Intelligent Insurer


EDITORIAL Sharing risk is a duty


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Intelligent Insurer—ISSN 2041-9929 Cover image: © istockphoto.com/Mlenny


of the global risk transfer industry, which is designed to bear the brunt of such events and help communities and economies recover faster.


T Despite the fact that the Japan earthquake came on the back of some other big catastrophes


in New Zealand and Chile, the industry coped well. Its capital reserves are more than adequate and it has been able to get funds to its clients quickly, creating certainty and breathing space in the most difficult circumstances.


Yet the Japan incident in particular also illustrated some of the industry’s shortcomings, and


there are lessons to be learned as a result. Firstly, the event again illustrated that no matter how good we become at analysing and


predicting risk, there will always be more work to do. It is clear that the risk modelling industry—including both specialist companies and the re/insurance industry—must invest in better understanding the risks posed by tsunamis.


Secondly, more work needs to be done to understand, and if possible mitigate, the risk posed by


nuclear reactors and other related industries. The fear this risk generates in society is so profound that the consequences can reach far beyond the reality of the tangible dangers this problem poses.


But the biggest and most stark lesson the industry must take on board concerns the way risks of this nature are shared and the losses borne in the aftermath of a big event.


The risk-sharing mechanisms the Japanese government had in place were woefully inadequate. Despite estimated economic losses totalling $300 billion, total insured losses are only estimated to be between $20 and $35 billion. This is because the majority of economic damages are either not insured or are covered by government insurance programmes.


Compare this with the situation in New Zealand. Despite being much smaller losses in economic


terms, the majority of the losses will be covered by the international reinsurance markets—an estimated $10 to $12 billion. The New Zealand earthquake could cost international reinsurers more than the Japanese one, despite overall losses being a fraction of the size.


As an economy, Japan is big enough and robust enough to cope with this disaster. But the same cannot be said of many emerging markets equally at risk for catastrophe events of this size.


Many initiatives are ongoing to help these economies find ways of better sharing risk


through the use of catastrophe pools or capital markets risk-sharing instruments. Progress is often slow, however, partly because of limited expertise and a lack of urgency on the part of the countries involved.


But getting such systems up and running cannot come soon enough. The risk transfer industry, the heart of which is the re/insurance industry, should see it as its duty to invest heavily in getting such programmes up and running by committing time, expertise and cash.


Everyone will benefit long term. Because when the next event on the scale of the Tohoku


earthquake occurs, it might not be in a country able to cope as Japan has—let’s get better risk-sharing systems in place now, before it is too late.


Summer 2011 | INTELLIGENT INSURER | 3


ohoku earthquake and subsequent tsunami, which hit Japan on March 11, was yet another reminder of both the devastating force of Mother Nature and the importance


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