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4 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP


EXECUTIVE SUMMARY


– Convergence between the traditional reinsurance market and the market for ILS has now occurred. An estimated $50bn of ILS will be in force by the end of this year and the cat bond industry is on track to break the previous 2007 issuance record of $7.2bn.


– There is huge potential for the ILS sector and cat bond industry to become much bigger. BNY Mellon predicts ILS in force could grow to $150bn by 2018, with the cat bond share of that total volume worth up to $50bn.


– The “disaster gap” between economic losses and insured losses is getting wider, leaving governments and society on the hook for the cost of rebuilding. Climate change and urbanisation are expected to exacerbate future losses from catastrophes.


– At present, 75% of this alternative capacity is focused on US peak perils – mainly windstorm and earthquake.


– There is a real opportunity for insurers to properly embrace the cat bond sector, to innovate and become more global. At the same time it will fulfil an important social role in covering the cost of future catastrophes.


– There are numerous challenges to overcome, including the lack of historical data and sophisticated catastrophe modelling in some regions. Big data could be the answer, providing underwriters with tools to price and structure future deals; and investors the tools to assess the risks.


– Insurers must acknowledge alternative capital is here to stay. Insurers and the capital markets working together with big data should be able to deploy this new capital to cover new perils.


THE DISASTER GAP


The gap between the cost of a disaster and the level of insurance was the subject of Lloyd’s Global Underinsurance Report, which came out in 2012. It estimates the annual gap at just over $168bn. The research, carried out by the Centre for Economic and Business Research defines this gap as the minimum levels of cover necessary and the actual levels that businesses and governments have set aside to rebuild and recover following major catastrophes.


The largest single gap in monetary terms is in China. With rapid economic growth and urbanisation the country’s exposure to earthquake, windstorm and flood losses is growing substantially. Yet only 1.4% of the losses between 2004 and 2011 were insured. One barrier to increasing insurance penetration in countries such as China is the role the government takes as insurer and reinsurer of last resort. “In China there is this attitude of government paternalism to the public when it comes to disasters,” says the World Bank’s Eugene Gurenko.


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