Pre Conference Forum

21
May

Natural disasters & uninsured economic losses: the insurance industry in front of a great capital gap

With a series of hurricanes, floods and earthquakes, the economic losses from natural disasters in 2017 rose to $353 billion –– a figure that makes last year the second-costliest on record, according to Aon Benfield’s Weather, Climate & Catastrophe Insight Annual Report (2017). Interestingly enough, the vast majority of these losses were uninsured, with a mere $134 billion corresponding to insured costs.

At the moment, a large portion of the insured post-disaster recovery costs is retained by governments or international donors, but the sustainability of such financial assistance becomes questionable as the frequency of large-scale disasters increases (McKinsey, 2017).

As the world races towards more resilient communities, the role of the private insurance industry in the aftermath of a disaster becomes more and more pronounced. Ensuring timely post-event liquidity and organizing payouts in the optimum way is critical for successful resilience strategies and insurance forms a key component in managing the ex-post disaster consequences.

Right now, the industry finds itself in front of a challenge: if it keeps repricing risk in a world where exposure to risk is growing exponentially, it will end up making insurance premiums unaffordable to a large percentage of the population, thus losing its share on the market. Opting out in providing cover for high risk areas does not seem like a solution either, as the global interest is now turned decisively – and will be for the years to come – on the effective management of natural perils in both developed and developing countries. One could say that the industry has an inherent interest in reducing societal risk exposure, in order to remain in the global market game.

The opportunity is out there, for insurers and reinsurers to take the strategic turn and increase their role in post-disaster financial protection, while having the chance to protect earnings and capital in the face of augmented exposure to natural hazards, with the aid of technological progress.

 

Staying up-to-date with the latest technological achievements (satellite imagery, artificial intelligence systems etc.) opens a whole new perspective to the insurance industry when allocating risk prices and deciding on deductibles for disaster risk contracts. Take for example the parametric insurance schemes, a relatively new but innovative approach to provide insurance that pays out benefits on the basis of a predetermined index, e.g. wind speed, strength of a hurricane, rainfall amounts or the magnitude of an earthquake. The models used in these schemes to determine the trigger for insurance payment aim to closely mirror the actual damage from a disaster event – so what about refining them with data from newly-emerging technologies?

By establishing common ground with the scientific community, insurers can enter a fruitful give-and-take of information and expertise: the private insurance sector can provide its know-how in calculating risk to help towards accurate risk assessments and rapid payouts, in exchange with finding itself at the leading edge of scientific developments.

Sources:

[1] Aon Benfield (2017). Weather, Climate & Catastrophe Insight. Annual Report. Aon Plc.

[2] McKinsey and Company (2017). Insuring hurricanes: Perspectives, gaps, and opportunities after 2017. Article. https://www.mckinsey.com/industries/financial-services/our-insights/insuring-hurricanes-perspectives-gaps-and-opportunities-after-2017