New research from Lloyd’s warns of an annualised $168bn insurance deficit that leaves 17 high growth countries severely exposed to the long-term costs of catastrophic events.
The new, independent study conducted by the Centre for Economics & Business Research (CEBR) and commissioned by Lloyd’s (Which can be found here) highlights clear risks for countries affected by this shortfall including an unnecessary burden placed on the State and a higher cost of recovery after disasters:
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The State bears an excessive proportion of the cost of natural catastrophes in countries with a low level of insurance. A 1% increase in a country’s insurance penetration can reduce State liability by as much as 22%. For example, China’s Sichuan Earthquake in 2008 resulted in estimated damages of $125bn and yet just 0.3% was covered by insurance. This left the Chinese State paying for almost all the cost.
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Post-catastrophe recovery costs are lower in countries that have higher levels of insurance. A 1% increase in insurance penetration delivers a 13% reduction in uninsured losses.
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The pace and extent of global economic development has seen the cost of catastrophes grow by $870bn in real terms since 1980. The level of natural catastrophes in 2011 saw $107bn of insurance claims–the second costliest year overall for the insurance industry and its costliest for natural catastrophe claims on record.
Richard Ward, chief executive of Lloyd’s, comments “With Superstorm Sandy still fresh in all our minds, I hope that this research will stimulate a debate on how governments–and businesses–manage the risk of natural catastrophes. It also raises an important question of the merits of risk transfer versus the use of public funds to cover the cost. Insurance exists for two simple reasons-to help prevent losses from happening in the first place, but to alleviate the financial consequences if disaster does strike.
As this research underlines, too many high-growth countries are failing to take the steps required to prepare properly for these sorts of events, leaving people and businesses exposed. As high-growth economies continue to develop and supply chains become increasingly interconnected, now is the time to ask ourselves: can the world afford to keep taking such a big risk?”
The comprehensive study is the first of its kind and creates a new benchmark measure of ‘underinsurance’. Other key findings include:
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An analysis of five major global disasters showed that only 21% ($115bn) of a total economic loss of $538bn was covered by insurance across the world.
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China insured just 1.4% of losses arising from natural catastrophes between 2004 and 2011, with $208bn in uninsured losses.
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In five of the 17 countries identified as severely underinsured, the average uninsured loss for major catastrophes is at least 80%. The average uninsured cost of catastrophe in China is $18.91bn; in India $1.96bn and in Indonesia $1.45bn.
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Higher levels of insurance correlate positively to economic growth. A 1% increase in insurance penetration is associated with increased investment of 2% of national GDP.
With the cost of natural catastrophe damage increasing every year, Lloyd’s is calling for more action by businesses, governments and insurance companies to adjust to the threat this insurance shortfall presents to jobs, homes and businesses in those countries most affected:
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Businesses need to take a more long-term view. Risk management needs to be a board-level issue and businesses should invest more in short-term preparation for long-term protection. This means better contingency planning to protect supply chains. Better planning and risk management can save money over the long term, free up funds for investment and allow businesses to better absorb shocks.
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Governments need to invest more in mitigation measures such as flood barriers and coastal defences, and promote strong building codes, to minimise the damage done by the next big natural catastrophe in a fragile fiscal climate. Governments can also help their economies by opening up markets to private insurers to increase the capacity available to underwrite risks.
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The Insurance industry needs to take steps to understand better risk in growth economies–enabling them to research and price new risks. This could include investing in relationships with insurers in unfamiliar territories, where the problem of underinsurance is most severe and doing more to develop a range of products and models for new clients in growth economies.
Douglas McWilliams, founder and chief executive of CEBR, said “This insurance gap has a huge and lasting impact on the ability of businesses, governments and people to recover from the earthquakes, hurricanes, flooding and forest fires that affect us all every year. This means lost orders, lost jobs and wasted taxpayer money as a failure to prepare ahead of such events creates costs that are more severe and unmanageable.”
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