DISASTER RESILIENCE
Working With Governments To Increase Disaster Resilience Can Open New Doors For Reinsurers
By Dennis Sugrue and Miroslav Petkov
Reinsurers can play a role in protecting governments and their citizens from the financial shocks associated with natural catastrophes, providing expertise in modeling and assessing catastrophe risk exposure, educating stakeholders, and enhancing relevance for the entire insurance sector in the process.
The rising tide of losses in the wake of natural catastrophes is increasing economic instability in many developing economies. Standard & Poor’s Ratings Services believes reinsurers can play a role in building governments’ resilience to the financial shocks associated with natural catastrophes. In some cases, extreme events in large developed and developing markets could not only derail the growth of that economy, but could also cause a ripple effect, affecting the global economy. Ultimately, developing a market for these products will help reinsurers reinforce their relevance to new clients and new risks should lead to a stronger insurance market and increased insurance penetration (measured as insurance premium as a percentage of GDP).
As part of a recent report on climate change and its impact on sovereign ratings, Standard & Poor’s analysis indicated that emerging economies are more vulnerable to extreme weather events (see “Climate Change Is A Global Mega-Trend For Sovereign Risk,” published on May 15, 2014). The debate is ongoing as to whether or not climate change is already causing
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the frequency of severe events to increase. However, extreme weather events are occurring more often, and economic losses are increasing as populations and wealth grow. Our research shows that each of the Top 20 most vulnerable nations are emerging markets, and the average insurance penetration (insurance premium as a percentage of GDP) in these countries, at 0.9%, is less than half of the global average (2.1%).
In our view, government-backed insurance solutions, supported by the global reinsurance industry, could provide some protection and stability to government budgets, mitigating the potential for instability and growth retardation.
Emerging Economies Risk Being Blown Off Course Following Large Catastrophes In a 2009 working paper produced for the World Bank, Stefan Hochrainer found that, on average, a country’s GDP five years after a catastrophe event is about 4% below what it would have been had no event occurred. Uninsured losses must be absorbed by the economy, either citizens or the state; leading
to unbudgeted expenditure. Table 1 shows how events modeled as having extremely low probabilities of occurrence (once in every 100 years, or once in every 250 years) would affect different countries. We calculate that in these scenarios, economic losses could wipe out GDP in some developing nations. However, the picture changes when we take insurance protection into account. In some cases, the insurance industry absorbs more than half of the catastrophe loss that the state and citizens would otherwise have to cover (see Table 2).
Natural catastrophe events, which include extreme weather events, have been occurring more frequently around the world. Since 1980, the annual average number of extreme weather events per decade has grown by 141%. At the same time, losses are increasing and, as the trendlines in Chart 1 demonstrate, the uninsured losses are growing faster than insured losses. Although this represents a missed opportunity for the insurance industry, it should also, in our view, represent a growing concern for the governments in these underinsured economies.
Global Reinsurance Highlights 2014
SHUTTERSTOCK / FEDECANDONIPHOTO
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