Last week, Typhoon Etau tore into Japan's east coast, causing severe flooding and the evacuation of thousands. Wildfires have been scorching swathes of the western United States from Washington to California. And even here in Monte Carlo's backyard, where I'm attending Les Rendez-vous de septembre, fires recently swept through the forested areas of the Provence region of France. These events demonstrate that natural catastrophes can strike anytime, anywhere.
But disasters are not only natural, they're also man-made. The recent massive explosion in Tianjin was a sobering case in point. And when insurance protection is inadequate, the human misery and economic dislocation caused by such events are far worse.
Unfortunately, the gap between economic and insured losses has remained stubbornly large, a fact highlighted by the new Swiss Re sigma study. Launched today here in Monte Carlo, its authors project a total global property protection gap of a whopping USD 200 billion per annum. This consists of losses driven by both natural catastrophes and general property risks.
Why is the gap getting bigger? The gap we're talking about is widening since the increasing frequency of losses and economic development are outstripping the purchase of insurance. Put another way: more people than ever before live in cities rather rural areas which results in highly concentrated pockets of economic assets and human life. Many urban areas are prone to natural catastrophes, and climate change is compounding this risk through an increase in extreme-weather events. Floods, windstorms and also earthquakes are the main culprits.
Underinsurance is often considered to be a problem unique to developing countries. But this ignores the fact that protection gaps exist in many developed markets too. This becomes very clear when consideringthe global natural catastrophe protection gap, to which the US and China are the biggest contributors. This is due to both the size of these economies and the low penetration of coverage against infrequent, low probability losses.
So what can be done? The insurance sector must take bolder steps to increase demand among consumers. These include improving risk awareness, better explaining the value of insurance and its affordability and developing simpler products that consumers can understand.
But underinsurance is not a subject for the insurance industry alone. The impact of natural catastrophe and other property risks is felt across society as a whole. If governments have to pick up the cost for uninsured losses following a disaster, this often diverts funds from other areas and is ultimately funded by taxpayers themselves. It also diminishes the incentives for the public to buy insurance: why should they, when they can rely on the government to come to the rescue?
An integrated risk management approach
Apropos governments, because no country can fully insulate itself against extreme events, insuring against catastrophic risk must be a key element in the financial strategy of every disaster-prone country. And to enable and sustain growth, this should ideally be part of an integrated risk management approach on the part of governments. Both the G20 and OECD have recognised that financial resilience through insurance coverage is critical to disaster management and the process of recovery. The rating agency Standard & Poor's also emphasizes the significance of disaster insurance in respect to sovereign financial resilience. It estimates that many countries may even face a deterioration in their credit ratings as a result of inadequate insurance coverage in a natural catastrophe situation.
The Monte Carlo event is great opportunity to discuss the challenges and solutions of property risks with our clients and partners. I am confident that through pooling our resources and insights we can achieve real progress on this front. Closing the property protection gap will be a joint effort. Together, insurers, governments and other agencies can narrow that gap and, in so doing, help communities bounce back more quickly following a disaster.
Category: Climate/natural disasters: Disaster risk, Drought, Earthquakes, Floods/storms, Resilience