1, panel A. Less than half of the surveyed banks stated associated with access to finance in the aftermath of that they offer loans or credit lines to businesses when floods, including for recovery and reconstructions efforts. they are affected by floods. In some instances, financial institutions have supported businesses by allowing BNM has stepped in to support vulnerable businesses, repayment deferrals on a temporary basis, such as bridging the gap in emergency sources of funds through moratorium. For example, RHB’s Flood Relief for businesses, especially smaller ones. As noted Assistance provided financial assistance to existing in Chapter 2, in the aftermath of the 2021-22 floods, customers affected by the 2021-22 floods, including BNM launched its Disaster Relief Facility providing businesses.62 This program includes deferment of financing for micro, small, and medium enterprises housing loan payments for up to six months, waiver (MSMEs) affected by floods. The goal of the Facility of late payment credit card charges for up to three was to enable businesses to resume their operations. months, and even waiver of card replacement fees. The Facility offered partially guaranteed (up to 80%) However, emergency finance offerings are not yet financing of up to RM700,000 ($155,000) per SME mainstream in Malaysia’s banking sector. About 40 and up to RM150,000 ($33,000) per micro enterprise, percent of the surveyed banks stated that they do not with a maximum financing rate of 3.5 percent per provide any emergency support to businesses.63 year, inclusive of partial guarantee fees. Financing is earmarked for expenses related to repairing and In Malaysia, emergency assistance has typically replacing of business assets and working capital.66 been offered officially through the government. Box As noted in Chapter 2, BNM allocated RM500 million 4.1 briefly outlines how emergency financing and relief (roughly $110 million) to the Facility. The Facility has not have been typically deployed in Malaysia. Emergency yet been fully utilized, with 53 percent disbursed as of financing and relief have been distributed exclusively July 2023. BNM is currently assessing how to enhance to individuals and households. For instance, during the its Disaster Relief Facility to provide support for access 2021-22 floods, no public sector funds were available to finance for ex- ante adaptation and risk mitigation, in for businesses despite the RM0.5 billion ($110 million) addition to the currently available support for ex-post loss in business premises incurred during these floods.64 financing for business recovery and rehabilitation. 62 See RHB Group’s Notice: https://www.rhbgroup.com/files/others/highlights/Flood_Relief_Assistance_programme.pdf. 63 Financial institutions can provide emergency support to businesses through a range of temporary measures, such as, deferment of loan repayment, minimum payment waiver or reduction, interest rate reduction, and waive of fees and penalties on early withdrawals, among others. 64 See DOSM (2022). 65 See for example https://www.abm.org.my/press-releases/banks-ready-to-assist-customers-affected-by-floods/. 66 See Bank Negara Malaysia. (2022a). 72 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector BOX 4.1 Emergency Financing and Relief during the 2021-22 Floods in Malaysia The 2021-22 floods, the most significant natural including floods, storms, droughts, beach erosions, disaster to impact Malaysians in recent years, and landslides. clearly demonstrate how emergency financing and relief are typically deployed in Malaysia. The In addition, Malaysia has also received emergency federal government supplied the largest proportion financing from international organizations typically of emergency financing through the National Disaster in the form of grants. Such support typically focuses Management Agency (NADMA), which focused on individuals affected by disasters and health primarily on supporting households.67 For businesses, emergencies. For example, the International Federation the government also distributed emergency funds of Red Cross (IFRC) have allocated $3 million to through a coordinating agency, like SME Corp. For Malaysia in their Disaster Response Emergency Fund example, RM100 million ($22 million) was allocated by (DREF), $2 million specifically for victims of floods. The the Malaysian Ministry of Entrepreneur Development & support was given as grants, according to DREF data.68 Cooperatives (MEDAC) to SME Corp for the SME 2.0 According to the IFRC annual report, almost $500,000 Emergency Fund (SMEEF 2.0) and distributed through were distributed for emergency relief associated with financing to SMEs affected by natural disasters, the floods in Malaysia in 2021 and 2022. 67 The Malaysian Family Flood Aid 2021/2022 was prepared for the victims of the 2021 floods. About RM1.4 billion ($310 million) was allocated for this program, distributed into different types of mechanisms such as the Bantuan Wang Ihsan (BWI), cash vouchers for electronics within the households, and for rebuilding houses destroyed due to the flood. See https://portalbencana.nadma.gov.my/portal/images/nadma/documents/banjir/Mekanisme_Bantuan_Banjir.pdf 68 See IFRC’s website, https://www.ifrc.org/happening-now/emergency-appeals/disaster-response-emergency-fund-dref. 4.3 Flood Risk Insurance Markets Flood insurance or takaful coverage is typically extent that adaptation strategies are mandatory offered as a non-mandatory “add-on” peril to fire prerequisite for coverage for a set of high-risk clients, a and motor protection products, and coverage for portion of such high-risk clients may be excluded from business interruption is supplementary. Universal the market. Consistently, the results in Chapter 3 show offering to business clients is not standard, except for that a proportion of businesses (13 percent) are unable coverage for commercial vehicles (Figure 4.1, panel B). to obtain flood insurance coverage due to their high Offerings are largely based on geographical location exposure to flood risks. or exposure to floods. In addition, almost 80 percent of ITOs mentioned that they consider flood risks when While processing of claims is generally fast for assessing the prospects of business clients and a large households, processing of claims from businesses share of ITOs tend to monitor flood risks annually or is marked by difficulties in assessing losses. Claims at a higher frequency. Akin to patterns observed for from businesses generally require longer processing banks, insurance coverage is sometimes linked to times. While most business claims are processed in less business preparedness for flood risks. For example, than ten business days, for about 30 percent of ITOs, 70 percent of the surveyed ITOs stated that business processing times are longer than ten business days. preparedness is an important determinant of whether ITOs stated that longer processing times for these flood insurance for premises is offered to businesses, claims were due to challenges related to verifying and and 50 percent stated so in the context of insurance quantifying damages amidst the limited availability coverage for content (including inventories). To the of information from businesses. Such challenges MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 73 CHAPTER 4 – Perspectives from the Financial Sector seem particularly marked in the case of SMEs, where those in the agriculture sector, where ITOs have shied record-keeping practices are less well-developed. For away, mainly due to the high riskiness of the segment. instance, real-time tracking and verifying inventories for assessing losses can be particularly challenging for Although the surveyed ITOs perceive flood risks smaller businesses. in Malaysia as non-systemic, with risks seen as diversifiable within Malaysia, the insurance market Pricing of flood insurance remains de facto tariff based. is highly dependent on re-insurance. The dependence Currently, Malaysia is still in the process of liberalizing the on re-insurance is demonstrated by the relatively small pricing of insurance and takaful products; the current impact of the 2021-22 floods on the insurance sector. pricing framework for these products already provides Most of the insured losses were absorbed by the re- some flexibility for ITOs to adopt risk-based pricing. insurance segment. Nevertheless, flood risks have However, due to a long-ingrained tariff pricing culture, been re-priced since then, which, in turn, could lead flood protection products remain mostly at tariff to changes in the marketplace dynamics. There are pricing, particularly for the range of existing products already some treaty restrictions related to exposure in the marketplace. Some ITOs utilize deductibles to to the agriculture sector. Given the market’s high incorporate risk appetites and risk-based pricing into dependence on re-insurance, such treaty restrictions their offerings. Another critical constraint relates to the curb the offer of protection for businesses in the lack of adequate data and capabilities to price risks segment. Interviews with re-insurance companies effectively and is further explained below. active in Malaysia revealed that risk absorption by the There is significant space to expand flood protection re-insurance industry is not perceived to be a constraint coverage among businesses in Malaysia, especially for market expansion at present. However, there is a among MSMEs. The survey evidence in Chapter perception in the marketplace that evolving flood risks, 3 showed that coverage is skewed toward larger the re-pricing of risks, and additional treaty restrictions businesses, with the uptake of flood insurance among could, in the future, lead to effective constraints in the MSMEs being less widespread, even after differences ability of domestic ITOs to transfer risks to re-insurance, in risk exposure are considered. ITOs and banks hold which, in turn, could affect the capacity of the insurance similar perceptions. For example, large businesses and takaful segment to absorb flood risks. Specifically, are perceived to be “well-covered” by more than 80 ITOs may reduce their aggregate flood risk exposures, percent of the surveyed ITOs and almost half of the for instance, by further excluding high-risk customers. banks offering insurance coverage (Figure 4.2). The In addition, ITOs may re-price flood risks in their rest of the surveyed financial institutions perceive their product offerings as the frequency of floods increases. coverage to be moderate. In contrast, over half of the Meanwhile, there is no substantial expansion in market surveyed ITOs and 75 percent of banks stated that depth that allows risk diversification across a large micro-business coverage is poor. The low penetration client base domestically, which could raise concerns of insurance among MSMEs is particularly marked for about affordability. FIGURE 4.2 Financial Sector Perception of Flood Insurance Coverage for Businesses in Malaysia A. By Banks B. By Insurers and Takaful Operators Poorly covered Moderately covered Well covered Don’t know/Not Offered Poorly covered Moderately covered Well covered 100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% Micro Firms Small Firms Medium Firms Large Firms Micro Firms Small Firms Medium Firms Large Firms Note: The survey instrument did not provide a definition of firm size. 74 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector 4.4 Supply-Side Challenges 4.4.1 Limited Availability and Accessibility to Flood- related Data At the core of the challenges for financial institutions, • Spatial granularity. Floods are highly localized especially banks, in providing adaptation and events. Hence, an adequate understanding of the emergency financing and protection for businesses impact of floods on businesses requires precise are data gaps. The survey shows that more than 50 geospatial data on flood prone locations that is percent of the banks highlighted as a top challenge for generally unavailable within Malaysia. All financial adaptation financing, the poor quality or unavailability institutions collect information on their assets at of sustainability reporting from businesses. And almost the street and postcode levels. The absence of 40 percent mentioned costly information gathering and publicly available geocoded data enabling the processing (Figure 4.3). Banks acknowledged that these identification of flood-prone locations for financial same factors thwart their ability to provide emergency institutions prevents them from overlaying their financing. Similarly, 45 percent of ITOs also highlighted asset-level exposure (and vulnerability) data the lack of information on flood risks as a top challenge with hazard information. Aggregated data— for providing flood protection to businesses (Figure for example, at the postal code level—may 4.4). mask the heterogeneity and granularity of flood impacts across different locations and asset The data gaps in Malaysia reflect limited availability, classes. In addition, there are concerns about the access, and quality of information. Flood risk comparability of information across geographical assessments for the pricing of financial products and locations due to a lack of consistency in data services require granular, detailed historical data of collection. various types, including meteorological, hydrological, • Data gatekeeping. Flood data are considered and topographical information and information on sensitive in Malaysia, and its publication is land use, flood protection infrastructure, and drainage perceived to carry some risks associated with the systems and their relative effectiveness, among others. potential backlash from the private sector, and These data are typically combined in flood risk maps. the public more broadly, from resulting changes These maps are largely unavailable in Malaysia. The in property values. Government agencies have information available to financial institutions is marked reservations about sharing available climate- by the following limitations: related data, including flood risk maps. Thus far, • Limited coverage. Public agencies and ministries there have been strict limitations on data usage collect information on riverine floods, but no by other public or private bodies. Nevertheless, information is currently collected or tracked on flash relevant ministries in Malaysia are conscious of the floods, which are precisely the type of floods that importance of accessibility of such data. They are are expected to increase in frequency in Malaysia. developing a centralized climate-related database, including flood hazard and projection maps. This • Temporal relevance. Data is most useful when information is planned to be made accessible to it can be relied upon to be accurate and up to the public, including financial institutions.69 date, especially for climate risk assessments and the need to understand rapidly evolving weather Financial institutions in Malaysia can overcome, at patterns. Data from public sources that are least in part, the limited availability of information currently made publicly available only covers a on flood risks, even though the available options are short historical period (e.g., five years backward). costly. There is some evidence that some financial There are no forward-looking projections nor institutions have been relying on a broad spectrum of sufficient information for financial institutions to practices in sourcing relevant climate-related data. develop their projections on the impacts of floods. In other words, limited historical information Proprietary flood risk maps. For example, financial constrains robust forecast analysis. institutions can access proprietary data from (re) 69 Some data have been made publicly available by the Selangor and Malaysia DID related to hydrology on their website, where information is based on data from telemetry stations. See http://infobanjirjps.selangor.gov.my/. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 75 CHAPTER 4 – Perspectives from the Financial Sector insurance companies, including flood hazard maps diversify flood risks in their portfolios by expanding and value-added services, such as flood modeling their client base. This constraint is particularly acute for and projection tools. These databases generally offer smaller financial institutions with a smaller client base. the most sophisticated data analysis and forecasts on flood risks for the Malaysian financial sector. They Open-sourced data. Technological advancements typically rely on global in-house flood risk models that have increasingly contributed to improved availability integrate flood hazard and exposure data from various and quality of data on flood risks. In recent years, the sources, such as satellite and hydrological data. Most increasing availability of open-source data, such as insurers rely on such databases. However, access satellite data, has allowed greater accuracy in assessing to these datasets can be costly and similar concerns the footprint of past floods and more widespread on availability and quality of data for Malaysia apply geographical coverage of flood risks, including for to such datasets. They also rely on limited historical areas where no other mapping or modeling capacity information and infrequent updates. Some third-party is available. These should facilitate the development of flood risk maps are also available only at the postcode flood risk models. However, few financial institutions in level. The estimated flood risk maps are thus subject Malaysia have independently used such information. to a high margin of error. Also, the assumptions and modeling framework are often “black boxes,” with These data gaps constrain the measuring and limited transparency to ITOs (or banks) intending to monitoring of flood risks, including changes associated leverage the information. with evolving weather patterns, changes in land use, urbanization, and even flood mitigation projects. This Enhanced information from clients. Financial institutions has important implications for flood risk management by can also collect data based on their clients’ exposures. financial institutions and the range of product offerings While there is no standardized practice for data for businesses. It can lead to inaccurate pricing of collection from customers, as discussed above, banks flood-related financing and insurance, which carry risks are building their data capacities by engaging more for financial institutions. It can also lead to exclusionary proactively with their clients in collecting data points or redlining behavior, with financial institutions acting such as insurance claims. ITOs can also leverage their historical claim data. However, such information often conservatively in offering flood protection coverage lacks sufficient granularity, such as geocoding, to or adaptation and emergency financing to perceived adequately understand the risk profile of customers. high-risk customers. There are also risks of inadequate Such an approach could enable the management of coverage of financial products—for instance, leaving flood risks in the portfolio of financial institutions. It is businesses under-compensated or without access arguably not sufficient to allow financial institutions to to financing following a severe flood event—that can accurately assess the risks of potential clients (especially constrain business adaptation and resilience, hamper those in different geographical locations), and to recovery efforts, and erode trust in the financial sector. FIGURE 4.3 Challenges for the Financing Adaptation and Resilience Top-3 Challenges Adaptation Financing Emergency Financing Poor quality of sustainability reporting Costly information gathering and processing Inability to adequately price ood risks Lack of demand Legal and regulatory environment Shortage of expertise Poor quality of nancial statements Inability to assess business prospects Inability to diversify ood risks Costly monitoring of accounts Lack of collateral 0% 10% 20% 30% 40% 50% 60% Share of surveyed banks 76 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector FIGURE 4.4 Challenges for the Expansion of Flood Insurance Top-3 Challenges Constraints from re-insurance Lack of information on ood risks Inability to cover high-risk clients Inability to price ood risks Limits on own exposures to ood risks Lack of expertise Lack of demand Clients do not understand insurance Legal and regulatory environment Inability to manage ood risks 0% 20% 40% 60% 80% Share of surveyed ITOs 4.4.2 Inability to Adequately Price and Diversify Risks and Serve High-Risk Businesses Financial institutions in Malaysia face critical large and diverse client base is crucial for the ability challenges in adequately pricing flood risks. Risk- of financial institutions to diversify away flood risks, based pricing lies at the core of financial markets especially in the case of ITOs. The non-mandatory for flood risks, especially for the insurance market. nature of flood insurance and the limited depth of the For instance, assessing flood risk exposures and insurance market in Malaysia make it challenging for quantifying potential losses is essential to calculating ITOs to build a sufficiently large pool of uncorrelated insurance premium amounts, ensuring that ITOs have risks, as clients within these high-risk areas are more the financial capacity to pay claims while maintaining likely to purchase insurance or takaful protection. financial sustainability, and establishing sufficient reserves and capital. Yet, more than 40 percent of ITOs Lack of adequate risk-based pricing and an inability and more than 30 percent of banks stated that their to effectively diversify flood risks can thus hinder the inability to adequately price flood risks hampers their ability of financial institutions, especially ITOs, to product offerings to businesses in Malaysia (Figures serve high-risk clients. Indeed, the survey shows that 4.3 and 4.4). This is partly due to the marked flood risk limitations to risk diversification are core challenges to data gaps discussed above, and limited expertise and ITOs in Malaysia, with a significant share of the surveyed capabilities among financial institutions, as discussed ITOs pointing to either the inability to cover high-risk below. clients or exposure limits to flood risks. Concerns with risk diversification and outreach to high-risk clients Flood risk diversification is also perceived as a key are likely to grow in Malaysia if markets develop on challenge for financial institutions, especially ITOs in a commercial basis. Interviews with ITOs and re- Malaysia. Flood risks in Malaysia are highly localized, insurance/re-takaful operators revealed that increases resulting in risk concentration. Insurers arguably in exposures to high-risk clients would likely raise the face concentrated risks as large losses can occur pricing of protection products, effectively crowding simultaneously and in geographically clustered areas. out potential clients that are of either lower risk or that For example, businesses located near river basins are would be unable to afford the higher premiums. In prone to more frequent flooding during monsoons, or addition to excluding those needing flood protection businesses located in coastal floodplains are generally the most, this may further hamper ITOs’ efforts to affected more frequently than businesses located at diversify risk in their portfolios effectively. a distance from (or elevation above) watercourses. A MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 77 CHAPTER 4 – Perspectives from the Financial Sector 4.4.3 Lack of Demand and Other Demand-Side Factors Banks highlighted that lack of demand is a challenge More than 20 percent of the banks mentioned as a top- for expanding adaptation and emergency financing. 3 constraint for emergency financing the poor quality Almost 30 percent of the surveyed banks stated that lack of financial statements, inability to assess business of demand is a top-3 challenge for adaptation financing, prospects, and lack of collateral. In contrast, only a and 20 percent of banks said so for emergency financing handful of banks noted these other demand factors (Figure 4.3). The lack of explicit classifications of flood as top constraints for adaptation financing. These risk adaptation strategies in the data collection practices differences can be explained by changes in business of banks can exacerbate this perception. However, only prospects in the aftermath of floods when businesses, a small share of ITOs (15 percent) noted lack of demand especially SMEs, may have suffered significant asset as a top challenge (Figure 4.4). losses and damages that formed the collateral basis for debt financing, and their business viability may in fact Banks also noted some other constraints from the become uncertain. demand-side, especially for emergency financing. 4.4.4 Lack of Capabilities A small share of surveyed banks and ITOs noted addition, the high uncertainty around flood risks adds an limited capabilities as a top challenge hindering additional layer of complication. Risk-mitigating factors, their ability to support businesses’ adaptation and such as the availability of adaptation technologies and resilience to flood risks. Almost a fifth of financial government policies that impact risk exposures and institutions cited a lack of expertise in assessing and pricing mechanisms, are challenging to understand managing flood-related risks in their portfolios. Such and quantify. These challenges are compounded by assessments can be particularly complicated in the the marked data gaps discussed above, as the lack of case of flood risks, even though such risks are highly high-quality flood data further limits the understanding localized in Malaysia. Sophisticated data analytics and of these risks and can exacerbate inaccuracies in modeling are usually required, which tend to be more estimating and pricing risks. complex and expensive compared to other risks. In 4.5 Conclusions Reinforcing the findings from the survey of Malaysian being less widespread. At the same time, there is businesses, evidence from financial institutions a perception among financial institutions of limited reveals that banks and ITOs have limited engagement business demand for financial products in flood risk in supporting businesses’ adaptation and resilience. management, which, in turn, reduces the incentives Financing for flood risk adaptation and resilience, for greater engagement by financial institutions. In the especially emergency financing remains relatively small, case of insurance, low demand may be caused by a with a limited range of financial products available to a “disaster syndrome” in which the low depth of the businesses. Consistent with the business-level survey insurance market pressures the government for ex- results, financial institutions also believe that insurance post compensation, whereas the expectation of such coverage is skewed toward larger businesses, with the compensation further reduces demand for insurance. uptake of flood insurance among smaller businesses 78 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 4 – Perspectives from the Financial Sector Marked gaps in flood-related information are at the The inability to properly quantify and price flood risks core of constraints in financing and insurance for and a lack of flood risk diversification hinder the flood risk management for businesses. There is limited ability of financial institutions to serve Malaysian reporting on exposures and vulnerabilities to flood risks businesses, especially high-risk ones, adequately. from businesses, and the availability and accessibility Indeed, the evidence in this chapter points toward a of information from public sources are also limited. At de facto exclusion of a set of high-risk, vulnerable least in part, due to marked data gaps and the inability businesses from access to either finance or insurance to adequately quantify flood risks, financial institutions (or both). These patterns are aligned with the evidence in Malaysia face challenges in monitoring flood risks. presented in Chapter 3, which also provided some Risk management practices related to floods are not evidence that high-risk businesses, especially smaller yet widespread, especially among banks. While many businesses, are being either priced out or outright banks use screening to assess flood risks for business excluded from the insurance market. clients, flood risks are not consistently embedded in credit risk assessments, and such risks are not priced The results suggest that there might be a vicious into financial services. There is also limited reporting cycle between bank financing and insurance, in which of banks’ exposures to flood risks, which can be partly limits in access to one source of external funds can explained by banks not tracking flood risks among their further constrain access to other sources of finance. clients. The inability to accurately assess risk exposures On the one hand, certain high-risk businesses affected and quantify potential losses constrain risk-based by floods were asked to retrofit their premises to obtain pricing—including for insurance premiums—and limit further insurance coverage. Doing so can be particularly the scope for risk transfers, for instance, to insurance difficult when businesses face constraints in access and re-insurance. to finance. Similarly, depending on past exposures to floods of businesses, banks could have requested Furthermore, there are limits to potential flood them to purchase flood insurance or develop and risk diversification. To the extent that flood risks implement adaptation plans as prerequisites for access are not random—that is, large losses tend to occur to financing. simultaneously and in geographically clustered areas— financial institutions face concentrated and correlated Finally, there is a role for public sector policies to risks. A large and diverse client base is crucial for their unlock financing and protection for flood risks. ability to diversify away flood risks. In the case of ITOs, Financial institutions face significant challenges in the non-mandatory nature of flood insurance and the providing these financial services and products in limited depth of the insurance market in Malaysia make Malaysia. For ITOs, the challenges in providing flood risk it challenging for ITOs to build a sufficiently large pool protection to a highly concentrated, high-risk segment of uncorrelated risks, as clients within high-risk areas is exacerbated by a prevailing tariff culture. For banks, are more likely to purchase insurance protection. For the inherent fragility of business in the aftermath of ITOs, these challenges imply that market expansion disasters negatively affects their incentives to provide on a commercial basis can raise concerns about emergency financing and adaptation finance; precisely affordability and may lead to further exclusion of some because these are businesses typically exposed (and of the most vulnerable businesses, namely high-risk vulnerable) to flood risks. The next chapter provides a businesses. Limited capabilities to assess and manage more in-depth discussion of these issues and how public flood risks seem to compound these challenges. There sector policies can foster financial sector development is also a perception, especially among banks, of limited as an enabler of greater private sector adaptation and demand from businesses for the financing of adaptation resilience. and resilience. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 79 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses CHAPTER 5 Public Sector Policies to Support the Management of Flood Risks for Businesses MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses Key Messages • An integrated, coherent, and proactive approach by the public sector, the private sector, and the financial sector is paramount in building a flood-resilient economy. • The public sector plays a pivotal role as the primary provider of large-scale flood control infrastructure, simultaneously ensuring the resilience of critical infrastructure and service delivery in the face of flood risks. The public sector is also responsible for a range of policies softer in nature, such as urban planning and land use restrictions in flood-prone areas, among other responsibilities. • The actions by the public sector can significantly change the scale and the type of private sector investments. They also affect the incentives to undertake such investments by businesses and the financial sector alike by changing their risk-return profiles. But while these actions can markedly reduce the impacts of floods on businesses in Malaysia, residual risks would remain. • Ultimately, the ability of businesses to reduce the impact of floods hinges on their capacity to adapt. But private sector actions should build on and complement those of the public sector, which puts a premium on transparency about public sector policy priorities and strategies. • The financial sector can be an important enabler. Access to financial products can support businesses in coping with floods by financing ex-ante adaptation efforts and enabling ex- post financial resilience. However, the landscape for financing investments to enhance private sector resilience to flood risks is marked by a range of market inefficiencies that call for policy intervention. • This chapter outlines a range of complementary policy actions in six key areas, focusing on how policy makers in Malaysia can support and foster private sector resilience to floods. This chapter discusses at length the following six critical sets of actions, as follows: 1. Enhancing data availability, accessibility, and affordability to support flood risk assessments, which are vital for risk management, informed investment decisions, and the development of financial markets. 2. Developing a long-term flood risk adaptation strategy has first-order importance by establishing the level of risk retention by the public sector, thereby reducing policy uncertainty and facilitating the assessment of flood risks for the private sector. 3. Strengthening the enabling environment for the financial sector, including mainstreaming flood risks to enhance accountability, ensure adequate risk management, and foster financing toward adaptation and resilience. 4. Supporting access to finance for adaptation and recovery, especially targeting the most vulnerable businesses, such as SMEs. 5. Deepening the insurance market to enhance the range of financial instruments that can support the financial resilience of businesses in Malaysia. 6. Enhancing flood risk awareness and building capabilities to foster greater efforts toward adaptation and resilience. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 81 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses Effective management of flood risks entails relocating away from high-risk locations, the public complementary actions by both the public sector sector can play a critical role in decreasing exposures and the private sector to reduce hazards, exposures, more widely by enhancing the resilience of public and vulnerabilities (Figure 5.1). As discussed earlier infrastructure, building flood control infrastructure, and in this report, the impact of floods on businesses strengthening urban planning and land use restrictions depends on the likelihood of floods and their physical in flood-prone areas, among others. A discussion of characteristics (i.e., the hazard); businesses’ exposures; such public sector policies is also beyond the scope and the degree to which businesses and their assets of this report and is left for future work. This report would be adversely affected by floods, taking into is focused on supporting businesses to adapt and account the hazards they face and their exposures (i.e., strengthen their resilience to flood risks. The public their vulnerabilities). Actions aimed at reducing hazards sector, working with the private sector, has a critical are complex, relate to climate change mitigation, and role in promoting informed private sector actions in lie beyond the scope of this report. While businesses this regard. can reduce their exposure to flood risks, mainly by FIGURE 5.1 Role of Policies in Adaptation to Flood Risks Hazard Exposure Vulnerability Flood Risks Where and When Who and What How and How Much Scope for Action for Firms : Scope for Action For Firms : Relocation Adaptation Strategies Emergency and Reconstruction Planning Scope for Public Policies: Policies for Climate Change Mitigation Scope for Public Policies: Flood Control Infrastructures Broader Recovery & Reconstruction Efforts Flood Resilient Infrastructure Early Warning Systems & Forecasting Emergency Response Enabling Role of the Financial Sector Awareness of Flood Risks Constrained access to finance for adaptation and This chapter focuses on the range of public sector resilience, especially for SMEs, is a key factor hampering policy options to strengthen private sector resilience the needed investments in climate change adaptation and enhance the management of flood risks for and resilience. As highlighted in Chapters 3 and 4, businesses, zooming in on policies for the financial businesses often lack access to finance to invest ex-ante sector. These policies should address the underlying in preparedness and risk reduction strategies. They also market failures and frictions that constrain businesses lack access to ex-post sources of funding for recovery from effectively adopting more resilient business efforts if these risks materialize. In fact, businesses highly practices while creating an enabling environment exposed to flood risks may face even tighter financing that encourages private financing toward appropriate constraints as risk-averse financial service providers investments in climate adaptation. Policies must retrench from such risks. SMEs, in particular, face more also be firmly grounded on a comprehensive binding constraints than larger businesses. Businesses understanding of incentives for both businesses and may not have access to emergency sources of financing financiers and the risks and uncertainties they face. when hit by floods as lenders may perceive these These guiding principles serve as the foundation for businesses as higher risk due to the negative impact of effective adaptation strategies and the design and floods on their assets and business prospects. Not only implementation of appropriate policy support. The rest banks but also ITOs may not cater to high-risk businesses. of this chapter brings together the evidence from the The evidence in Chapter 4 suggests this is currently demand and supply assessments discussed in Chapters the case in Malaysia. Improving access to finance for 3 and 4 to outline the critical challenges hindering businesses, especially SMEs, can be crucial to enhancing private sector adaptation and resilience and to present a the resilience of the private sector to flood risks. range of policy options available to tackle them. 82 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses 5.1 Challenges of Financing Investments in Adaptation to Flood Risks The landscape for financing adaptation efforts in suffered, on average, greater losses and damages response to flood risks is marked by financial frictions when affected by floods in recent years. Despite the and market failures that can lead to underinvestment potential benefits, the analyses in this report pointed in adaptation by both businesses (especially SMEs) toward limited investments in flood preparedness and financiers. Chapter 2 provided evidence of the characterized by perceived mismatches in supply and potential benefits of climate adaptation investments demand. Banks argue that there is limited demand for businesses, such as those associated with supply for finance from businesses, as shown in Chapter 4. In chain resilience. Business-level survey evidence contrast, businesses argue that the range of financial reinforced this assessment by showing that businesses products is inadequate, and they have limited access to with limited access to finance in Malaysia are less finance, as highlighted in Chapter 3. These challenges likely to invest adequately in preparedness and have can be particularly marked for SMEs.70 5.1.1 The Lack of Business Case for Investments in Flood Risk Adaptation Mismatched time horizons and difficulties in cost- vulnerabilities to floods call for tailored adaptation benefit assessments hinder investment in flood risk strategies, adding to the complexity of the decision- adaptation and resilience. Such investments often making process and the cost-benefit assessment. require significant upfront expenditures but returns tend to have longer and more uncertain payback The uncertainty about the timing and magnitude of periods when compared to conventional investments. the returns to adaptation and resilience investments These benefits may not be material to businesses can stifle financing. Lenders tend to favor investments in the short term, especially for SMEs, a segment of with predictable short-term returns and may not businesses typically characterized by high entry and appropriately consider the longer-term benefits (and exit rates. Many SMEs may not be operating when the costs) associated with efforts toward adaptation to risks these investments seek to address materialize. flood risks. In fact, developing financial markets for long-term financing is a well-known challenge in many In addition, the benefits of investments in adaptation EMDEs. and resilience to floods can be particularly hard to quantify, which further weakens the business case for Furthermore, externalities and the public good nature investments. An important benefit from investments of adaptation investments toward flood risks can in adaptation and resilience is the mitigation of lead to the mispricing of benefits, costs, and risks. vulnerabilities to risks, which lowers expected losses For example, investments by individual businesses associated with floods. Hence, the benefits of such can contribute to sector-wide resilience and stability, investments are, in practice, avoided losses, which partly because many businesses in Malaysia operate are complex to measure and monetize. This is further within complex supply chains. Investments that compounded by the high uncertainty surrounding not strengthen individual businesses’ resilience can reduce only flood risks, but also the effectiveness of adaptation vulnerabilities in the entire supply chain. Without and resilience strategies. For instance, regional, effective pricing mechanisms for these externalities, sectoral, and firm-specific variations in exposures and individual businesses would undervalue the benefits 70 See also Schaer and Kuruppu (2018). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 83 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses of investments, thereby reducing their incentives to resilience-enhancing investments could compromise invest. For the same reasons, lenders may be reluctant short-run profitability. to fund these investments, especially when prioritizing 5.1.2 High Uncertainty amidst Limited Capabilities For starters, the magnitude and frequency of floods to address rapidly evolving climate risks. There is are inherently difficult to assess and marked by also a lack of clarity over responsibilities and often uncertainty. This is due to the need to account duplication of interventions, which results in confusion for complex and interdependent factors, including and delays among the agencies involved in response hydrological and meteorological processes, natural and recovery activities. Recent large-scale disasters and non-natural factors (including rainfall patterns, soil have revealed areas for improvement in the current moisture, topography, and drainage systems, among institutional structure for disaster response system others), and mitigating factors (such as flood control management, which is summarized in Box 5.1. Evidence infrastructure). Climate change adds an additional layer from the business-level survey in Chapter 3 reaffirms of uncertainty and complexity to these assessments, as the perception. Malaysian businesses noted the need discussed in Chapter 2. for greater coordination and transparency across government agencies. Information deficiencies exacerbate these uncertainties, rendering adaptation and resilience Overall, the high uncertainty hinders the willingness investments riskier than conventional investments. of both businesses and financiers to invest in climate In addition to the marked data gaps related to limited adaptation and resilience. The high uncertainty availability, accessibility, and quality of information often results in indecision and underinvestment. on flood risks in Malaysia, there is heightened For businesses, there are risks of overadaptation uncertainty stemming from limited knowledge around: (i.e., undertaking investments that later prove to be (i) technologies (e.g., technical feasibility); (ii) markets; unnecessary), underadaptation (i.e., failure to invest and (iii) policies and regulations, including a lack of toward mitigation of losses), or incorrect adaptation consistency in public sector policies.71 (i.e., undertaking investments that later prove to be ineffective). Even when businesses recognize the need In Malaysia, an important source of uncertainty to devise strategies to mitigate losses associated with pertains to public sector policies. Private efforts toward floods, the high uncertainty and risks of inadequate flood risk resilience should complement public sector action amidst costly investments can hinder effective efforts to achieve efficiency, minimize duplication action toward preparedness and adaptation, including of efforts, and maximize the impact of investments. financial resilience planning. For lenders, high Limited information about the government’s capital uncertainty is equivalent to high riskiness, whether real investments in flood adaptation projects (actual or or perceived, which in turn affects risk-return trade-offs planned) and the extent of government support to and can discourage financing. recovery efforts after flooding events (see below) constrains effective coordination between private The underdevelopment of the financial infrastructure sector and public sector efforts. for climate-related adaptation investments further complicates this already intricate informational Lack of transparency about the disaster risk environment. Taxonomies that define criteria for management framework at the country level economic activities aligned with climate-related goals further compounds on uncertainties. As a result, and and climate-related disclosure standards are essential as discussed in Chapter 2, disaster risk reduction, elements in building an enabling environment for response, and recovery projects seem to lack financing sustainable and climate-resilient projects. integration and cohesiveness, with limited information The absence of formally agreed-upon objectives and about coordination protocols and mechanisms standards can result in a lack of comparability, reliability, 71 Data gaps are a significant constraint to financial institutions in Malaysia, hindering critical flood risk assessments that underpin the pricing of financial services, including insurance premiums, as argued in Chapter 4. Data gaps also constrain an accurate flood risk management for businesses. When businesses lack access to information, they may not understand the risks they face, and consequently, they are less likely to invest in flood risk mitigation. As discussed in Chapter 3, a significant fraction of SMEs noted that they lack sufficient information about flood risks as a factor constraining investments. 84 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses and accountability, leading to higher transaction environment for climate change adaptation vis-à-vis costs and unnecessary outlays, which can reduce the mitigation is not unique to Malaysia. Indeed, most attractiveness of these investments. Thus far, policies taxonomies and disclosure and reporting requirements supporting the enabling environment in Malaysia have do not explicitly reference how financing can support focused primarily on climate change mitigation efforts climate change adaptation and resilience.72 rather than adaptation, with an emphasis on managing Finally, limited awareness and capabilities intensify GHG emissions. There remains a lack of clarity around the challenges posed by data gaps and high the standards and definitions for adaptation investments. uncertainty and can hinder the adoption of effective Also, a standardized reporting framework with well- risk management practices. As highlighted in Chapters defined metrics that would allow financial institutions 3 and 4, there are marked gaps in awareness of flood to better monitor and report on flood risks remains to risks, for both businesses and financial institutions in be developed. The underdevelopment of the enabling Malaysia. 72 See, for example, the Policy Note, “Green Finance: A Policy and Advocacy Approach,” by the Inclusive Green Finance Working Group, United Nations Secretary- General’s Special Advocate for Inclusive Finance for Development. BOX 5.1 The Government Response to the 2021-22 Floods In the aftermath of the large-scale December 2021 issue timely warnings, indicating a need for improved - January 2022 floods, the government responded forecasting and communication infrastructure. The with several measures to aid recovery efforts. The 2022 Auditor-General’s Report revealed that Phase 1 of magnitude of the event exposed some shortcomings the Flood Forecasting and Warning Programme for the in the disaster risk management framework in Malaysia three river basins in Kelantan, Terengganu and Pahang and offered valuable lessons for reforms, including: was unsatisfactory, with a flood forecasting accuracy rate of 5.6 percent.75 Challenges to early warning systems.73 On December 16, 2021, MetMalaysia issued an orange alert for severe Weak communication and coordination. Widespread weather in Kelantan and Terengganu.74 However, an news reports suggest a lack of effective communication unexpected shift of Tropical Depression 29W led and coordination among different government agencies, to unprecedented rainfall also on the west coast of local authorities, and various stakeholders during Peninsular Malaysia. MetMalaysia then issued an amber this flood episode.76 In fact, Government of Malaysia alert, which then swiftly turned to a red alert (the highest officials acknowledged shortfalls in the government level) for the Klang Valley, Selangor and neighboring response, including in NADMA’s role during this states. It rained continuously for four days, with total episode, citing insufficient and inadequate staffing precipitation equivalent to a month’s worth of rainfall that curbed its capabilities to centrally coordinate in the area. By December 20, floodwaters reached a emergency responses.77 This lack of coordination height of four meters in some places and many roads resulted in inefficiencies in timely response actions, remained impassable. This episode revealed potential resource allocation, and dissemination of information shortcomings in the early warning system’s capacity to affected communities. to accurately predict severe weather patterns and 73 See Malay Mail (2022) and Rahman (2022) and references herein. 74 See The Star (2021). 75 See, for example, New Straits Times (2023). 76 See, for example, Free Malaysia Today (2021) and Reuters (2021). 77 See, for example, Astro Awani (2022) and Mohd Yazid (2022). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 85 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses Slow and inefficient resource allocation and distribution. and reconstruction challenges, including delays The government faced difficulties in efficiently in rebuilding damaged infrastructure, insufficient allocating and distributing resources such as food, support for affected communities, and challenges in water, medical supplies, and relief aid to affected implementing comprehensive reconstruction plans. In areas.78 Often, slow and inefficient official response response to the flood events, the federal government required local communities, civil society organizations, announced a flood relief package to support recovery community groups, non-governmental agencies, as and reconstruction efforts. Most of the public sector well as individuals and corporates to rally together and support was aimed at individuals and households, but fill gaps, which, at times, led to overlaps (and gaps) in support was limited and marked by difficult application disaster relief efforts.79 processes.80 There were only a few initiatives Post-disaster recovery and reconstruction. Following supporting affected businesses, and coverage also the floods, the government faced long-term recovery seemed limited.81 78 See, for example, The Diplomat (2021) and Malay Mail (2021). 79 See, for example, The Diplomat (2021), The Malaysian Reserve (2021), and The Vibes (2021). 80 See, for example, New Strait Times (2021b) and Rahaman (2022). 81 In addition to Bank Negara Malaysia’ Disaster Relief Facility, Bank Simpanan Nasional (a development finance institution under the DFIA 2002 Prescribed Institution Act) offered interest free loans of up to RM10,000 for affected businesses. See MOF (2021). Additional deliberations took place within the Economic Action Council (EAC) regarding proposals to provide special grants for MSMEs impacted by the floods—see New Straits Times (2022). 5.2 Challenges of Developing the Insurance Markets for the Management of Flood Risks Insurance coverage is an important element for markets absorb a portion of claim payments through the financial resilience of businesses. Investments re-insurance, there is a transfer of risk away from in preparedness and adaptation aim to reduce the local economy.82 In other words, insurance and businesses’ exposures and vulnerabilities to flood risks. takaful markets are primarily about risk transfer and While effective risk mitigation can go a long way, losses risk sharing, respectively, not risk mitigation. When and damages caused by floods may not be entirely insurance premiums are reflective of risks (risk-based preventable. Businesses need strategies to ensure they pricing), insurance can then encourage investments in can cope without devastating long-term consequences risk mitigation. and quickly recover when floods occur. Indemnity insurance allows businesses to protect against financial Insurance can provide timely financial resources losses associated with specific assets or pools of for reconstruction efforts when disaster strikes. 83 assets by transferring the financial risks they face to Existing research shows that countries with higher financial institutions. In addition, when international insurance penetration usually recover more quickly 82 For example, the economic impact of the 2011 Canterbury earthquake in New Zealand was minimal despite direct losses approaching 20 percent of GDP (New Zealand Parliamentary Library, 2014). 83 As an illustration of this impact, 80 percent of insured residences were rebuilt after Hurricane Katrina in subsequent years, compared to only 50 percent of uninsured properties. See Turnham et al. (2011). 86 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses and have lower economic output losses.84 In countries assistance. There are also several challenges on the with developed insurance markets, insurance claims supply-side. The classical indemnity insurance is based payments tend to be larger and more quickly disbursed on the observation of losses, whereby insurance claim than government assistance.85 When insurance payments are triggered once losses occur. For this type penetration is sufficiently high, insurance payments of insurance product, if flood risks are to be covered can reduce the need for emergency relief from the by the private markets, risks need to be “insurable.” government, thereby reducing the potential costs of This means that for insurance companies to charge floods to taxpayers. actuarially sound premium rates, risks need to be: (i) quantifiable –that is, the probability of occurrence of a International experience has shown that developing flood, its severity, and its impact in terms of damage the insurance markets for flood risks is challenging. In Malaysia, challenges from both the demand and and losses must be measurable; (ii) random –that is, supply for flood risk insurance have led to a relative the timing and location of insured events must be underdevelopment of insurance and takaful markets. unpredictable, and not affected by the insured parties; From the demand-side, as shown in Chapter 3, and (iii) diversifiable –that is, risk diversification must be there is limited demand for insurance by businesses, possible across a sufficiently large community facing especially among SMEs, due to: (i) limited awareness different risk exposures. Flood risks pose particular and underestimation of flood risks; (ii) lack of challenges regarding insurability as these criteria are understanding about insurance coverage and claim not always met, pushing up the prices of insurance payment processes; and (iii) expectations of post- coverage and leading to shallow markets. We review disaster government compensation or financial these individual elements below. 5.2.1 Inability to Accurately Quantify Flood Risks Private insurance markets tend to develop based The marked data gaps in Malaysia pose challenges on risk-based pricing. Assessing risk exposures and for the insurance sector. Classical indemnity insurance quantifying potential losses is critical to calculating requires robust data for the insurer to assess flood risks. premium amounts, ensuring that ITOs have the financial As discussed in Chapter 4, the lack of data of sufficient capacity to pay claims (and remain profitable), and quality limits the adoption of accurate probabilistic establishing sufficient reserves and capital. Robust risk models for flood risks in Malaysia by ITOs, which are assessment analysis, quantifying potential losses, is also necessary for risk-based pricing. The de facto tariff- essential in facilitating the transfer of risks to re-insurance based pricing prevalent in Malaysia and the relatively markets. Scenario-based or fully probabilistic flood shallow markets arguably lead to limits or exclusion of catastrophe models, developed in part at the instigation coverage for riskier segments. International experience of the re-insurance sector, form the basis of underwriting indicates that Malaysia may be trapped in a vicious flood insurance coverage worldwide.86 Such models can cycle. OECD (2016) notes that the availability of assess both flood risks and potential flood damages. risk maps suitable for underwriting flood insurance Notably, risk-based pricing provides incentives for insurers to offer coverage. It is also an effective mechanism to coverage is often driven by demand from the insurance incentivize risk reduction as it signals the extent of risk sector needing data for mapping and modeling flood exposures to potential clients. In fact, in the absence risks. This was the case in the United States and Canada, of a flood insurance market and risk-based pricing, real where the development of flood risk models was led estate prices tend to ignore flood risks, raising the risks by re-insurance brokers and catastrophe modeling of maladaptation, in which businesses take actions that businesses along with the deepening of the private increase their exposures and vulnerabilities to risks. insurance market. 84 See, for example, Melecky and Raddatz (2011), Von Peter et al. (2012), OECD (2018), Cambridge Centre for Risk Studies and AXA XL (2020), and Fache Rousová et al. (2021). 85 For example, Kousky and Shabman (2015) provide evidence that this is the case in Germany, Austria, and Switzerland. 86 Catastrophic risk models use information on the probability of events of varying magnitudes, the location, structural characteristics, and vulnerabilities of assets-at- risk, and the level of insurance coverage of those assets to provide ITOs with estimates of their exposure to different types of disaster events. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 87 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses 5.2.2 Lack of Risk Randomness and Limits to Risk Diversification Flood risks tend not to be random. The expected losses of insurance cannot be fully adjusted to the level of for the insurance sector depend on the frequency of risk that clients face—either because the information damaging events and the extent of possible damages. is unavailable or too costly to collect or because of Hazards, exposures, and losses associated with floods price controls—then those clients facing more risk in Malaysia are location specific. Businesses located are more likely to demand more insurance, posing near river basins are prone to more frequent flooding risks to the sustainability of the insurance market. In during monsoons, or businesses located in coastal other words, those purchasing insurance tend to be floodplains are generally affected more frequently than precisely those facing higher risks. When the insurance businesses located at a distance from (or elevation market is voluntary, as in the case of Malaysia, the above) watercourses. Frequent flooding of high-risk difficulty in attracting low-risk clients into the pool of areas and extensive potential damages related to clients for flood insurance constrain risk diversification, each flood event means that risk-based premiums can often leading to higher premiums and the exclusion become very high for high-risk properties. For example, of high-risk businesses. As discussed in Chapter 4, the actuarially-sound premium for properties prone to while currently not a binding constraint, ITOs and severe flooding (e.g., more frequently than 1-in-50-year re-insurance companies view adverse selection as a probability of return event) is estimated to exceed 1 potential risk if/when the private flood insurance market percent of the property’s value. Precisely because were to expand in Malaysia. flood risks are not random—that is, significant losses occur simultaneously and in geographically clustered Although moral hazard tends to be a concern for areas—ITOs face concentrated and correlated risks. indemnity insurance markets, the business-level When insurance covers a small client base or a client survey evidence suggests that this is not currently base displays some degree of interconnectedness or the case in Malaysia. Moral hazard exists if there correlated risks, insurance companies are not able to is no reward for risk mitigation behavior built into diversify their risks and tend to charge higher premiums insurance products. In this case, policyholders tend and limit their overall risk exposure by excluding high- to rely on insurance alone to offset their financial risk clients.87 These two factors imply that high-risk risks; thus, choosing to do less ex-ante to reduce properties could be effectively priced out or excluded their vulnerabilities to flood risks, which can lead to from private insurance markets.88 In Malaysia, the potentially higher exposures and losses. The adoption survey evidence presented in Chapter 4 suggests that of risk-based pricing could reduce the risk of moral this is indeed the case, with a set of high-risk businesses hazard. The survey evidence presented in Chapter being unable to obtain coverage. 3 indicates that moral hazard does not seem to be a current source of concern for businesses in Malaysia, as Marked informational inefficiencies related to flood there is a positive correlation between flood insurance risks result in adverse selection in indemnity insurance. uptake and the adoption of preparedness plans. Adverse selection refers to the fact that if the price 87 See, for example, Schwarze and Wagner (2007). 88 According to the OECD (2016), flood-prone areas, particularly outside major urban areas in developed countries, are generally not protected for events beyond a 1-in-100-year return period, which is viewed as a relatively high level of frequency for an insurance loss. 88 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses 5.3 Public Sector Policy Support to Enhance the Role of Financial Markets Overall, a range of market failures, frictions, and and an accurate assessment of risk exposures, while inefficiencies justify policy interventions to strengthen supporting the needed financing for investments to private sector resilience by supporting the financing of mitigate risks and minimize losses. For similar reasons, flood risk adaptation and resilience efforts. Managing this information is also beneficial for the public sector climate and environment-related risks in the financial and the private sector. Because of significant positive system is a key priority for Malaysia. As described in externalities associated with sharing credible and BNM’s Financial Sector Blueprint 2022-2026, one of the timely climate-related information, governments are five strategic thrusts is to position the financial system usually the leading providers of this information. to facilitate an orderly transition to a more sustainable and resilient economy. The challenges discussed in Timely and accurate information is also critical for this report relating primarily to the development of emergency responses. In many high-income countries, financial markets for the management of flood risks the impact of extreme weather events is often reaffirm the relevance of continued public sector mitigated by their ability to take early action based on support and involvement. Specifically, policy makers meteorological and hydrological warnings. A review of should support the development of private adaptation the experience of high-income countries reveals that and emergency finance and the insurance market into many have invested in their publicly financed National more mature, efficient, and mainstream markets that Meteorological and Hydrological Services, encouraged can support a more resilient economy. The challenges the development of complementary private services, vary depending on whether businesses seek financing and invested heavily in research and development. or insurance products to reduce their vulnerabilities However, the provision of meteorological and and enhance their financial resilience. Tackling these hydrological services is complex, and often too challenges will require a deliberate and holistic much an emphasis is placed on buying observation approach to catalyze private capital while incentivizing equipment and not enough on the delivery of services businesses to manage flood risks through a range of to enhance awareness and foster action.89 Box 5.2 complementary interventions. Implementation will provides examples of the broader economic benefits depend on dedicated involvement and coordination of more accurate and timely information. among policy makers, regulators, the financial sector, Policy makers in Malaysia must ensure that the and the private sector. information needed to manage flood risks for both the private sector and the financial sector is available and widely accessible.90 Investments are also needed RECOMMENDATION 1 to improve the quality of information on flood hazards. Enhancing Flood Risk Data Availability, For instance, as highlighted in Chapter 4, improvements Accessibility, and Affordability are needed to expand the data coverage to flash floods and ensure timely and up-to-date information reflecting Governments are critical in building the appropriate evolving flood risks. Flood maps should also provide climate information infrastructure for flood risks to information with the necessary spatial granularity—that mobilize private investment in adaptation activities. is, more granular than postal code level—for adequate Flood risk maps are an invaluable tool, providing flood risk assessments by the financial sector. Flood information in support of climate change adaptation maps should incorporate climate model projections, and resilience decisions. This information is crucial for such as those published by the IPCC reports, to the financial sector, enabling risk modeling, pricing, explicitly recognize and signal that a changing climate 89 See, for example, World Bank (2019) for detailed guidance on how to improve meteorological and hydrological services. 90 For example, in a wide range of countries worldwide, governments usually prepare and publish flood hazard maps. See, for example, OECD (2022). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 89 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses will impact flood risks. The Government of Malaysia also risk data to support the development of a better data needs to improve access to flood-related data. In this environment. Box 5.3 discusses some examples of how regard, when deciding how to communicate flood risk countries have managed the legal risks associated with information to the public, the government must ensure the publication of flood risk maps and their impact on they communicate the considerable uncertainty around insurance provision. Global experience provides some the future impact of climate change, and not only lessons for Malaysia, as follows: the most likely scenario. The Government could also consider using interactive platforms to disseminate the • Establishing legal and regulatory frameworks to information and help increase awareness of flood risks.91 support the collection and dissemination of data, clearly defining the roles and responsibilities of the While the Government of Malaysia should be the various parties and agencies, outlining procedures leading provider of meteorological and hydrological for updating and disseminating the maps, data, public-private arrangements could be developed. establishing data qualifications and limitations, For example, public-private partnerships could and the intended purpose of flood risk data. Some complement and enhance national meteorological jurisdictions—such as Indonesia, the Netherlands, and hydrological services, enabling cost-sharing and and the EU flood risk directive—have enacted revenue-generating activities, for instance, through legal frameworks to make it an obligation for local sales of value-added information such as advisory agencies and governments to collect, monitor, and services.92 The Government could also leverage disseminate flood data. privately-owned infrastructure to enhance data • Involving the public while enhancing awareness to collection efforts, use the private sector to support mitigate privacy, property rights, and other legal service delivery and monitoring systems, and explore risks arising from the misinterpretation or misuse collaboration related to ICT systems (including data of the maps while also creating awareness of the services and cloud computing). In addition, while the intended role of data. For example, the Australian government can develop and publish the risk models Flood Risk Information Portal hosts flood risk maps, for floods needed by the financial sector, the private satellite observations, catalogued flood data, sector could also undertake this role if the necessary and scientific research. It adopts a crowdsourced underlying data are available. 93,94 In this regard, there approach where the public can contribute to are lessons from the experience of MalaysiaRe, which the portal. In addition, countries have deployed had built and published its flood risk model in the robust communication and awareness strategies early 2010s but was recently phased out due to high to effectively communicate the purposes and maintenance costs, inaccuracies in the flood risk maps, limitations of flood maps to the public, including and lack of usage by the private sector. The case of providing clear information on the accuracy of the MalaysiaRe illustrates the importance of the public maps, their intended use, and the responsibilities sector. Even if the private sector leads efforts to model of individuals and organizations in responding to flood risks, the public sector still has a critical role in flood risks. data provision with the needed scope and quality. • Enabling a “challenge process” to enhance the An important factor limiting the Malaysian quality of flood maps and enable corrections. In government’s willingness to share information on the United Kingdom and the United States, the flood risks relates to legal indemnity. Generally, public may challenge the information on flood governments are concerned about potential liabilities maps by providing relevant evidence to the emerging from their decisions to publish information or relevant authorities. that they are not provided full protection for decisions • Grandfathering of rules with the release of maps. made in good faith. However, countries worldwide For instance, in the case of Belgium, constraints have adopted several strategies to mitigate the legal to financial product offerings are limited to new liabilities associated with the dissemination of flood constructions after the publication of flood maps. 91 In Indonesia, STRADAA’s dashboard displays the exposures and vulnerabilities to floods at the village level and clusters similar villages into “vulnerability profiles.” It also includes information on the extent of adaptation measures in place. The EU also publishes flood risk maps with information on areas with significant exposure to flood risks, along with links to primary information on hazards, exposures, management plans, and adaptation strategies. 92 See, for example, World Bank (2019). 93 For instance, since the 2011 floods in Thailand, several initiatives have been launched to remediate the lack of reliable data/ information on flood risks, including a risk modeling service by Impact Forecasting, a risk mapper for insurers by Munich Re, and a database of industrial parks with associated maps by Guy Carpenter. 94 There are some complexities surrounding the relationships between the public sector and the private sector that fundamentally influence the provision of hydrological and meteorological information and services. Rogers et al. (2021) highlight the importance of legal frameworks, open data policies, and regulation to maximize the benefits of weather enterprise and expand public sector-private sector engagement. 90 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses BOX 5.2 The Value of Hydro-Meteorological Data and Early Warning Systemsa As highlighted in Chapter 3, businesses mentioned the making it more difficult to convince inhabitants to leave need for improvements in Malaysia’s early warning before Hurricane Katrina, which resulted in devastating systems. For instance, businesses noted the lack losses in the area. If the risk of false alarms becomes of timely forecasts and the limited lead time in early low enough to create and maintain trust and allow for warning systems during past floods events. significant prevention measures before disasters, a limited improvement in forecast accuracy can lead to a Hydro-meteorological information allows for better significant increase in economic and financial benefits. early warning systems. Weather forecasts enable Communication is essential to raise awareness about the anticipation of, and preparation for, climate- the limitations of forecasts. related events like floods, with benefits in terms of protecting people, businesses, and assets (prevention) Improvements in weather forecasting could also lead and emergency preparation. Early warnings enable to broader economic benefits. In agriculture, weather businesses to move vehicles and other movable forecasts are used for planning purposes, such as assets out of flood zones. They also enable the guiding decisions on fertilizer application or crop timing. implementation of other mitigation measures (e.g., A few studies assessed the productivity gains from sandbagging). Machines, equipment, and inventories weather forecasts. For instance, Wills and Wolfe (1998) can also be moved to avoid damage. Significant investigated the use of forecasts to optimize lettuce savings are possible in the transport sector by moving production in the state of New York, and they found a transport equipment, including trains and buses, out 10 percent increase in productivity from more accurate of dangerous areas. In other words, early warning forecasts. In the energy sector, weather forecasts can systems enable preparation, which can reduce physical be used to anticipate electricity demand, allowing damages and economic losses. more efficient management of energy production to maximize the use of lower-cost but slowly-adjusting The more lead time early warning systems give and the production units. Roulston et al. (2003) estimated the greater the population’s trust, the more effective they value of weather information to optimize wind power are, and the greater the benefits. This warning timing production; they found a doubling in profits thanks is critical. The more time businesses have to prepare to one and two-day forecasts. In the tourism sector, themselves ahead of flooding, the more they can do weather is a predictor of future activities and helpful to minimize their losses. Accurate and timely forecasts in resource planning, like anticipating the number of also allow the preparation of emergency services visitors to a tourist site, hotel occupancy rates, or the before an event occurs. During the few hours before an number of restaurant customers. intense weather event, much can be done to increase the efficiency of emergency services. Forecasting Long historical data series are helpful to infrastructure floods, however, is particularly complex, and building design and urban planning while enabling the trust is difficult. If it were possible to predict flash monitoring of the environment over the long term. floods with a high degree of accuracy, including their Measures can be taken to prevent the private sector location, it would be possible to evacuate the at-risk from taking on new risks, such as improving building areas, and reduce losses significantly without expensive and construction codes that promote growth into low- investments in flood protection. But the decision to hazard areas. In many countries, new constructions are evacuate cannot be made if the probability of false tightly regulated, or even prohibited, in flood-prone alarm is too high or the warning area is too large. With areas. Without accurate historical data, identifying such every false alarm, the trust in the early warning system zones can be challenging, and curtails the adoption of diminishes. This problem was illustrated in New Orleans, such preventive measures. Accurate historical data also which had been previously unnecessarily evacuated enable the identification of long-term trends that can twice (for Hurricane George in 1998 and Ivan in 2004), help guide the design of adaptation efforts. a Source: Hallegatte (2012). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 91 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses BOX 5.3 Managing the Legal Risks of the Publication of Flood Maps around the World The publication of flood maps involves certain legal knowledge and expert advice. They also encourage risks. Among chief risks are concerns about: (i) liability, the public to report back on discrepancies, in case the maps contain inaccuracies; (ii) privacy, in case providing relevant data or methodologies if they maps reveal sensitive information about individuals and would like to change or review information on their properties; (iii) intellectual property rights, in case flood risk maps.96 Some agencies even provide maps are created based on proprietary or copyrighted a detailed checklist of the steps required to materials and are published without proper authorization; challenge the information on flood maps.97 and (iv) misinterpretation, in case of actions solely based • Australia: the Australian Government, through on maps that lead to subsequent losses. Geoscience Australia, maintains the Australian Flood Risk Information Portal (AFRIP)98 which Below are some examples of how countries have hosts flood risk maps, satellite observations, managed the legal risks of disseminating flood- and a wealth of catalogued flood data compiled related data. It is important to note that while these from various sources, including local, state, and examples can provide relevant insights into the territory governments. The AFRIP also adopts a challenges of publishing flood-related data in Malaysia, crowdsourced approach, where the public may specific approaches have varied depending on each contribute to the portal. They emphasize that while country’s legal system and their unique circumstances. the information is based on the best available • United States: the Federal Emergency Management data, it may not account for all possible flood risk Agency (FEMA) provides flood risk maps through scenarios, and users should exercise caution and its National Flood Insurance Program, which has seek additional advice when making decisions established regulations and guidelines for floodplain based on the maps. management and flood risk mapping. These maps • Germany: The government provides guidance on are used to determine flood insurance requirements how to interpret and use the maps responsibly. and are publicly accessible. However, FEMA provides As an awareness tool, EU-level flood risk maps disclaimers stating that the maps are not perfect are published in a centralized platform alongside and may not account for all possible flood risks. In flood management plans. 99 addition, in the case of inaccuracies, such as the • Netherlands: Risicokaart.nl publishes street-level erroneous inclusion of a location into a high-flood risk flood hazard maps, intended as a public awareness area, landowners may file a “flood map challenge” to tool to inform citizens about their living environment have their land re-classified by demonstrating that and support crisis preparedness planning for the their land is not subject to flooding.95 public sector authorities. Under local legislation, • United Kingdom: the relevant environment provincial authorities are obliged to produce agencies provide flood risk maps identifying and manage publicly accessible risk maps100 areas at risk. The agencies acknowledge that the compliant with the associated provincial risk map maps are imperfect and should be used with local regulations.101 95 See, for example, Kusler, J. (2016). 96 See https://www.sepa.org.uk/flood-map-help-pages/help/. 97 See https://naturalresources.wales/flooding/challenging-our-flood-maps/?lang=en. 98 For more information on AFRIP, see https://www.community-safety.ga.gov.au/data-and-products/afrip. 99 EU’s flood risk map is available at https://discomap.eea.europa.eu/floodsviewer/. 100 For further information on Risicokaart, see https://www.risicokaart.nl/aanleiding. 101 For further information on provincial risk map regulations in the Netherlands, see https://www.risicokaart.nl/algemene-informatie/regeling-provinciale-risicokaart. 92 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses • Bangladesh: The government has invested in flood • Singapore: The Public Utilities Board (PUB) of risk mapping and early warning systems. These Singapore provides flood risk information and maps are used to identify vulnerable areas and early warnings. Information covering over 300 plan evacuation strategies. Legal frameworks have water level sensors around Singapore’s canals been established to support the dissemination of and drains alongside images from a network of 48 this information. CCTVs (updated every five minutes) are published • Vietnam: The government has developed flood risk on an interactive map on the PUB’s website.105 maps, which are used for disaster preparedness The public may also subscribe to the PUB’s SMS and planning. Legal frameworks exist to ensure alert system for timely updates on potential flash the responsible use of this information. floods. Legal provisions guide the responsible use of this information. • India: The government has established agencies like the Central Water Commission (CWC) and After publishing flood risk maps, several countries the India Meteorological Department (IMD) that have adopted measures to encourage investments provide flood forecasting, early warning services, in adaptation and mitigate moral hazard concerns and flood risk maps. Legal provisions are in place associated with specific public sector supported to govern the dissemination of this information. insurance schemes. Here are some examples: • Indonesia: The government has developed a two-stage process for publishing flood risk maps • United States: In some flood-prone regions, identifying vulnerable areas. First, local agencies private insurance companies may refuse coverage are responsible for preparing and publishing or charge higher premiums for properties located maps of disaster-prone areas. Second, after in high-risk zones. FEMA designates Special Flood disseminating maps to government bodies, it Hazard Areas based on flood risk assessments, becomes the responsibility of the Indonesian and properties in these areas may face challenges government to revoke or reduce property rights in obtaining flood insurance coverage. such areas and provide compensation to property • Belgium: Insurers may not extend coverage to holders under the legislation.102 Indonesia’s high-risk properties built after the completion of “Law Concerning Meteorology, Climatology and risk maps. Geophysics” further obliges the government to • Australia: In flood-prone regions, insurance enhance awareness and participation of people in companies may impose exclusions or limitations climate change adaptation activities by fostering on coverage for properties located in high-risk data collection, analysis, and monitoring of climate areas. change and public dissemination of information. • India: In flood-prone areas, insurance companies • Japan: The Japanese government, through may refuse coverage or charge higher premiums agencies like the Ministry of Land, Infrastructure, for properties located in high-risk zones. Transport and Tourism (MLIT), provides flood • United Kingdom: Flood risk maps help determine risk maps and early warnings. The Japan the insurance category and class for land areas, Meteorological Agency publishes “Real-time Risk considering the probability of floods and potential Maps”103 showing the levels of risk of inundation, losses. Insurance companies use this information floods, and landslides three hours in advance of an to assess the risk and provide coverage. event.104 Legal frameworks are in place to regulate the use and dissemination of this information. 102 See Mehryar and Surminski (2020). 103 See https://www.jma.go.jp/bosai/en_risk/#zoom:5/lat:33.998027/lon:135.000000/colordepth:normal/elements. 104 See https://www.gov-online.go.jp/eng/publicity/book/hlj/html/201803/201803_03_en.html. 105 See https://app.pub.gov.sg/waterlevel/pages/WaterLevelSensors.aspx. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 93 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses RECOMMENDATION 2 insurers to increase coverage in more vulnerable areas that need it the most while maintaining affordability. Developing a Long-Term Flood Risk Adaptation Strategy One important foundational step for policy makers in Malaysia is the articulation of a national adaptation Governments can play a crucial role in reducing strategy with a prioritized action plan. Developing businesses’ uncertainty by informing the public clear adaptation goals toward flood risks would allow the about the extent of flood risk protection, which is (or country to leverage actions taken by different ministries will be) the public sector’s responsibility.106 In doing and agencies of government and across the national so, governments can improve the decision-making and sub-national levels of government. Importantly, the processes of a broad spectrum of stakeholders. As proposed national adaptation strategy should be closely discussed earlier in this chapter, governments are aligned with the country’s infrastructure development the primary providers of large-scale risk mitigation plans. To ensure effective implementation of policy infrastructure. They are also responsible for ensuring that priorities, policy makers could consider embedding infrastructure and service delivery are resilient to flood climate risk assessments in public capital investments risks, among other responsibilities. Private sector actions and infrastructure planning processes. should build on and complement those of the public sector. But without a clear definition of responsibilities In addition, national and sub-national policy makers of the public sector and lack of transparency (or high could issue complementary detailed adaptation uncertainty) about policy priorities, as is the case in investment plans, outlining portfolios of high-priority Malaysia, private efforts can be haphazard and may projects, to support the achievement of the national not necessarily address the critical needs of the private adaptation goals. Prioritization would allow policy sector and the country more broadly. Therefore, policy makers to identify a subset of interventions most likely makers should signal and commit to the direction of to deliver significant net benefits, especially those that future policies to the largest extent possible, to enhance prevent irreversible impacts (such as “building right” transparency and provide crucial information for the to prevent sizable retrofit costs a few decades later). private sector and financiers alike. Providing more information about specific public sector investments would facilitate the identification of residual In many countries, governments establish legal risks associated with floods for the private sector and of responsibilities and liabilities and communicate these the complementary needed adaptation and resilience to all relevant stakeholders.107 In the Netherlands, the efforts to mitigate vulnerabilities to flood risks. Doing level of flood protection the government must provide so would also facilitate the alignment of financial sector to the population is legally defined. The government is policies, regulations, and especially the adoption of responsible for flood risk protection, but only up to a incentives and targeted approaches consistent with prescribed level. It publishes maps outlining residual national adaptation goals. Global experiences indicate flooding risks despite the public flood defenses. These that the ministry of finance usually plays a central maps help all private actors decide where to buy a house role in setting up a multi-sector, multi-stakeholder, or build a factory, the construction standards they should iterative process to translate needs and opportunities implement, and the levels of financial preparedness identified at the local level into a national list of priority they will need. When private businesses provide public investments.108 Robust governance principles should services—such as electricity supply—regulation is used underlie these processes to ensure transparency and to define risk management responsibilities, including accountability in public sector policies. the disaster risks associated with flooding, in a way that aligns private actors’ incentives with public interest. An integrated, whole-of-government approach, with Allocating responsibilities may require significant strong cooperation among different ministries and institutional and legal reforms. In addition, there could agencies, is also essential to reduce uncertainty about be effects on the development of financial markets. long-term government policies and foster coordinated For example, improved zoning, land use, and building action.109 The national adaptation strategy could outline standards can reduce economic losses and as a result, such an approach. The public sector in Malaysia is actively insurance claims more generally, which could allow involved in the management of flood risks, including 106 See, for example, Fatas and Fuhrer (2004), Bloom and Van Reenen (2009), and Hendrickson (2017). 107 For more details, see Hallegatte et al. (2020). 108 See, for example, World Bank (2021). 109 See, for example, Bloom and Van Reenen (2009) and Hendrickson (2017). 94 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses through investments in ex-ante risk reduction, ex-post relief provider of last resort, as is the case in Malaysia. emergency response, reconstruction efforts, and the Currently, flood-related disaster costs are funded from provision of emergency financial assistance. But there is fiscal budgets (federal and sub-national) allocated a need for a more integrated approach, with effective every year, and Malaysia’s Ministry of Finance can make coordination of all these different levers of policy action additional funds available ex-post in case of significant across the various layers of government. Such a holistic damages. While historical costs of disasters have not approach is crucial for coherent and robust policy making been very large, as discussed in Chapter 2, they are and also to address coordination failures that may hinder expected to rise due to the increased frequency of effective action and outcomes. It could also minimize floods. governance failures associated with poorly designed regulations and ineffective or inefficient institutions. The government should consider the adoption of a Developing a coordinated approach may require risk-layered approach. Risk layering to improve financial adjustments in institutional and legal frameworks, resilience against disasters involves diversifying and including adjusting the mandate of ministries, agencies, stacking multiple layers of risk management tools and or institutions, creating new agencies when needed, or strategies to mitigate the financial impact of disasters. even establishing an overarching coordinating body.110 This approach ensures that cheaper sources of funds are used first and that more expensive instruments are Furthermore, policy makers could foster partnerships used only for extreme events. The specific combination between the public sector and the private sector. and design of risk layers depend on factors such as Partnerships could enable increased financial capacity the nature and frequency of risks and the overall risk as public sector resources are scarce. They could management strategy. The first layer typically comprises also facilitate risk sharing and transfer mechanisms risk retention financial instruments. One relevant through risk pooling or other financial instruments that financial instrument for Malaysia is contingent financing, help distribute the financial burden of disasters more which can be useful for both the public sector and the equitably. Moreover, partnerships can facilitate the private sector. At the national level, such instrument can coordination of public sector and private sector efforts provide immediate liquidity following a natural disaster to reduce hazards, exposures, and vulnerabilities to and can be particularly useful for emergency assistance. flood risks while ensuring a holistic approach to risk For example, a catastrophe-deferred drawdown option assessment, financing, and risk reduction to promote (Cat DDO) is a pre-approved contingent credit line that efficiency and maximize the impact of public sector can disburse quickly once disaster strikes. Cat DDOs interventions. have strengthened DRF frameworks in more than 20 countries globally. Cat DDOs can also spur the adoption The government could reduce uncertainty related of additional financial instruments. For example, as to post-flood emergency and recovery by setting part of its Cat DDO, the Government of Madagascar out its strategic priorities for financing disaster committed to the development of a sovereign insurance response; for instance, through a disaster risk finance solution against the risks associated with tropical (DRF) framework. The adoption of a DRF is a critical cyclones. The other layers typically involve risk transfer component of a comprehensive approach to disaster financial instruments, such as insurance and insurance- risk management that complements risk reduction linked securities (such as catastrophe bonds). The and preparedness. Such a framework would outline adoption of these solutions for flood risks in Malaysia is comprehensive financial protection strategies to discussed below. manage costs associated with disasters like floods, aimed at limiting their impact on public sector finances. For example, the DRF could highlight the segments of society whose support the government would prioritize RECOMMENDATION 3 during future shocks, the current (and potentially new) financing instruments upon which it intends to draw Strengthening the Enabling Environment to support vulnerable segments, and the delivery for the Financial Sector mechanisms through which it intends to disburse Strengthening the financial sector’s capacity to funds. Strengthening the financial resilience of the manage flood risks is vital to enhance accountability, government can be particularly important when there ensure adequate risk management and financial is an expectation that the state will act as the insurer or stability, and foster financing toward adaptation 110 See, for example, Hallegatte et al. (2020). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 95 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses and resilience. Harnessing investment opportunities a phased approach in establishing the building blocks should go closely together with risk management. The for a strong foundation in climate risk management financial sector can only mobilize finance to adaptation for the financial sector, working collaboratively with and resilience if financial institutions can effectively industry participants through the Joint Committee on manage flood risks in their portfolios. Since the Climate Change (or JC3).112,113,114 Bank Negara Malaysia perceived level of risk directly impacts on investment introduced climate-related risk considerations into decisions, managing such risks can directly impact regulatory and supervisory expectations as well as into financial behavior and support capital toward flood macroeconomic and financial stability assessments in risk adaptation and resilience. Also, adequate flood 2021. Specifically, Bank Negara Malaysia issued in April risk management is important to preserving financial 2021 its Climate Change and Principle-based Taxonomy stability, especially if financial institutions are to play a (CCPT) to facilitate the assessment of climate- more significant role in funding climate adaptation. related risks and encourage financial flows towards environmentally sustainable economic activities. Prudential regulators’ mandates to create an enabling Several use cases have been published since then and environment for the financial sector include the an updated implementation guidance, including a design of a robust climate information architecture. standardized due diligence questionnaire for mandatory Taxonomies and climate-related disclosure standards adoption by financial institutions, was published are essential elements in this regard for both private in January 2024 to facilitate financial institutions’ capital mobilization and risk management. Taxonomies effective implementation of the CCPT.115,116 Securities focus on setting standards that enable businesses, Commission Malaysia issued its principles-based lenders, investors, and other stakeholders to identify Sustainable and Responsible Investment Taxonomy systematically, consistently, and transparently flood- for the Malaysian Capital Market (the “SRI Taxonomy”) resilient investments, assets, and entities, to facilitate in December 2022, outlining the guiding principles the flow of financing toward them. Disclosure standards for the identification and classification of sustainable also support financial institution’s decision-making economic activities.117 In June 2022, the JC3 published processes by improving the information flow. They the Task Force on Climate-related Financial Disclosures provide investors, lenders, and insurance underwriters (TCFD) Application Guide for Malaysian Financial with the necessary information to assess and price flood Institutions, which outlines key recommendations and risks, thereby supporting risk management. Disclosure provides practical resources to facilitate the adoption requirements allow businesses to monitor impact and of TCFD Recommendations by the Malaysian financial outcomes better, and course correct when needed. industry. TCFD-aligned disclosures for licensed However, the financing of adaptation investments is financial institutions will be mandatory for the financial marked by distinct challenges, such as the lack of clear, year commencing in January 2024. To foster climate standardized metrics for assessing adaptation results risk management, Bank Negara Malaysia also issued and outcomes.111 in June 2022 a discussion paper for the upcoming Malaysian financial sector regulators have developed 2024 Climate Risk Stress Testing Exercise, followed by a comprehensive strategy to prepare the Malaysian a policy document on Climate Risk Management and financial system to be more sustainable and climate Scenario Analysis, and in February 2024, a climate risk resilient, with emphasis on the development of the stress testing methodology paper.118 These documents informational enabling environment. Bank Negara set out the principles and requirements on climate Malaysia and Securities Commission Malaysia have taken risk management and scenario analysis for financial 111 Outcomes on risk reduction from climate adaptation investments are typically expressed in specific ways to the respective sector or context of these investments (e.g., agricultural yields, health benefits, or reduced water stress). This highlights that “adaptation has no common reference metrics in the same way that tonnes of GHGs or radiative forcing values are for mitigation” (IPCC, 2014). 112 In April 2019, BNM pledged to undertake the six recommendations published in the “NGFS First Comprehensive Report on A Call for Action: Climate Change as a Source of Financial Risk.” See https://www.bnm.gov.my/climatechange/bnm-pledge-ngfs-glasgow-declaration. In January 2022, BNM outlined “finance for sustainability” as one of the three broad themes in its Financial Sector Blueprint 2022-2026, setting a target of more than 50 percent of new financing for green and transitioning activities. 113 The SC articulated its commitment to developing the SRI ecosystem in Malaysia in its 2019 Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap). See https://www.sc.com.my/upload/sri-roadmap-2019/book/sri-roadmap-2019.pdf. 114 See https://www.jc3malaysia.com/about-jc3. 115 See for example the sectoral guides under the Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF). See https://www. bnm.gov.my/-/value-based-intermediation-financing-and-investment-impact-assessment-framework-guidance-document. 116 The JC3 updated several documents for the implementation of CCPT classification by financial institutions. See https://www.bnm.gov.my/-/jc3-sc1-ccpt-docs. 117 See https://www.sc.com.my/resources/media/media-release/sc-unveils-principles-based-sustainable-and-responsible-investment-taxonomy-for-the-malaysian- capital-market. 118 See https://www.bnm.gov.my/-/climate-risk-stress-testing. 96 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses institutions.119 Meanwhile, the Securities Commission Accounting for the impact of flood risks on the safety Malaysia launched in December 2023 a voluntary and soundness of financial institutions is an integral Sustainable and Responsible Investment Guide for component of prudential supervision.123 Flood risks Private Markets, outlining guidance on sustainability manifest themselves in the form of credit, operational, considerations for investment and due diligence and liquidity risks, threatening the profitability and processes.120 In addition, the JC3 has worked to solvency of banks and the overall stability of the financial bridge critical data needs to support the management system. Hence, they belong to the core mandate of climate- and environment-related risks within the of supervisory authorities. Among the regulatory financial sector, for example through the issuance of measures at the disposal of prudential authorities are its Climate Data Catalogue to serve as a reference flood risk assessments, which, depending on capacity by the financial sector.121 The Securities Commission and data availability, could range from empirical analysis Malaysia, through its affiliate Capital Markets Malaysia, of risk exposures to model-driven stress testing. They issued in October 2023 the Simplified ESG Disclosure can provide a fact base for dialogue between the Guide for SMEs, aimed at guiding the development of various stakeholders. Insights into these risks can help a standardized national dataset of SME ESG disclosures (macro- and micro-) prudential supervisors focus on the aligned with international standards.122 most relevant risks. It also supports the improvement of flood risk management practices among financial Thus far, supporting enabling environment for the institutions. financial sector regarding adaptation investments has lagged behind that for mitigation investments Although heatedly debated in policy and academic in Malaysia and globally. Policies, such as those circles and not widely used across countries, prudential described above, have predominantly highlighted policies could also be used to stimulate adaptation climate mitigation efforts rather than adaptation to financing. One example is through differentiated enhance resilience. Globally, existing standards have capital requirements.124 Capital adequacy frameworks focused primarily on climate change mitigation efforts could be updated to account for climate change, rather than adaptation, with an emphasis on managing and capital adequacy parameters may be linked to GHG emissions. For example, existing taxonomies tend investments in flood risk mitigation and adaptation, to focus on defining sectors and activities that can be freeing up capital to be invested in risk reduction classified as “green” to make them more attractive to projects.125 Supervisory authorities can also set lenders and investors. As noted above, many taxonomies quantitative targets, for example, the share of a bank’s do not explicitly reference how financing can support portfolio that must target vulnerable segments—for climate change adaptation or resilience in the face of example, Bangladesh has adopted analogous policies climate shocks. Similar observations can be made in targeting green sectors. the case of disclosure and reporting requirements. For example, while the TCFD recognizes the importance Also widely debated is the use of monetary policy tools, of reporting on physical risks associated with climate such as collateral policies, to foster financial flows change, it places greater emphasis on the disclosure of to adaptation. Specifically, central banks can adjust financial risks and opportunities related to the transition their collateral frameworks and give favorable status to a low-carbon economy. Similar trends are observed in to green bonds and securities linked to adaptation Malaysia. Overall, this is a fast-evolving area, and global finance. Central banks could also purchase sovereign standard-setting bodies are increasingly recognizing or private-sector debt instruments linked to adaptation the need for more extensive adaptation efforts. Yet, the or emergency financing. Such measures would increase evidence remains limited on whether such efforts have the demand for such instruments, thus lowering the translated into adaptation investments at scale. financing costs for such projects. 119 See https://www.bnm.gov.my/-/dp_2024_crst and https://www.bnm.gov.my/-/pd-crmsa-2022. 120 See https://www.sc.com.my/api/documentms/download.ashx?id=f04c3b23-0aae-4024-94af-235b0b573e94. 121 The Climate Data Catalogue identifies and maps available climate data sources to support the critical data needs for specific identified use cases, including investment and lending decisions, macroeconomic modelling, stress testing, scenario analysis and product development. See https://www.jc3malaysia.com/data- catalogue. 122 See https://www.capitalmarketsmalaysia.com/wp-content/uploads/2023/07/Public-Consultation-Simplified-ESG-Disclosure-Guide-for-SMEs.pdf. 123 SMEs account for the vast majority of businesses in Malaysia and are among the most vulnerable businesses to flood risks, as shown in Chapter 3. Because banks are an essential source of external financing for SMEs, their regulation remains a critical element of the enabling environment for adaptation financing. 124 See for example World Bank (2022). 125 The Hungarian National Bank has incorporated environmental issues proactively in its policy objectives, actions, and frameworks, including lowering the risk weights for green assets so banks can hold less regulatory capital against them. Such measures are relatively easy to implement. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 97 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses While efforts are needed to develop the enabling which tend to be more vulnerable, partly because of environment for the financial sector to foster more constrained access to finance and lower capacity financing toward investments in flood risk adaptation to develop and adopt resilience strategies that can and resilience, policy makers should also pay close help them avoid, absorb, and adapt to floods. Yet, attention to unintended consequences. Although the vulnerabilities to flood risks depend, to a large extent, empirical evidence remains limited, policy makers on businesses’ geographical location and their risk should carefully monitor the implementation of management strategies. Effective support requires new frameworks—such as, stress testing, disclosure solutions to reflect geographic-specific challenges requirements, prudential requirements, and supervisory but with widespread outreach across businesses and tools accounting for physical risks like floods—to avoid specifically designed to support access to finance for and mitigate potential unintended consequences. the most vulnerable businesses with limited access to A key concern is that once banks monitor flood risks finance, such as SMEs.127 more closely, they may reallocate their loans away from clients in high-risk areas. As recent World Bank Interventions to address constraints in access to research has shown, even proportional implementation finance for ex-post recovery efforts also require a of policies can have unintended implications for such widespread outreach. Government support programs high-risk clients.126 SMEs tend to face marked financial in Malaysia for flood-related losses largely leave out constraints, which can become even more acute. To SMEs from their coverage. Given the limited access the extent that SMEs may be highly vulnerable to such to private sources of emergency financing, there is risks, they may face more significant barriers to access a strong case for public sector support to enhance to finance if banks need to comply with climate risk- access to emergency financing to ensure business related regulatory policies. continuity and allow businesses, especially SMEs, to make the needed expenditures and investments for It is also important to consider the operational their recovery. Policy targeting is important in this feasibility of these new policy levers, given context. When floods hit, there is some urgency in concerns raised by financial institutions about getting funds to businesses struggling with liquidity their capabilities and the prevailing deficiencies constraints that hinder their capacity to withstand the in the data environment. The implementation and shock and minimize their losses. Unless a framework is operationalization of policies are highly dependent on already in place that enables governments to deliver capabilities and data availability, which are a constraint financial support to affected businesses rapidly, in Malaysia. The financial sector regulators should targeting of emergency support will be challenging. At assess the extent to which data gaps related to flood the speed with which decisions must be made, policy risks could compromise the adoption of specific tools makers will face the tough decision of either setting discussed here. As data availability and capabilities simplified targets and disbursing quickly, but likely develop over time, supervisors should periodically re- providing support to businesses that do not need it, assess their menu of feasible policy tools. or setting more strict targets (e.g., based on proof of flood damages) with greater outreach for businesses in need of support, but disbursing at a slower pace. Policy makers faced a similar trade-off in the aftermath of the RECOMMENDATION 4 COVID-19 pandemic. Supporting Access to Finance for Effective policies supporting access to finance for ex- Adaptation and Recovery ante and ex-post financing related to flood risks require Financial sector policies that support business careful design and adoption of robust monitoring financing should place greater emphasis on climate- and evaluation (M&E) frameworks. High-quality data resilient adaptation efforts, ensuring outreach to a on businesses’ vulnerabilities to flood risks is vital in this broad set of businesses. Flood risks impact a wide range regard, enabling the identification of vulnerable and of Malaysian businesses, exposing them to potentially affected businesses, thus reinforcing Recommendation extensive losses from extreme events. As discussed in 1 on closing data gaps. Robust and independent M&E Chapter 3, such risks are particularly acute for SMEs, frameworks are critical for accountability, transparency, 126 For example, Miguel, Pedraza, and Ruiz-Ortega (2022) show that a micro-prudential policy in Brazil requiring banks to incorporate environmental risks into capital assessments induced large banks to reallocate their lending portfolio away from exposed sectors. 127 While financing adaptation requires localized solutions, financing mitigation is more standardized. The response mechanisms to improve energy efficiency and adopt renewable energy sources tend to be similar across a wide range of country contexts. 98 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses and fine-tuning of interventions. Systematic monitoring carries the risk of reducing the incentives for financial and frequent evaluations of the impacts of support intermediaries or investors to commit their funding, measures could inform an effective policy toolkit for the depending on who bears credit risks. There are also next crisis through positive feedback loops. For instance, risks that financial institutions are unable to compete M&E frameworks would not only reveal the impact of with support programs, which can lead to crowding past support policies but also identify lessons that could out effects. Governments should: (i) determine form the basis of future revisions to the design and clear objectives to be achieved with the use of implementation of these programs. M&E frameworks concessionality, with emphasis on private capital would allow for evidence-based course correction mobilization and market creation; (ii) assess the extent of public sector support programs, which could be of potential market distortions, including crowding- particularly helpful due to evolving flood risks in Malaysia. out effects and changes in competitive dynamics; and (iii) deploy mechanisms to mitigate such risks. Externalities justify the use of concessional finance Such interventions should also embed an exit strategy for flood risk adaptation investments. The “public and clear graduation targets for both businesses and good” feature underlying some of the needed financial institutions. To this end, at the instrument investments in adaptation justifies using public sector design stage, policy makers should assess how to ensure funds for concessional finance–that is, financing at more that concessionality expands the universe of businesses favorable terms when compared to commercial sources with access to finance for adaptation investments, and (for example, lower interest rates, longer maturities, and whether there may be additional policy actions needed more favorable debt repayment schedules). Moreover, to support the removal of concessional financing at the challenges associated with the high upfront costs a later stage, including actions strengthening the and long return periods could be addressed through enabling environment. concessionality. Such support should not aim at providing liquidity to financial institutions but rather at The higher risks of flood-related investments providing incentives to businesses (especially SMEs), highlight the importance of risk-sharing support, fostering greater access to funding, thereby enhancing for instance, through public credit guarantees the business case for these investments. (PCGs).128 This high riskiness, perceived and actual, of Concessional financing may also be used for ex- investments is explained not only by the high exposure post recovery financing. Access to market-based of businesses to flood risks but also in part by the post-disaster financing can be particularly challenging, marked uncertainties about these risks, mismatched especially for SMEs that may have lost assets that formed time horizons for investments (upfront costs alongside the collateral basis for debt financing, and, as a result, their uncertain future payoffs), and inefficiencies in the business viability may come into question. In addition, informational environment. The main objective of de- there are externalities in such support. Emergency risking interventions, such as PCGs, is to change the financing may contribute to economic and financial risk-return profile of investments for lenders, thereby stability by mitigating the adverse effects of natural fostering capital mobilization.129 PCGs can be mobilized disasters on businesses. In some cases, the government at scale to reduce the net losses financial institutions can go beyond concessionality in financing, e.g., through may incur if borrowers default, especially when such subsidized loans or emergency assistance in the form of risks can materialize in clusters. PCGs can also be grants (See Box 5.4). Once again, policy makers should important in reducing information asymmetries through be careful in the design of policies to avoid providing demonstration effects for financial institutions, helping the private sector with disincentives for adaptation financial intermediaries learn to engage in this segment. investments. Research has emphasized these risks, often Furthermore, PCGs can be leveraged to provide referred to as maladaptation risks, in the context of emergency finance to viable businesses affected by government-supported insurance to flood risks (see more floods. For example, PCGs can incorporate “automatic” below). To mitigate such risks, emergency financing could be used alongside adaptation investments. shock absorbers, for example, through disaster-related windows, that can support not only ex-post financing However, policy makers should deploy concessional but also ex-ante access to finance by lowering the credit financing sparingly as it carries risks. Concessionality risks borne by financial intermediaries for potentially 128 For more details on this recommendation, see World Bank (2022). 129 Dalhuijsen et al. (2023) suggest that DFIs can play a role in reducing regulatory and policy risks. For instance, DFIs could act as a bridge between local governments and the market to address key concerns and uncertainties about the policy and regulatory environment for green investments and drive necessary reforms to improve the enabling environment, in addition to offering de-risking instruments such as political risk guarantee, first loss provisions, and loan loss reserves. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 99 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses impacted businesses. In this context, PCGs would have financing flood adaptation investments. For instance, to adopt robust M&E frameworks aligned with the DFIs can support private capital mobilization by goals of improved absorption of flood-related risks. designing innovative financial instruments, acting as first Some EMDEs have started to explore PCGs to support movers, setting standards, and demonstration effects, adaptation activities, especially post-disaster financial among others. Moreover, DFIs can support capacity support through disaster-triggered guarantee programs. building efforts, for example, by providing technical For example, Morocco’s Central Guarantee Fund and assistance to businesses and lenders in managing flood portfolio credit guarantee schemes in Burkina Faso risks. DFIs can also lead by example, for instance, by and Rwanda provide a capital injection to the financing developing flood-related risk management frameworks institutions that may experience liquidity constraints and sharing the lessons from these practices with post-disaster, enabling banks to continue lending to private financial institutions. Nonetheless, these are MSMEs affected by climate shocks. However, such complex endeavors. Evidence from DFIs worldwide, initiatives are still at a nascent stage of development. which are leading players in climate finance in EMDEs, shows that DFIs strongly favor mitigation investments, Policy makers can also leverage developmental with limited evidence that they have supported climate- financial institutions (DFIs) to play an important resilient investments at scale (Dalhuijsen et al., 2023).131 catalytic role in fostering change in the financial For instance, DFIs often focus on projects such as those sector.130 In Malaysia, DFIs have the scale and the promoting improved energy efficiency or the adoption necessary tools to provide long-term funding and of renewable energy sources. In fact, some DFIs support riskier projects, and they could also catalyze provide financing exclusively for mitigation purposes. private capital, all essential features appropriate to 130 See, for example, Dalhuijsen et al. (2023) for a review of the lessons learned from greening DFIs. 131 The bias toward mitigation investments is further evidenced in other studies, such as the International Development Finance Club (IDFC), which suggests that $146 billion of the $185 billion green finance provided by IDFC members in 2020 is dedicated to climate mitigation. See IDFC (2021). Similarly, CPI (2023) shows that about 90 percent of climate finance from public actors—largely comprised of DFIs—is dedicated to climate mitigation. BOX 5.4 Emergency Relief Governments may consider the provision of post- in the increasing levels of government assistance seen disaster assistance for businesses. Where flood in many countries over time (OECD, 2016). It can also damages are considered uninsurable, national induce moral hazard in insurance uptake. The greater governments may provide (partial) compensation for the expectations of ex-post relief are, the smaller the flood damages. Some countries provide grants to incentives are for ex-ante investments in adaptation businesses affected by flooding to support business and insurance uptake. survival and, therefore, employment. When such assistance is provided, the costs of flooding shift Defining the scope and eligibility for ex-post financial away from the private sector to the public sector, assistance can reduce misunderstandings and at least in part, depending upon the extent of the mitigate potential adverse impacts, especially when assistance programs. This type of public sector such criteria are applied consistently over time and support disincentivizes ex-ante adaptation investments across flooding events, especially when criteria are or insurance uptake. Moreover, a lack of clarity on the narrowly focused on providing immediate needs. To level of financial assistance that may be available for reduce the impact of emergency compensation on businesses can lead to misunderstandings in terms insurance demand, several countries do not provide of the amount of assistance that will be available and compensation for damages that would otherwise have room for political discretion in terms of the amount of been insurable (rather than what was actually insured). assistance eventually granted, which is likely a factor 100 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses Policy makers can also strengthen the role of capital RECOMMENDATION 5 markets in financing flood mitigation investments for Malaysian businesses through innovative instruments. Deepening the Insurance Markets One potential solution is the securitization of loans for The increasing prevalence of flooding in Malaysia small-scale flood mitigation projects, allowing lenders and its associated costs suggests the public sector to transfer some of the risks of these investments should engage more actively to develop the insurance to capital market investors and giving capital market. While the government is considered an market investors the option to invest in adaptation insurer of last resort and is expected to step in to cover investments at scale. For SMEs, pooling solutions losses and fund recovery efforts in Malaysia, given the could be helpful, for example, through instruments increased frequency of flooding, this approach is likely with the scale to justify issuance and measurement, not sustainable. Efforts are needed to develop financial reporting, and verification (MRV) costs and attracting markets that can support the financial resilience of institutional investors while mitigating idiosyncratic businesses to flood risks. Insurance is a core financial risks among issuers. Policy makers could support market segment in this regard. However, it seems unlikely such an approach by establishing a dedicated fund that the private insurance market will be able to unlock the to finance flood adaptation efforts by businesses (or challenges hindering greater penetration. This would be leveraging existing ones). Given the need to assemble the case even if flood risk maps become widely available. a sufficiently large pool of assets to cover the costs While more information would provide ITOs with the of securitization (as noted in Chapter 4), and the needed data to more adequately price risks, it would SME sector’s limited access to collateral, another not help resolve the various causes of misalignment of option would be to target funding to a revolving pool incentives that hinder the uptake of private insurance. of receivables of those SMEs investing in climate Global experience suggests that high-risk clients could adaptation. Malaysia Securities Commission could also still effectively be excluded from the market. support the introduction of innovative instruments directed at investment in climate resilience. Malaysia seems trapped in a vicious cycle that stunts the development of the private insurance market. Malaysia has a deep pool of domestic institutional Several market failures and financial market frictions investors that could be leveraged as cornerstone play a role in limiting the depth of the private insurance investors in such initiatives. Given the externalities market, placing the segment in a “disaster syndrome.” associated with climate adaptation investments, A low level of flood insurance penetration pressures Securities Commission Malaysia, working with the government for ex-post compensation, and the institutional investors, should consider fostering expectation of such compensation further reduces financing for climate adaptation investments. As demand for insurance coverage.133 Moreover, ITOs mentioned above, this could be facilitated, for example, seem to place restrictions on providing insurance to through requirements for investment allocation some high-risk businesses, especially those in the equivalent to a certain percentage of assets under agriculture sector. Although flood insurance has been management. provided through de facto tariff pricing, as indicated in Chapter 4, market-based pricing dynamics would only Policy makers could also enhance support for reinforce the tendency to exclude high-risk businesses. adaptation financing through alternative financing On the demand-side, an increase in insurance take- platforms, such as equity crowdfunding and peer-to- up would likely come from high-risk businesses (due peer lending platforms. The Securities Commission to adverse selection), likely pushing premiums up as Malaysia has supported SME financing through these aggregate risks for ITOs would increase, further curbing platforms, for example, through a co-investment demand. Malaysia’s key challenge is expanding flood scheme such as the Malaysia Co-Investment Fund insurance penetration, while ensuring affordability and (MyCIF).132 Such an approach fosters private capital providing incentives for risk reduction and adaptation. mobilization and could be leveraged to support adaptation and resilience investments of SMEs, for Countries worldwide have adopted a wide range of instance, by the adoption of targeted allocations for approaches to tackle these complex challenges, but flood preparedness and adaptation investments. specific trade-offs mark each solution. Such trade-offs 132 MyCIF was set up as part of Belanjawan 2019 to co-invest in micro, small and medium enterprises (MSMEs) and social enterprises alongside private investors via equity crowdfunding and peer-to-peer financing (P2P) platforms. See https://www.sc.com.my/mycif. 133 In some contexts, this has also been called the “charity hazard,” in which businesses and households expect government compensation for uninsured damage. Hence, they purposely do not purchase insurance coverage. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 101 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses reflect the tensions associated with who will ultimately example, in Hungary and the United Kingdom, public bear the financial costs associated with floods. In sector support for flood insurance is offered for high- Malaysia’s status quo, these costs are assumed mostly risk properties and coverage for lower-risk properties is by vulnerable businesses, and to a lesser extent by available from private insurance companies. The public the public sector in as much as reliance is placed on sector also plays an active role (through various types government support schemes for businesses affected of interventions) in countries like Malaysia with relatively by floods. In the solutions discussed below, greater more frequent but similarly severe flooding events (such insurance market depth and affordability are achieved as in Belgium and Costa Rica) or in countries with similar by either the transfer of financial risks to the public sector frequency but more severe flooding events (such as in or by cross-subsidizing financial risks across a wider Austria, Switzerland, and Thailand). Other broad-based pool of insured assets (Figure 5.2). The solutions seek public sector support examples include Iceland, France, to address the externalities associated with insurance the Republic of Korea, and Spain. In contrast, government provision, as summarized by the “disaster syndrome,” intervention is much more limited in Italy, which faces and therefore affect incentives for businesses, ITOs, challenges very similar to Malaysia in developing flood and the public sector, with consequences for market insurance market. More broadly, government intervention dynamics. All these solutions have distributional is less prevalent in countries with less frequent and less impacts, whereby some stakeholders would gain, while costly flooding events, and even in such cases, adverse others would lose. Ultimately, the level of protection in selection has led to the unavailability of flood insurance the marketplace should reflect Malaysian policy makers’ for high-risk clients. decision on the distribution of the costs associated with floods across the private and the public sectors. The specific solution for public sector support, however, is a policy decision. The set of possible While the supply-side survey indicates that flood risks arrangements is broad, and there is no predefined are perceived as insurable in Malaysia, international approach to be prescribed; each country should experience suggests some role for public sector identify the solution that best suits its specific needs. support. The evidence in Chapter 4 shows that the In choosing the specific solution to deploy for flood perception among insurance and re-insurance companies risks in Malaysia, policy makers should consider the active in Malaysia is that flood risks are currently various distributional impacts of different schemes, diversifiable and can be shouldered by the industry. If the effectiveness of solutions in addressing the this were indeed the case, there would be no need for the current barriers in the marketplace, their expected public sector to absorb losses associated with flooding. impact in terms of coverage expansion, especially to However, in several countries with risk profiles similar to highly vulnerable segments, and affordability, while Malaysia’s, the public sector has absorbed some of the considering their overall fiscal costs. The pros and cons losses associated with flooding and has also intervened of different solutions are outlined below, with examples to develop the insurance market (Figure 5.3).134 For from other countries. FIGURE 5.2 Developing Insurance Markets • High penetration enables risk diversi cation • Depending on pricing, may induce moral hazard • Government assumes the risks • High scal costs High Publicly Level of Government Intervention • Low penetration and unaffordability (adverse selection concerns) Supported Insurance Market Depth • Risks remain with the private sector Insurance • No scal costs • Can achieve high penetration rates Public-Private • While there is wide scope/range of intervention, Approaches governments typically add stability to the system to Insurance by assuming the costs of extreme events • Leverages private-sector know how Purely • Maintains market dynamics (e.g., competition Market-based for services) Low Insurance • Limited scal costs Affordability; Fiscal Costs Low High Source: Adapted from World Bank (2023). 134 In certain countries, flood risks are considered uninsurable; the public sector typically absorbs a significant share of the risks associated with floods. This is the case of the Netherlands, for example. 102 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses FIGURE 5.3 Countries’ Flood Risk Profile and Government Intervention 1.2% CZE Private Insurance PAK Exclusion of High Risks 1.0% Public Intervention or Pooling Schemes THA Avg. Damages (% of GDP) 0.8% POR Severity of Floods AUT 0.6% PER CHE 0.4% DEU VNM CHN BEL 0.2% CHL IRE CRI AUS COL GBR HUN ITA Malaysia IDN CANMEXTUR NZL JPN FRA PHL RUS BRA ESP 0.0% USA 0 5 10 15 20 Frequency of Floods No. of Events per Year (per 1 mil. Km2) Source: Calculations based on EM-DAT database. Private Insurance Markets most ITOs. Assessment of the financial viability of such investments and performance monitoring are tasks The challenges in the Malaysian marketplace are usually performed by banks for investments funded similar to those of many countries worldwide that have with bank loans. Closer collaboration between banks the insurance market based on private providers. This and ITOs could further support adaptation investments. market structure is typically characterized by adverse selection (which often leads to the exclusion of high- In Malaysia, flood insurance is typically provided as risk clients from the market), lack of affordability, high an optional add-on. In some countries, it is offered premiums, especially for high-risk clients, and limited bundled with coverage for other perils. Under bundling, market depth. Although insurance penetration varies flood coverage is combined with coverage for other substantially, countries with a private insurance market perils such as fire and windstorms, thereby spreading generally have low penetration rates—this is the case the risk of flood losses across a large geographical of Bulgaria, Germany, Greece, Italy, Luxembourg, and area and significantly increasing the percentage of Turkey.135 Risk-based pricing raises awareness about the population covered for flood damage. When flood flood risks and incentivizes investments in adaptation peril is automatically included in standard building and to flood risks, thereby reducing moral hazard concerns contents insurance for businesses, penetration rates of (e.g., Japan).136 In some countries (e.g., Germany), flood insurance are generally higher.138 Such bundling insurance companies provide premium discounts when accounts for relatively higher penetration rates in businesses invest in risk reduction (e.g., such as, flood- Israel, Latvia, and the United Kingdom. Higher take-up proofing buildings).137 However, oversight of investment rates are also observed in countries where mortgage design and implementation lies beyond the capacity of holders are mandated to take insurance against flood 135 See OECD (2016). 136 The benefits of risk-based pricing have been documented at length. There is, however, limited evidence demonstrating that risk-based pricing has actually led to significant investments in risk reduction or adaptation. See Cummins and Mahul (2009), OECD (2023), and references herein. 137 Insurance discounts affect the decision to invest in risk reduction and adaptation by bringing down the costs of such investments. Such incentives can be relevant when policyholders underestimate the benefits of such investments. There is, however, limited empirical evidence. See Hudson et al. (2016). 138 Insurance penetration rates tend to be higher, for instance, when there are requirements for flood insurance coverage attached to mortgages (e.g., Ireland and Sweden). However, penetration rates remain relatively low in other countries with mortgage-related requirements for flood insurance, such as the Czech Republic and Portugal (and would likely be even lower without the mortgage-related requirements). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 103 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses risks. The drawback of this approach is that insurance suffer. Such a deviation can occur in either direction— coverage would likely expire with the mortgage.139 calculated payouts can be below the sustained losses While bundling more broadly could lead to higher to the insured (negative basis risk) or above them penetration rates vis-à-vis add-on policies, flood risks (positive basis risk). Accurately structuring and pricing tend to be underpriced. Bundling can also mask the the parametric insurance products requires an in- extent of losses associated with flooding. These risks depth assessment of exposures and vulnerabilities. would be particularly high in the case of Malaysia, in Basis risk is also highly dependent on selecting an light of the various data gaps. Insurers may still exclude adequate trigger. High-quality and timely data are high-risk clients, and the lack of explicit premiums for critical for such schemes, which would be particularly flood risks would remove the incentives for investments challenging in the case of Malaysia due to data gaps. in adaptation. Importantly, this type of insurance does not address the concerns with adverse selection, as ITOs may still limit their exposure to high-risk clients, especially if payouts are frequently triggered. Parametric insurance Parametric Insurance Solutions also does not directly tackle the challenges of shallow A few countries have explored using parametric or markets and unaffordability. Depending on its design, index-based insurance for floods. Parametric insurance it may exacerbate moral hazard concerns as the ease is a type of insurance that does not indemnify actual of payouts may disincentivize investments in flood risk losses incurred. Instead of paying for damages that mitigation. occur after a flooding event, such solutions pay out if Payout triggers are the key to minimizing basis risks certain agreed-upon conditions are met. Payment is in parametric insurance solutions. They are usually triggered and quickly disbursed, regardless of damage. related to the intensity of disasters and can take two Parametric solutions cover risks without the complexity forms: “pure” parametric trigger or modeled loss of assessing damages after an event. They typically trigger. In the former, payouts are based on physical address challenges associated with slow and complex characteristics of disasters, such as the amount of claim payout processes since they do not require rainfall occurring in a particular location. For the latter, inspections and verification. Nonetheless, parametric the payout trigger is based on estimated losses for insurance can be more expensive than indemnity-based a given event as calculated by a catastrophe model. insurance as the premium is generally priced at two to Parametric solutions can have multiple triggers, five percent of the policy limit.140 Parametric insurance resulting in different payouts levels. The main has grown in popularity globally and has been used in requirements for a parametric trigger are: (i) that the several industries.141 It has been more widely used in measure is objective and can be modeled; (ii) that the agriculture, providing coverage against droughts and measure is independently verifiable by a third party other weather-related events that can damage crops. immediately after a disaster; and (iii) that the measure A few countries have adopted parametric solutions for is tightly correlated with the actual losses incurred flood risks (see Box 5.5). following a disaster to minimize basis risk. Neither the The most significant drawback of parametric insured nor the risk-taker should be able to influence solutions is basis risk, which is the difference between the trigger (or its calculation or reporting). payments contract holders receive and the losses they 139 Such requirements exist, for example, in the United States, the United Kingdom, Ireland, and Sweden. In the United States, federally licensed mortgage lenders are legally required to ensure that borrowers with properties in flood-prone areas are protected by flood insurance. It is estimated that approximately 50 percent of all residential properties in the Special Flood Hazard Area (SFHA) are covered by flood insurance (where mortgage requirements are in place), while less than one percent of homes in the 500-year flood zone are covered. 140 See Angier (2019). 141 See Swiss Re (2022). 104 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses BOX 5.5 Examples of Parametric Insurance for Flood Risks Bangladesh’s Parametric Flood Insurance.142 In June China’s Heilongjiang Provincial Government Multi- 2020, a pilot project based on index-based flood Peril Parametric Disaster Relief Coverage.143 The insurance was introduced by Oxfam Bangladesh with the program was launched in 2016 to insure China’s support of the United Nations World Food Programme Heilongjiang provincial government against fiscal and funded by the Korea International Cooperation contingent liabilities related to disaster relief for 28 Agency (KOICA). The pilot project’s objective was to counties classified as “less poverty resilient.” The enhance household resilience in flood-prone areas scheme covered not only floods but also excess rain, while strengthening food security. Insurance payout droughts, and high temperatures. The parametric was triggered quickly after the program’s launch when triggers were designed to reflect significant yield Bangladesh experienced the most severe and long- losses of crops based on the satellite flood footprint lasting flooding event in 20 years during the 2020 index, precipitation index, drought (based on monsoon season. Each enrolled household received temperature and precipitation), and low temperature. a payout of $32 through their mobile money platform. When triggered, payouts are typically used for disaster The scheme uses satellite data, including water levels relief and post-disaster reconstructions of properties and rainfall data, collected over 19 years. and infrastructure. The insurer, Sunlight Agro Mutual Insurance, with SwissRe as the re-insurer, provides an insured sum of $360 million and uses satellite and meteorological data to identify trigger events. 142 See Eram (2021). 143 See Pagniez (2016). Public Sector Support through Subsidized Premiums To foster the uptake of insurance and improve the public sector absorbs some of the costs, it does affordability, one solution is to subsidize insurance not absorb the ex-post risks and costs associated premiums for flood risks directly. But this can with floods. In other words, although the provision of lead to perverse incentives for risk management as subsidies may impact the insurance pool’s size and policyholders are not necessarily aware of their risks. risk profile, the risks associated with floods remain Countries have adopted this solution with variations in primarily with ITOs and businesses. Depending on coverage and pricing. For example, subsidies can be their design, subsidized premiums may not address targeted at only high-risk clients or can embed cross- adverse selection concerns, and private insurers subsidization through flat or tariff-based pricing (i.e., may still have incentives to exclude high-risk clients not risk-based pricing). Certain pricing policies may because they ultimately bear the risk of such clients. be adopted due to difficulties in accurately modeling In some countries, schemes may target precisely high- flood risks, thus pricing them,144 or as a deliberate risk clients. This type of public sector support has a government policy.145 Independent of their specific limited impact in fostering investments in adaptation design, such subsidies partly shift the financial costs to flood risks as it tends to remove the signaling effects associated with floods to the public sector. While of pricing for vulnerable clients. Such solutions can 144 For example, in Japan and Chile. 145 For example, in France, Spain, and Switzerland. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 105 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses be expensive for the public sector, and they may be Achieving equilibrium pricing in mandatory schemes politically challenging to remove ex-post. For instance, is not straightforward, especially in markets where while the use of subsidies is widespread for agriculture the quantification of risks is not well developed, as in insurance in high- and middle-income countries (for the case of Malaysia. When mandatory schemes are example, in Brazil, Canada, China, India, Japan, Mexico, adopted, premiums are often flat; they do not reflect Portugal, South Korea, Spain, Turkey, and the United the riskiness of individual policyholders, clearly signaling States), it is rarely used in low-income countries, largely the cross-subsidization built into such schemes. Such because of fiscal budget constraints. an approach puts less emphasis on location-based risk assessments and is particularly well suited for countries with marked deficiencies in the information environment, such as Malaysia. However, implementing Public Sector Support through Mandatory a mandatory flood insurance scheme warrants close Insurance Schemes collaboration between the public sector and the private Many countries have adopted some form of mandatory sector, especially regarding pricing policies to ensure scheme. Sometimes mandatory coverage is linked to adequate profitability and stability of the private other financial products (e.g., mortgages, loans, and insurance market. Specifically, relatively high premiums even ex-post government relief); sometimes, countries can lead to a significant increase in the profitability of impose mandatory bundling with other insurance the insurance industry (at the expense of the private products (e.g., fire insurance); and sometimes, they have sector). Alternatively, if premiums are priced too low, adopted universal coverage.146 Mandatory schemes mandatory flood insurance could threaten the stability aim to improve affordability and increase insurance of the insurance sector. Mechanisms can be designed penetration by expanding the client base, thereby to minimize such risks. For instance, processes could enabling effective diversification of risks. Mandatory be established in which the financial sector regulators schemes tend to eliminate adverse selection concerns regularly review outcomes for the insurance and takaful as they expand coverage independent of the riskiness industry in collaboration with the sector, considering the of clients. severity and costs associated with the actual incidence of flood events. Adjustments to the flat mandatory To counter moral hazard concerns, mandatory schemes premium for flood insurance would be discussed and often embed measures to incentivize investments approved within such a framework. in adaptation to flood risks. Moral hazard can be significant if insurance policies cover the majority Malaysia could also consider establishing a national of actual losses. In fact, this can lead to an increase insurance fund under the joint oversight of the public in aggregate losses associated with floods, raising sector and the financial sector. Such a fund could be a concerns about the effectiveness and sustainability of mechanism to relieve pressures on the insurance industry insurance schemes. One solution adopted by France and stabilize premiums (that is, so they remain relatively and the United States, has been to design schemes to stable from year to year despite variations in the incidence pool funds from the collected premium and earmark and severity of flooding). In other words, it would act as them to claim payouts and investments in adaptation. a stabilizer, absorbing “excess” premiums in periods of Doing so secures funding for adaptation investments lower outlays while covering for larger outlays in other without burdening public sector finances. Schemes periods. This mechanism would have the advantage of can also build incentives through their pricing policies. further reducing recourse to public sector funding except Some countries charge higher premiums (e.g., the in the case of extreme events. Given that investments United States) or impose higher deductibles (e.g., in climate adaptation are associated with considerable France) for higher-risk customers, and in some cases, externalities, consideration could also be given to using to geographical areas without up-to-date flood maps resources pooled by the insurance fund to finance some and risk prevention plans, respectively. Other countries of the needed investments (see more below). embed incentives to minimize moral hazard concerns via Mandatory schemes are usually established through premium pricing. For instance, pricing can depend on regulations and are self-funded. While they do not whether the policyholder undertakes risk reduction and necessarily entail direct costs for the public sector, mitigation activities. implementation can still be politically difficult. The 146 In some countries, offering flood insurance is mandatory to address the potential exclusion of high-risk clients from insurance markets. However, because uptake is not mandatory, such a solution is still prone to adverse selection and may lead to higher premiums. It also does not address the challenges with limited demand for insurance. Such solution has been deployed in Norway, where private insurers are mandated to offer flood insurance, and Spain, where the responsibility lies with the public sector. In both cases, the purchase of flood insurance remains voluntary. 106 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses cross-subsidization embedded in such schemes implies Pooling Schemes that the costs associated with floods are distributed widely, regardless of whether policyholders face flood These schemes provide cross-subsidization across risks. This setup implies additional costs to many who selected segments of households and businesses, would prefer not to pay for insurance (for example, depending on the reach of individual schemes. In some those in low-risk locations). Enforcement among countries, they are country-wide schemes; in others, some segments, such as informal enterprises, can be they cover specific geographical areas or segments.148 challenging. Despite this, premiums would still be In some cases, such schemes emerge in the context relatively low given the larger pool of participants in of mandatory insurance solutions. In most cases, the such an insurance scheme. A positive spillover effect is goal of pooling schemes is to enable the diversification that mandatory schemes provide the basis for quickly of risks through a broader client base comprised of enhancing data availability, as data can be easily both high-risk and low-risk clients. Depending on the collected for flood events occurring after its adoption. specific design of the scheme, it can eliminate adverse selection concerns akin to mandatory insurance solutions. There are variations in the funding structure of pooling schemes: some are funded through specific Provision of Insurance by the Public Sector surcharges, fees, or taxes, and when mandatory, a The public sector can financially back the insurance portion of the premiums could fund the reserve pool. coverage of flood risks, often as the insurer of last Pooling schemes can be designed to foster investments resort. Once again, there are many forms of support in risk mitigation, for example, by earmarking funds across countries. The public sector can directly be an in the pool. Schemes that embed preparedness and insurer or re-insurer for all or a subset of higher-risk risk reduction incentives as a condition for coverage clients. For example, public sector coverage for flood are being tested in some developing countries. For insurance is only available for high-risk properties in example, the African Risk Capacity combines drought Hungary. In many countries, mandatory flood insurance risk insurance with contingency planning services, coverage is combined with the option for insurance improved risk forecasting systems, and access to companies to transfer risks to a public re-insurer.147 international funding. Another example is through public sector guarantees. Pooling schemes have been developed by the public Private insurers provide flood risk coverage, and the sector, the private insurance sector, or through government guarantees private insurers to cover partnerships between them. In some countries, pooling losses for extreme events above a specific threshold. schemes are developed by the public sector, typically For example, in Belgium, the government provides a combined with government guarantees. That is the backstop on losses to private insurance companies, case of the French and Spanish insurance systems, in which are not allowed to insure high-risk properties. which a state guarantee is triggered when disasters Insurance schemes backed by the public sector could occur, thereby addressing insolvency concerns for also entail the transfer of risks to global markets. When private insurance companies. Another example is the government takes on risk through such schemes, community-based flood insurance, where a single one option is to transfer risks to private re-insurance policy is issued with widespread coverage within the companies. Another option is to transfer risks through community and, the local government pays premiums. capital market instruments, such as catastrophe bonds. In other countries, private insurance companies have Catastrophe bonds are insurance-linked securities that independently established such pooling schemes. By transfer the risk of a catastrophic event from the bond spreading the flood risks across the entire industry, such issuer, usually an insurance or re-insurance company, to schemes minimize incentives for individual insurance the bond investors. Catastrophe bonds typically cover companies to decline protection for high-risk clients. In high-cost extreme events occurring with a very low some countries, pooling is a joint initiative between the probability. Issuances have usually covered events such government and private insurers, such as the scheme as typhoons, hurricanes, or earthquakes. Catastrophe covering high-risk properties in the United Kingdom; bonds for flood risks have been less prevalent, partly however, no such scheme is available to businesses. due to the complexity of flood modeling. 147 In France, Caisse central de reassurance can assume 50 percent of exposure to disaster. In Spain, insurance companies can pass on disaster risks to Compensacion de Seguros. 148 For example, some countries have supported agricultural insurance pools and supporting agencies or technical support units, such as China, Malawi, Mongolia, Spain, Thailand, and Turkey. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 107 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses Another range of solutions entails sharing risks across provides a detailed discussion of recommendations for countries through catastrophe pools. Such pooling the design of awareness campaigns.149 arrangements have been adopted by several small countries across Africa, the Pacific, the Caribbean, Policy makers should also prioritize capacity building and Central America through sovereign catastrophe as an integral element of the policy agenda to enhance risk pools providing parametric catastrophe risk private sector resilience to flood risks, possibly insurance. In Southeast Asia, Cambodia, Indonesia, undertaken alongside directed financial support. As Lao PDR, Myanmar, Philippines, Singapore, Japan, and highlighted in both the business-level survey and the Vietnam have joined the Southeast Asia Disaster Risk financial institution survey, there are concerns about Insurance Facility (SEADRIF), which offers parametric the lack of capabilities for flood risk management insurance products to participating countries. It also across the board in Malaysia. Even if flood risk data offers access to a flood risk assessment model. These were to become widely available, businesses may face pooling schemes aim to improve access to international difficulties using this information to assess risks and re-insurance and capital markets based on the their impacts on their operations. Interventions aimed diversification of correlated risks. to enhance businesses’ capabilities and strengthen their ability to manage flood risks can span a wide range of activities. Such interventions can foster the capacity for integrated enterprise risk management RECOMMENDATION 6 and business continuity planning that mainstream prevention and better connects risk analysis and Building Capabilities and Enhancing reduction.150 Preparing business continuity plans can Awareness ensure that management and workers know what to do Raising flood risk awareness is critical. Lack of in case of flooding to maintain or restore production as awareness and understanding of flood risks as well as quickly as possible. Interventions can also strengthen about the effectiveness of adaptation and resilience the capacity of businesses to incorporate strategic strategies can lead to inaction. As discussed in foresight and scenario planning to identify multiple and Chapter 3, there are marked flood risk awareness gaps intersecting hazards (that may interact with flood risks) in Malaysia, particularly among SMEs. Public sector and their cumulative impact. interventions should focus on closing such gaps, concentrating on businesses with lower capabilities As indicated in Chapter 3, businesses may also and those prone to greater information asymmetries, need support in understanding the range of such as SMEs. Chapter 3 also highlighted a positive adequate adaptation strategies, including the cost- correlation between history of floods and increased effectiveness of adaptation and resilience strategies. flood risk awareness. Consistent with this view, global Support programs can enhance business-level capacity experience indicates that awareness tends to be high in to identify and implement adaptation strategies. For regions where floods are frequent compared to areas example, capacity building efforts could promulgate where floods occur infrequently. As flood risks evolve the range of flood protection measures, their cost- due to climate change, public sector interventions effectiveness, associated technical standards, should also target businesses in areas where the and minimum requirements for adoption. Close frequency of flooding is not historically high but might coordination with the financial sector to promote be on the rise. A specific form of policy intervention access to finance for such investments could enhance is through public awareness campaigns to strengthen the overall effectiveness of the approach. Another the management of flood risks among businesses, important element in this agenda is the need to support especially among vulnerable segments, including business capabilities to enhance supply chain resilience, mainstreaming of flood risks into business operations, particularly for SMEs, as discussed in Box 5.6. Programs risk management practices, and investment decisions. can also enhance capacities that allow businesses to Messages should be targeted and tailored to each build back better. For example, businesses can replace stakeholder’s capabilities (including financial literacy), old production technologies with new ones—for while encouraging preventive action. World Bank (2012) instance, computer-based management files instead 149 See Chapter 4 of World Bank (2012), which focuses on flood awareness campaigns. 150 Patnaik and Fabrizio (2023) outline a managerial “climate risk planning” framework, which conceptualizes how businesses in various sectors can assess and respond to climate risks. 108 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses of paper-based systems that may be destroyed during also aim to have demonstration effects, to educate floods. investors and lenders, and to increase their confidence in adaptation investments. In addition, efforts should Policy makers can also support building the capabilities go beyond capacity building efforts for financial of financial institutions. For instance, policy makers institutions and businesses; they should reach policy could engage in broad-based efforts to foster learning and knowledge sharing of best practices among makers themselves. Capacity building based on best financial intermediaries regarding the relatively new practices can help countries leapfrog through market concepts and tools needed to incorporate flood risks development with faster learning facilitated by the into their business operations. Policy schemes could experience of other countries. BOX 5.6 Fostering Supply Chain Resilience More resilient supply chains can help businesses Policy makers in Malaysia can support businesses reduce their exposure and vulnerabilities to floods. to enhance supply chain resilience, particularly for As argued in Chapter 2, knock-on effects through SMEs. In line with the support to strengthen business supply chains (upstream and downstream) can directly capabilities outlined in Recommendation 6, targeted contribute to the adverse impacts of floods, at least training programs can build the capacity of businesses for less severe floods. While empirical evidence about to map and stress-test their value chains. This can help businesses’ specific behavior in the face of floods identify suppliers or inputs most vulnerable to disaster (and disasters in general) remains limited, a recent risk for which preventive action may be essential (for survey in Tanzania shed some light on strategies used example, creating supply chain redundancy, holding to mitigate exposure to direct risks (on-site flooding) inventory, identifying alternative input), particularly and indirect risks (through supply chains and damaged for critical or time-dependent inputs. They can also infrastructure/utilities).151 The results suggest that encourage collaboration among stakeholders within businesses facing higher direct impacts tend to focus value chains and across sectors to reduce their on loss-avoidance strategies (e.g., smaller inventories, vulnerability to flood risks. The government can work lower generator ownership), while those facing more with industry associations to provide businesses in indirect risks seek to bridge disruptions (e.g., holding different sectors with information and support to find larger inventories, maintaining more extensive supply new suppliers and clients, including abroad. It can also networks). However, the survey also suggests that facilitate the establishment of new business linkages, businesses tend to stick with their existing suppliers by developing access to trade finance for instance. even when such suppliers cannot meet their demand; in other words, businesses cannot easily switch suppliers in response to disruptions. 151 See Rentschler et al. (2021). MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 109 CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses 5.4 Conclusions This study is a first attempt to assess the the six recommendations discussed in this chapter, macroeconomic and financial sector impact of flood governments can play a vital role in reducing exposures events, despite the limited availability of granular data and vulnerabilities to flood risks, thus minimizing on many fronts. Yet, the original findings in this report private sector losses, as highlighted in Chapter 2. are useful in surfacing gaps and areas where immediate Such actions can significantly change not only the attention by policy makers in Malaysia are much needed. scale and the type of private sector investments, but Indeed, there is significant scope to strengthen a set of also the incentives to undertake such investments by public sector policies to further support private sector businesses and the financial sector alike by changing adaptation and resilience to flood risks, which ultimately their risk-return profiles. The types of public sector would lead to more sustainable and resilient economic investments can be grouped into three categories: (i) development for Malaysia. land use planning and land use restrictions aimed at reducing the level of assets exposed to flood risk; (ii) This report outlines a range of complementary policy flood-control infrastructures—including flood defenses actions in six key areas, focusing on how policy such as levees, dams, flood walls and drainage makers in Malaysia can support and foster private systems, and nature-based solutions (e.g., wetlands, sector resilience to floods, with emphasis on policies mangroves) aimed at protecting particular areas to enhance the role of the financial sector. Specifically, against inundation; and (iii) risk reduction through the six critical sets of actions are as follows: (1) Enhancing forest and wetland protection and water resource data availability, accessibility, and affordability; (2) management. In addition, the government has a role Developing a long-term flood risk adaptation strategy; in reducing vulnerabilities through the development (3) Strengthening the enabling environment for the of forecasting capacity and early warning systems and financial sector; (4) Supporting access to finance for the development and implementation of effective adaptation and recovery; (5) Deepening the insurance emergency response systems, as discussed in this market; and (6) Enhancing flood risk awareness and chapter. All these areas for public sector intervention are building capabilities. This report leaves the more in-depth assessment of the range of actions that not mutually exclusive and should be considered part businesses can undertake and their effectiveness for of a comprehensive approach to flood prevention and future research. mitigation. Therefore, the recommendations outlined in this chapter should not be viewed in isolation but There is also a need for a complementary top-down rather as part of an integrated approach to flood risk approach. In addition to public sector support through management. 110 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 5 – Public Sector Policies to Support the Management of Flood Risks for Businesses MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 111 CHAPTER 6 – Roadmap for Policy Action CHAPTER 6 Roadmap for Policy Action MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 6 – Roadmap for Policy Action Key Messages • This chapter outlines a roadmap for policy action around the six broad recommendations developed in Chapter 5, highlighting the need for collaboration across a wide range of policy makers in Malaysia. • Enhance data availability, accessibility, and affordability. In the short term, the Government of Malaysia should publish flood hazard maps to expand public access to information. In the medium term, the Government should improve the quality of the primary data on flood hazard risks to address concerns with limited time horizons, frequency of updates, limited coverage, and geographical comparability. • Develop a long-term national adaptation strategy. In the short term, an immediate, important foundational step for Malaysia is the articulation of a national adaptation strategy with a prioritized action plan that outlines clear adaptation goals toward flood risks. The strategy should also strengthen institutional structure and arrangements for disaster risk management and establish effective cooperation and coordination mechanisms across the various stakeholders. • Strengthen the enabling environment for the financial sector. In the short term, financial sector regulators should rebalance the focus of the climate information architecture (e.g., taxonomies and disclosure and reporting frameworks) by placing greater emphasis on climate change adaptation. In the medium term, the regulators should undertake flood risk assessments for the financial sector to inform other prudential policy actions to preserve financial stability. The regulators should also carefully monitor the implementation of new policy tools and financial sector responses to guard against unintended consequences for financial inclusion and financial stability. • Deploy targeted interventions to support access to finance for adaptation and recovery efforts. In the short term, such interventions should focus on the most vulnerable businesses, especially SMEs. Policy makers must adopt an evidence-driven approach to design and implement targeted policy support as well as the adoption of M&E frameworks to enhance the effectiveness of policy support. In the medium term, the Government of Malaysia with the financial sector regulators should consider developing a policy framework outlining priorities in supporting access to finance for adaptation and recovery. • Deepen the insurance market. In the short term, the authorities should conduct a more in-depth and granular assessment to identify critical vulnerabilities among businesses and gaps in insurance and takaful coverage, and consider the adoption of temporary, targeted policies. In the medium term, the Government of Malaysia and the financial sector regulators should assess alternative arrangements for public sector support for the insurance market, with explicit consideration to defining the scope for public sector funding support. • Building capabilities and enhancing awareness. In the short term, the Government of Malaysia could leverage the possible publication of flood risk maps with awareness raising, for example, by using interactive platforms. In the medium term, the Government of Malaysia should deploy programs to strengthen the capacity of businesses to map and assess their resilience (including their supply chains). Interventions supporting capacity building for both businesses and financial intermediaries can be deployed alongside directed financial support to improve the likelihood of impactful outcomes. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 113 CHAPTER 6 – Roadmap for Policy Action This report has shown that there is further scope to sector initiatives by leveraging private sector strengthen public sector policies to support private capabilities and expertise in the development of sector adaptation and resilience to flood risks, risk models, while reducing fiscal costs. ultimately leading to more sustainable and resilient 2. Develop a long-term national adaptation economic development for Malaysia. Discussions strategy, clearly outlining and communicating around the need to adapt and mitigate flood risks have the priorities for the Government of Malaysia gained prominence in recent years, reflecting relatively and defining the scope of action for the public large-scale episodes. Policy makers in Malaysia have sector. In the short term, an immediate, important been shifting their approach from reactive to proactive foundational step for Malaysia is the articulation of a flood risk management, focusing on preparedness and national adaptation strategy with a prioritized action resilience. However, comprehensive and coordinated plan that outlines clear adaptation goals toward policy action still remains at a nascent stage, and such flood risks. The strategy should also: (i) strengthen impetus must also be nurtured in the private sector. institutional structure and arrangements for disaster risk management; (ii) establish effective cooperation The findings point to several areas where policy and coordination mechanisms across the various makers in Malaysia can undertake concrete actions stakeholders; (iii) establish in the legal framework in the short and medium term in tandem with other the responsibilities and liabilities of national, climate change initiatives to manage climate-related regional, and local government authorities and other risks more broadly and effectively. This chapter outlines relevant stakeholders about flood risk management a roadmap for policy action around the six broad in its entirety, encompassing the periods before, recommendations in Chapter 5, highlighting the need during, and after floods; and (iv) encompass robust for collaboration across a wide range of policy makers in governance arrangements to promote transparency Malaysia (see also Table 6.1). The Roadmap recognizes and accountability in public sector policy action— and leverages the responsibilities of the national and for example, by conducting an effective public sub-national governments to address the challenges consultation process and establishing regular posed by climate change, including physical risks such monitoring and reporting against set targets. as floods, in an collaborative manner with the financial In the medium term, complementing these, the sector regulators and supervisors, among others. national and sub-national governments should 1. Enhance data availability, accessibility, and issue detailed adaptation investment plans, affordability to support flood risk assessments, outlining their portfolio of high-priority projects, which are essential for risk management, thereby facilitating the identification of residual risks informed investment decisions, and the associated with floods for the private sector. By development of financial markets. In the short recognizing that climate change poses a significant term, the Government of Malaysia should publish threat to the long-term sustainability of public sector flood hazard maps to expand public access to finances, the Government should also consider information and develop legal and regulatory developing a disaster risk finance framework to frameworks to support the collection and institutionalize disaster response and recovery dissemination of data to manage the legal risks. systems while leveraging innovative contingent In the medium term, the Government should financing instruments. Such a framework would improve the quality of the primary data on flood outline comprehensive ex-ante financial protection hazard risks to address concerns with limited strategies for managing the costs associated with time horizons, frequency of updates, limited disasters like floods, aiming at limiting their impact coverage, and geographical comparability by on public sector finances.152 investing in hydro-met services and exploiting 3. Strengthen the enabling environment for the new technologies. The Government should also financial sector to foster adaptation and promote the development of technologies and emergency financing. In the short term, financial expertise in monitoring and assessing flood sector regulators should rebalance the focus of risks not only in the public sector, but also in the the climate information architecture by placing private sector and the scientific and academic greater emphasis on climate change adaptation, communities. Moreover, the Government could for instance, by (i) raising awareness and consider establishing partnerships with private strengthening the policy discourse and advocacy stakeholders to complement and enhance public for adaptation and emergency financing related 152 The framework should assess and outline the appropriate level of risk retention and risk transfer for the public sector in alignment with their responsibilities and accountabilities for the financial impact of floods in Malaysia. 114 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CHAPTER 6 – Roadmap for Policy Action to flood risks, and (ii) publishing implementation range of potential pathways for policy support to guidance for taxonomies and climate-related expand the insurance market depth while ensuring disclosure frameworks focused on investments and affordability. The different solutions will affect activities related to adaptation and resilience to incentives for businesses, ITOs, and the public flood risks. In the medium term, as data availability sector, with consequences for market dynamics and quality improve, the regulators should and significant distributional impacts. Therefore, undertake flood risk assessments for the financial the Government of Malaysia and the financial sector to inform other prudential policy actions to sector regulators should conduct an in-depth preserve financial stability. The frequency of such assessment of arrangements for public sector assessments should improve as information on support for the insurance market, examining the flood risks and capabilities develop. The regulators relevant trade-offs of specific solutions in light of should also carefully monitor the implementation the challenges faced by Malaysian businesses and of new policy tools and financial sector responses Malaysia’s climate risk profile. These authorities to guard against unintended consequences for should also consider establishing a framework for financial inclusion and financial stability. collaboration between the public sector and the 4. Deploy targeted interventions to support insurance industry and defining the scope for public access to finance for adaptation and recovery sector funding and other policy support. Because efforts, especially targeting the most vulnerable this assessment will take time, in the short term, the businesses, such as SMEs. While support to authorities should conduct a more in-depth and the enabling environment is necessary, it is not granular diagnostics assessment to identify critical sufficient to foster adaptation and emergency vulnerabilities among businesses and gaps in financing related to flood risks; targeted financial insurance coverage, especially among vulnerable interventions are still needed. Such interventions SMEs, and consider adopting temporary, targeted should focus on the most vulnerable businesses, public sector policies to support financial resilience especially SMEs, and policy makers must adopt for vulnerable businesses. an evidence-driven approach to design and 6. Strengthen public sector policy efforts to enhance implement targeted policy support to ensure flood risk awareness and build capabilities effective outreach. The Government of Malaysia to foster greater efforts toward adaptation with the financial sector regulators should and resilience. Public sector intervention should consider developing a policy framework outlining focus on closing awareness gaps, particularly for priorities in supporting access to finance for businesses with lower capabilities and those prone adaptation and recovery. Greater efforts are to greater information asymmetries, such as SMEs. needed to strengthen the coordination of public In the short term, the Government of Malaysia sector policies to enhance the effectiveness and could leverage the possible publication of flood impact of interventions and prevent duplication risk maps with awareness raising, for example, by of efforts. The policy framework could establish using interactive platforms with information on priorities and specific strategies (including specific flood hazards, exposures, and adaptation efforts. policy instruments) to address the financing gaps The Government could also develop well-targeted for the most vulnerable businesses (especially public awareness campaigns to mainstream SMEs), drawing from the principles discussed in flood risk management for businesses, especially this report about the use of concessionality, de- among vulnerable segments. In the medium term, risking instruments (such as credit guarantees), the Government of Malaysia should also deploy and the adoption of robust M&E frameworks. programs specifically designed to strengthen To enhance the effectiveness of policy support, the capacity of businesses to map and assess policy makers should adopt M&E frameworks the resilience of their supply chains, providing across the range of targeted support currently guidance in identifying vulnerable links for which available to businesses, including existing financial preventive action may be warranted. Interventions relief mechanisms provided by financial regulators. supporting capacity building for both businesses The deployment of targeted support should and financial intermediaries can be deployed leverage public entities, such as development alongside directed financial support to improve financial institutions, and existing financial support the likelihood of impactful outcomes. Financial schemes for businesses. sector regulators can also enhance their capacity 5. Deepen the insurance market to enhance building efforts to foster the mainstreaming the range of financial instruments that can of flood risks into business operations, risk support the financial resilience of businesses in management practices, and investment decisions Malaysia. Doing so will involve consideration of a of financial institutions. MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 115 CHAPTER 6 – Roadmap for Policy Action Time Roadmap for Policy Action Frame* Enhancing Flood Risk Data Availability, Accessibility, and Affordability Enhance accessibility by publishing flood hazard maps ST Develop legal and regulatory frameworks to support the collection and dissemination of data while ST managing the legal risks Improve the quality of flood hazard data by investing in hydro-met services MT Consider public sector and private sector partnerships to enhance data availability and accessibility MT Developing a Long-term Adaptation Strategy Develop a national adaptation strategy, outlining the government priorities and the scope of action ST for the public sector Strengthen the institutional structure and arrangements for disaster risk management ST Establish effective cooperation and coordination mechanisms and establish in the legal framework the responsibilities and liabilities of national, regional, and local government authorities and other ST-MT stakeholders about flood risk management Consider issuing detailed adaptation investment plans, outlining the public sector portfolio of high- MT priority projects Consider developing a disaster risk finance framework, based on risk-layering principles, to MT institutionalize disaster response and recovery systems Strengthening the Enabling Environment for the Financial Sector Rebalance the focus of the climate information architecture by placing greater emphasis on climate ST change adaptation rather than climate change mitigation Undertake flood risk assessments for the financial sector to inform other prudential policy actions, MT and reassess frequently as information and capabilities develop Monitor the implementation of new policy tools and financial sector responses to guard against LT unintended consequences for financial inclusion and financial stability Supporting Access to Finance for Adaptation and Recovery Develop a policy framework to support access to finance for adaptation and recovery ST-MT Consider the use of concessionality in access to adaptation and emergency financing to address MT critical financing gaps for vulnerable segments, such as SMEs Consider the deployment of de-risking instruments, such as credit guarantees MT Adopt robust monitoring and evaluation frameworks in policy interventions MT Consider the development of innovative capital market solutions to support adaptation financing MT-LT Deepening the Insurance Market Identify critical gaps in insurance and takaful coverage among vulnerable segments and consider the ST adoption of targeted policies for short-term support Conduct an in-depth assessment of alternative insurance arrangements, with explicit consideration to establishing a framework for collaboration between the public sector and the insurance industry and MT to defining the scope for public sector funding support Building Capabilities and Enhancing Awareness Consider the use of interactive platforms with information on flood hazards, exposures, and adaptation ST efforts to increase awareness Undertake public awareness campaigns to mainstream flood risk management ST Strengthen capabilities for flood risk management in the financial sector and the private sector ST-MT Deploy programs specifically designed to strengthen the capacity of businesses to map and assess MT the resilience of their supply chains * Short term (ST): 6 to 12 months; Medium term (MT): 12 to 36 months; Long term (LT): 3 years and beyond. 116 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia References Angier, D., 2019. “Triggered: Parametric Insurance and Natural Catastrophe Losses.” Chartered Insurance Professional, mimeo. 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MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 119 Annex 1 Sample for Business for the Assessment in Chapter 3 Survey Sample 2015 Census Weights Business Size Share of Firms No. of Firms Share of Firms No. of Firms Large 30.0 450 0.9 13 SMEs 70.0 1,050 99.1 1,487 Total 1,500 1,500 Survey Sample 2015 Census Weights Business Sector Share of Firms No. of Firms Share of Firms No. of Firms Agriculture 3.4 51 1.1 17 Manufacturing 41.8 627 5.4 81 Services 50.7 760 89.1 1,337 Construction 4.1 62 4.3 65 Total 1,500 1,500 Survey Sample 2015 Census Weights Business Geographical Location Share of Firms No. of Firms Share of Firms No. of Firms Central (net) 58.5 878 38.9 584 Northern 17.7 266 21.7 325 Southern 11.3 169 14.2 213 Eastern 5.7 86 12.4 186 East Malaysia 6.7 101 12.8 192 1,500 1,500 120 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Annex 2 Census Weight Results of the Business Survey FIGURE A2.1 Profile of Businesses Affected by Floods in the Last Three Years A. Across Business Size B. Across Geographical Location Share of rms affected by oods in the last 3 years (Weighted) Share of rms affected by oods in the last 3 years, by Region (Weighted) KL/Federal 14 79 7 Other Central 24 69 7 Large 49 49 2 Northern 19 65 16 Southern 29 67 4 Eastern 32 60 8 SME 22 70 8 East Malaysia 24 74 2 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don’t Know C. Across Sectors Share of rms affected by oods in the last 3 years (%) (Weighted) Share of rms affected by oods in the last 3 years (%) (Weighted) Agri and Mining 46 54 Wholesale – Motor Trade 25 68 7 Manufacturing − Automotive, Machineries & Equipments 52 38 9 Wholesale – Other 27 64 9 Manufacturing − E&E, Computers & Softwares 47 47 6 Transportation & Storage 28 62 10 Manufacturing - Other 42 53 5 Hospitality, Hotel, Leisure and Tourism 14 82 4 Information or Communication Activities 7 93 0 Electricity, Gas, Steam or Air Conditioning Supply 17 62 21 Telecommunications 35 58 7 Water, Sewage or Waste Management 48 52 Financial or Insurance Services 20 80 1 Construction 23 70 7 Real Estate / Estate Agencies 30 68 2 Retail – Food & Beverage 15 73 13 Professional / Business Services 21 69 10 Retail – Motor Trade 25 75 Education 17 75 8 Retail – Other 16 71 13 Healthcare, Residental Care or Social Work Activities 38 54 8 Wholesale – Food & Beverage 35 53 12 Other 83 17 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don't Know FIGURE A2.2 Losses and Disruptions Associated with Floods A. Direct Losses B. Indirect Losses Survey Question: Looking at the worst ooding episode in the past 3 years Survey Question: Looking at the worst ooding episode that your (Jan 2020 onwards), what was the type of damage to your business? company has experienced in the past 3 years (Jan 2020 onwards), Share of Firms (%) (Weighted) what type of business disruptions did your business face as an indirect consequence of oods (e.g., nearby oods)? 78 Large Firms SMEs Share of Firms (%) (Weighted) 67 Large Firms SMEs 59 66 54 55 60 51 58 51 36 37 45 44 33 41 29 38 26 18 Loss of Stock Building Building Vehicle Equipment Contract Damage Damage Damage Damage Payment Financial (Non-Structural) (Structural) Compensation Customers Employees Supply Chains Transactions MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 121 Annex FIGURE A2.3 Flood-Hit Businesses and Flood Risk Awareness A. Across Geographical Locations B. Across Sectors 60% 70% Share of rms considering oods as a recurring risk (Weighted) Wholesale–motor trade Manufacturing–other Agriculture & mining Share of rms considering oods as a recurring risk (Weighted) Wholesale–other Telecommunications Melaka 60% Water, sewage or waste management Johor Pahang Hospitality, hotel, leisure and Terengganu tourism Manufacturing-E&E, Education Kedah Sabah 50% Real estate/estate agencies computers and software Kelantan 40% Professional/business Perak Pulau Pinang services Transportation & storage Healthcare or other Retail–other care/social work 40% Selangor Kuala Lumpur Manufacturing–automotive Retail–food & beverage 30% 20% Perlis Negeri Sembilan Retail–motor trade Financial or insurance Sarawak 20% services Wholesale–food & beverage Information or Construction Cyberjaya/Putrajaya communications 10% Electricity, gas, steam or AC supply 0% 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 0% 10% 20% 30% 40% 50% 60% Share of rms ooded in the past 3 years (Weighted) Share of rms ooded in the past 3 years (Weighted) C. Across Business Size D. Perceptions about its Competitiveness Perception of increasing exposure to physical climate risk (Weighted) Do you think that Malaysia's exposure to physical climate risks affect your competitiveness in foreign markets and your capacity Share of Firms (%) to compete with imported products? (Weighted) Large 45 44 11 Share of Firms (%) Not ooded/don't know Large 75 18 7 SME 30 47 23 Not ooded/don't know SME 29 47 24 Large 86 13 1 Large 86 13 1 Flooded Flooded SME 86 11 3 SME 85 13 3 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don't Know FIGURE A2.4 Flood-Hit Businesses and Perceptions about Availability of Information A. Across Business Size B. Sources of Information Do you feel you have suf cient information about Top 3 sources of information used to monitor disaster risks (Weighted) future climate or disaster risk exposures? (Weighted) Share of Firms (%) Share of Firms (%) 7979 80 70 66 6659 66 64 62 Large 45 52 3 58 56 60 54 545452 5150 50 51 Not ooded/don't know 41 38 4342 48 4039 40 39 40 3129 3533 SME 33 52 15 26 29 272626 2827 26 18 18 20 15 10 32211 2 0 0 0 Large SME Large SME Large 89 11 1 Not ooded/don't know Flooded in past 3 years Flooded SME 70 27 3 Internet State/Local Government Federal Government Social Media 0 20 40 60 80 100 TV Malaysia Investment Development Authority Messages from apps Yes No Radio Local community word of mouth Don't Know Newspaper Warnings by Employees SMS None of the above 122 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Annex FIGURE A2.5 Flood Risk Awareness and Adoption of Disaster Preparedness Strategies A. Across Geographical Locations B. Across Sectors Percentage of rms with disaster preparedness strategies Percentage of rms with disaster preparedness strategies Share of Firms (%) (Weighted) Share of Firms (%) (Weighted) Firms considering oods as a recurring risk Firms affected by oods Firms considering oods as a recurring risk Firms affected by oods 70% 60% 60% Actual or Expected (Weighted) Actual or Expected (Weighted) 50% 50% Flood Exposures Flood Exposures 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 40% 50% 60% 70% 80% 90% 100% 110% Share of rms with disaster preparedness strategies (Weighted) Share of rms with disaster preparedness strategies C. Outward Supply Chain Resilience Planning D. Inward Supply Chain Resilience Planning Does your company currently have any kind of Does your company currently have any kind of resilient supply chain planning (outward) in place? (Weighted) resilient supply chain planning (inward) in place? (Weighted) Share of Firms (%) Share of Firms (%) Large 41 56 4 Large 58 35 7 Not ooded/don't know Not ooded/don't know SME 22 60 18 SME 23 60 18 Large Large 98 1 1 98 2 0 Flooded Flooded SME SME 71 24 6 69 26 5 0 20 40 60 80 100 0 20 40 60 80 100 Yes No Yes No Don't Know Don't Know FIGURE A2.6 Flood Insurance Uptake A. Across Sectors B. Across Geographical Location Firms considering oods as a recurring risk Firms affected by oods Firms considering oods as a recurring risk Firms affected by oods 70% 60% 60% Actual or Expected (Weighted) Actual or Expected (Weighted) 50% 50% Flood Exposures Flood Exposures 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0% 10% 20% 30% 40% 50% 60% 70% 80% Insurance Uptake Insurance Uptake Share of rms with insurance against oods (Weighted) Share of rms with insurance against oods (Weighted) MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 123 Annex FIGURE A2.7 Motivation to Purchase Flood Insurance Survey Question: In your view, what is the main motivation for your company to obtain insurance/takaful against disaster risks (including oods)? 70% Share of Firms (%) (Weighted) 60% 50% 40% 30% 20% 10% % Availability of Ex-Post Improved Financial Improved GVC Compulsory (eg. due Financial Resources Conditions Relations to mortgage terms) Large Firms Not Flooded Large Firms Flooded SMEs Not Flooded SMEs Flooded FIGURE A2.8 Constraints in Access to Finance for Adaptation Strategies A. Top-3 Challenges for Preparedness B. Sources of Funds for Preparedness What are the main barriers hindering investments in business resilience How does or did your company nance these implementation or implementing strategies towards disaster preparedness? (Weighted) strategies to deal with disaster preparedness? (Weighted) 52 43 0 10 20 30 40 50 10 20 30 40 43 37 39 4138 41 31 33 34 37 26 28 34 3333 27 28 2827 26 28 22 21 24 2725 19 2222 24 18 17 18 20 15 15 14 1413 1616 14 10 11 10 9 9 11 13 8 9 5 4 3 3 1 0 Large SME Large SME Large SME Do not consider Consider ood Insurance/takaful Internal Funds ood as a recurring risk as a recurring risk compensation/payout Out of pocket Government grants/loans Limited nancial resources N/a or None of the above expenses by owner for disaster recovery to implement Lack of awareness & knowledge Dif culty in identifying cost-effective Loans by commercial banks Equity injection by owner adaptation measures Limited technical capacity Adaptation measures Equity injection by Loans by licensed non-bank to implement at our level ineffective new business partner nancial institutions Loans from family and friends Loans from unlicensed Social constraints Offered loan amount is too large money lenders Current policies & regulations Don't Know C. Source of Funds for Reconstruction D. Top-3 Challenges in Financing Preparedness Sources of nancing for reconstruction or return to operations (Weighted) What are the main challenges in obtaining external sources of Share of Firms (%) nancing for the adoption of disaster preparedness? (Weighted) 42 43 40 40 40 40 35 35 31 30 31 28 27 27 26 30 30 25 24 25 23 23 23 23 23 23 23 19 17 19 19 16 16 16 20 20 17 15 14 14 13 12 13 12 12 10 10 6 5 3 0 0 Large SME Large SME Insurance Payout Internal Funds High interest rates None of the above Loans (Banks) Government Grant/Loans Unable to nd suitable Lack of company relationship nancial product with a nancial institution Out of Pocket (by owners) Equity Injections Lack of nancial records Leasing not available Equity Injections (New Partners) Loans (Non-bank FIs) for the company and/or inadequate Lack of collateral Short maturities Loans (Unlicensed) Loans (Family and Friends) Did not need external Lack of credit history sources of nancing Note: Only asked to the rms that were affected by oods Rejected credit application 124 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia Annex E. Top-3 Challenges in Financing Recovery and F. Top-3 Challenges to Obtain Insurance Reconstruction Expenses Challenges in obtaining nancing for recovery (Weighted) What are the main obstacles to get insurance for your business against special perils, speci cally oods? (Weighted) Share of Firms (%) 40 38 40 34 60 32 5452 29 28 49 30 47 45 24 24 24 23 22 22 22 21 21 39 40 31 3434 33 20 2625 30 3028 15 15 24 2322 13 2221201919 20 18 16 18 1818 20 14 15 16 10 11 121212 12 4 9 9 0 31 2 0 0 0 0 Large SME Large SME Large SME Higher than usual interest Lack of collateral Not ooded/don't know Flooded Unable to nd suitable Untimely or delayed processing Hard to claim payout Lack of information on claim payout nancial product of payments Complexity of insurance/ Products and coverage inadequate takaful policies to business needs Lack of relationship with FI Short maturities Had to retro t the company's Cannot afford Unable to extend/renew premises to get coverage Unable to obtain new leasing lines of credit Do not need coverage Do not know where to buy the products Rejected credit applications None/not needed Do not understand the products Refused a quote due to high ood risks Note: Only asked to the rms that were affected by oods and that are insured. Other Annex 3 Flood Insurance across Sectors and Regions FIGURE A3.1 Uptake of Flood Risk Insurance (Unweighted) A. Across Sectors Businesses Affected by Floods Businesses Not Affected by Floods Firms affected by oods with ood insurance Firms not affected by oods with ood insurance Share of Firms(%) Share of Firms(%) Agri and Mining 40 60 Agri and Mining 14 86 Manufacturing - Automotive, Mach 56 44 Manufacturing - Automotive, Mach 8 92 Manufacturing - E&E, Computers a 39 61 Manufacturing - E&E, Computers a 11 89 Manufacturing - Other 46 54 Manufacturing - Other 8 92 Electricity, Gas, Steam or Air C 100 Electricity, Gas, Steam or Air C 25 75 Water, sewage or waste managemen 100 Water, sewage or waste managemen 0 100 Construction 58 42 Construction 7 93 Retail – food & beverage 58 42 Retail – food & beverage 27 73 Retail – motor trade 7624 Retail – motor trade 0 100 Retail – other 64 36 Retail – other 17 83 Wholesale – food & beverage 9010 Wholesale – food & beverage 25 75 Wholesale – motor trade 7822 Wholesale – motor trade 0 100 Wholesale – other 41 59 Wholesale – other 33 67 Transportation & storage 42 58 Transportation & storage 17 83 Hospitality, hotel, leisure and 58 42 Hospitality, hotel, leisure and 33 67 Information or communication act 68 32 Information or communication act 0 100 Telecommunications 26 74 Telecommunications 0 100 Financial or insurance services 7426 Financial or insurance services 16 84 Real estate / estate agencies 52 48 Real estate / estate agencies 18 82 Professional / business services 56 44 Professional / business services 0 100 Education 63 37 Education 9 91 Healthcare, residental care or s 7624 Healthcare, residental care or s 29 71 Other 7030 0 20 40 60 80 100 0 20 40 60 80 100 No ood insurance No ood insurance Have ood insurance Have ood insurance MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia 125 Annex B. Across Regions Businesses Affected by Floods Businesses Not Affected by Floods Firms affected by oods with ood insurance Firms not affected by oods with ood insurance Share of Firms(%) Share of Firms(%) Selangor 13 87 Selangor 56 44 Kuala Lumpur 10 90 Kuala Lumpur 59 41 Cyberjaya/Putrajaya 42 58 Cyberjaya/Putrajaya 90 10 Negeri Sembilan 9 91 Negeri Sembilan 70 30 Pulau Pinang 6 94 Pulau Pinang 57 43 Perak 8 92 Perak 58 42 Kedah 5 95 Kedah 57 43 Perlis 13 88 Perlis 44 56 Johor 8 92 Johor 40 60 Melaka 0 100 Melaka 33 67 Pahang 17 83 Pahang 45 55 Kelantan 23 77 Kelantan 60 40 Terengganu 22 78 Terengganu 65 35 Sabah 14 86 Sabah 33 67 Sarawak 33 67 Sarawak 52 48 0 20 40 60 80 100 0 20 40 60 80 100 No ood insurance Have ood insurance No ood insurance Have ood insurance FIGURE A3.2 Uptake of Flood Risk Insurance (Weighted) A. Across Sectors Businesses Affected by Floods Businesses Not Affected by Floods Firms affected by oods with ood insurance (Weighted) Firms not affected by oods with ood insurance (Weighted) Share of Firms(%) Share of Firms(%) 15 85 Agri and Mining 38 62 Agri and Mining 65 35 Manufacturing - Automotive, Mach 16 84 Manufacturing - Automotive, Mach 11 89 Manufacturing - E&E, Computers a 61 39 Manufacturing - E&E, Computers a 38 62 Manufacturing - Other 10 90 Manufacturing - Other 41 59 Electricity, Gas, Steam or Air C 100 Electricity, Gas, Steam or Air C Water, sewage or waste managemen 100 Water, sewage or waste managemen 0 100 55 45 5 95 Construction Construction Retail – food & beverage 56 44 Retail – food & beverage 26 74 70 30 0 100 Retail – motor trade Retail – motor trade Retail – other 64 36 Retail – other 19 81 93 7 24 76 Wholesale – food & beverage Wholesale – food & beverage Wholesale – motor trade 69 31 Wholesale – motor trade 0 100 Wholesale – other 45 55 Wholesale – other 41 59 Transportation & storage 40 60 Transportation & storage 8 92 Hospitality, hotel, leisure and 54 46 Hospitality, hotel, leisure and 41 59 Information or communication act 74 26 Information or communication act 0 100 Telecommunications 29 71 Telecommunications 0 100 Financial or insurance services 68 32 Financial or insurance services 10 90 Real estate / estate agencies 52 48 Real estate / estate agencies 13 87 Professional / business services 64 36 Professional / business services 0 100 Education 54 46 Education 8 92 Healthcare, residental care or s 80 20 Healthcare, residental care or s 32 68 Other 69 31 0 20 40 60 80 100 0 20 40 60 80 100 No ood insurance No ood insurance Have ood insurance Have ood insurance B. Across Regions Businesses Affected by Floods Businesses Not Affected by Floods Firms affected by oods with ood insurance (Weighted) Firms not affected by oods with ood insurance (Weighted) Share of Firms(%) Share of Firms(%) Selangor 17 83 Selangor 58 42 Kuala Lumpur 22 78 Kuala Lumpur 64 36 Cyberjaya/Putrajaya 27 73 Cyberjaya/Putrajaya 94 6 Negeri Sembilan 16 84 Negeri Sembilan 86 14 Pulau Pinang 2 98 Pulau Pinang 65 35 Perak 3 97 Perak 64 36 Kedah 3 97 Kedah 59 41 Perlis 0 100 Perlis 62 38 Johor 3 97 Johor 45 55 Melaka 0 100 Melaka 47 53 Pahang 12 88 Pahang 53 47 Kelantan 18 82 Kelantan 67 33 Terengganu 38 62 Terengganu 77 23 Sabah 18 82 Sabah 45 55 Sarawak 50 50 Sarawak 59 41 0 20 40 60 80 100 0 20 40 60 80 100 No ood insurance No ood insurance Have ood insurance Have ood insurance 126 MANAGING FLOOD RISKS Leveraging Finance forBusiness Resilience in Malaysia CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia http://bit.ly/WB_blogsMY www.bnm.gov.my @banknegaramalaysia Bank Negara Malaysia