DISASTER RESILIENCE


in external indebtedness, budget deficit, and inflation.


As if these were not enough, the evidence indicates that natural catastrophes also inhibit a country’s development prospects and ability to attract capital. Munich Reinsurance Co.’s research indicates that, in some small countries, economic losses from large catastrophic events can amount to 30 years’ worth of net capital formation. The level of macroeconomic instability caused by catastrophic events largely depends on the size and severity of the event. In certain extreme events in major developing markets, we consider it possible that destabilization and significant reversals of growth could have a ripple effect in the region, or even globally. Our research suggests that, over the long term, climate change and extreme weather events could lead to sovereign rating changes, and could contribute to a divergence in ratings between sovereigns.


In our view, the global reinsurance industry is well placed to help catastrophe- exposed states reduce their liability and protect their economic stability. Reinsurers can offer expertise in modeling and assessing catastrophe risk exposure, educating stakeholders on the level of their exposures, creating bespoke solutions that provide proper protection, and acting as an intermediary with the capital markets to pair buyers and sellers of protection. Many insurance-based solutions already protect developing economies around the world (see “Risk Transfer Innovation: The Key To Emerging Markets For Global Reinsurers,” published on Sept. 9, 2013). Governments have made use of pooling arrangements, structured reinsurance solutions, and bespoke insurance policies. However, these are typically put in place following a major event, as was the case with the Turkish Catastrophe Insurance Pool, set up in 2000 after a series of earthquakes the previous year.


The Benefits Of Being Prepared Putting these arrangements in place before a disaster strikes carries clear benefits (see Charts 2 and 3). Chart 2 shows the timing mismatch between demand for relief, recovery, and reconstruction funding and when those funds begin to come in from external and domestic sources, such as donor relief, budget reallocation and debt, which is the current status quo. By contrast, in Chart 3, we see that where insurance-based solutions or other mitigants are in use, the funds for relief, recovery, and reconstruction


26 Chart 1: Natural Catastrophes: 1980-2013 (Bil. $)


100 200 300 400 500 600


0


Source: Munich Re, NatCatSERVICE (2014). © Standard & Poor's 2014.


Insured loss (left scale)


Economic loss (left scale)


Extreme weather events (right scale)


(No. of occurrences)


100 200 300 400 500 600 700 800 900 1,000


0


Chart 2: Supply And Demand Of Funds Following A Catastrophe Using Pre-Catastrophe Financing Donor (relief)


External debt


Budget reallocation Donor (reconstruction)


Domestic debt Tax increase


Relief (1-3 months)


Recovery (3-9 months)


Reconstruction (over 9 months)


© 2014 Münchener Rückversicherungs-Gesellschaft, NatCatSERVICE


Time


Chart 3: Supply And Demand Of Funds Following A Catastrophe Using Post-Catastrophe Financing Budget contingencies


Parametric insurance


Reserve fund CAT-Bonds


Contingent debt facility Traditional insurance


Relief (1-3 months)


Recovery (3-9 months)


Reconstruction (over 9 months)


© 2014 Münchener Rückversicherungs-Gesellschaft, NatCatSERVICE


Time


Global Reinsurance Highlights 2014


(Resource requirements $)


(Resource requirements $)


1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013


(Resource availability $) (Resource availability $)


Nat. Cat.


Nat. Cat.


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