 By Martyn Parker, Chairman Global Partnerships, Swiss Re
From the early voyages of exploration and discovery in the 15th century to the construction of skyscraper-filled skylines in the 20th century, insurance has a long history of enabling economic progress. In the 21st century, insurance is again playing an indispensable role in enabling growth in emerging markets around the world.
For large scale infrastructure projects or industrial development which requires foreign capital to get off the ground, insurance provides confidence and security for investors in regions which might otherwise be perceived as too high risk.Functioning insurance and risk management frameworks are also essential in alleviating the economic burden from natural catastrophes on governments, who are ultimately insurers of last resort. Insurance also strengthens socialresilience by allowing growing middle classes to secure their newly accumulated wealth, thus laying the basis for long-term, sustainable domestic growth.
Natural catastrophes provide an insight into how insurers can offer financial protection for both growing businesses and governments in emerging markets. As foreign investment moves into a country and the economy develops, there is a corresponding increase in the value of the assets which are exposed to hurricanes, earthquakes and flooding. The expansion of urban development to serve a growing middle class exacerbates the potential for extreme natural catastrophe losses.In recent years we have seen the appearance of clusters of high value industrial and commercial assets, often with a high significance to global supply chains, in areas with a high exposure to natural catastrophes.
The value of insurance in such circumstances was well illustrated by the 2011 Thailand floods. Of the USD 12 billion in insured losses incurred in Thailand, 70% was written outside the country by international companies. However, this level of insurance participation is the exception rather than the rule. On average, approximately 30% of total losses from natural catastrophes worldwide are insured. However, in emerging economies this figure drops to less than 10% on average and recent earthquake events in China saw less than1% of economic losses covered.
This means that when disaster strikes that governments, businesses and affected households are left to bear the costs of recovery. If these stakeholders are not in a position to finance the losses, then newly-accumulated wealth can be quite literally washed away.
Large scale natural catastrophes will always be present. But there are opportunities for societies to plan, mitigate and manage the consequences much better. This would require a paradigm shift. There needs to be a move away from an over-reliance on governments as the insurers of last resort.The sheer scale of losses means that governments have a vested interest in closing insurance protection gaps and the tools are available for them to do so. Insurance, cat pools and the capital markets are just some of the ways they can ensure that financing mechanisms are in place before disaster strikes.
By employing better risk management practices, disaster mitigation and climate adaptation measures, countries can put themselves in a position to lower the overall economic losses in the first place. Studies in emerging countries have shown that between 40 and 70% of expected disaster losses can be cost-effectively reduced by ensuring that the fundamental preparations are in place before catastrophes hit. Disaster prevention measures such as sea walls, implementing building codes in exposed areas and public awareness campaigns need to part of the catastrophe management tool kit.
Insurers are working hand-in-hand with governments on financing mechanisms such as the creation of funding pools or advice on risk transfer to the capital markets through cat-bonds and other instruments. Mexico and the Caribbean states have taken on a pioneering role in this area in recent years, concluding new types of insurance in order to finance disaster aid. These programmes are not simply copy-paste versions of US or European schemes, but have been developed with the unique needs of the specific regionsin mind.
Building the insurance safety net often requires that insurers adapt and innovate to meet the demands of new markets. Insurers may face challenges in distribution, claims assessment, regulatory issues and cultural conditions.The good news is that insurers are rising to the challenges. Takaful insurance solutions are enjoying success in the Islamic world. Parametric risk solutions, which work on index triggers, such as rainfall or seismic activity, provide a solution to the problem of large scale claims assessment in hard to assess areas. Mobile telephone distribution mechanisms in Africa are proving invaluable in a region where infrastructure simply does not allow for large scale personal contact.
But perhaps the most far reaching innovationin recent years has come from the booming micro insurance industry. This sector has the potential to cover up to 4 billion people, and will translate into a potential premium volume of up to USD 40 billion.In India, for example, a weather insurance scheme introduced by Swiss Re with micro-finance institutions and local insurers six years ago has developed into a market that now covers 1.5 million people against the negative impact of monsoon rains. The expansion of micro insurance based agricultural products into Sub-Saharan Africa and health insurance solutions in the Caribbean have shown that micro insurance is expandable and adaptable.
Micro insurance is proving instrumental in ensuring that the hard won economic improvements at the societal level are maintained and that sustainable long-term domestic growth can take place.
Over the next 10 years, insurance premium growth rates in emerging markets will be about double that of advanced economies and emerging markets will account for a third of global premiums. For globally oriented insurers and reinsurers, who have been living with saturated mature markets, low interest rates and the on-going series of financial and debt crises, the push into these regions has become less of a foray into an exotic field, and more of an essential element in their strategies.
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