ILS could assist IDF’s contribution to the G7 InsuResilience target

The Insurance Development Forum (IDF) has expressed its support of the G7 InsuResilience target and proposed the formation of a Technical Assistance Facility (TAF), which, aims to support increased insurance penetration in emerging regions and that could be supported by the insurance-linked securities (ILS) space.

The IDF is a public-private partnership that consists of insurance and reinsurance industry executives, leaders of the United Nations (UN) and the World Bank Group, whose ultimate goal is to close the protection gap (difference between economic and insured losses post-event) by increasing insurance take-up and improving global, disaster resilience.

In a recent announcement, the IDF has expressed its support and desire to contribute to the G7 InsuResilience target of providing 400 million of the world’s most vulnerable people with access to affordable, and adequate insurance protection by 2020, something that will likely require a concerted effort from the insurance, reinsurance, and ILS space.

Owing to its experience at managing, financing and protecting against a broad range of risks, the insurance sector is well positioned to assist with the UN and the World Bank’s resilience goals. But with the range of risks so broad and the scope of geographies expanding and evolving as a result of macroeconomic and regional developments, the features, experience and capacity of the reinsurance and ILS space will likely prove invaluable in achieving the end goal.

“With growing natural disaster losses it is essential that governments learn how to incorporate risk management fundamentals into their planning, budgeting and governing processes so that their citizens can be better protected. The world is watching to see whether this unique public and private sector partnership can deliver results that will use insurance industry risk management skills to build resilience that benefits economies and families,” said Stephen Catlin, Chair of the IDF Steering Committee (which leads the IDF), and Deputy Executive Chair of XL Group Ltd.

As highlighted by Catlin, the insurance or reinsurance sector and broader risk transfer landscape has the experience and skillset to improve insurance penetration across the globe, particularly in emerging markets that have some of the lowest penetration rates anywhere in the world, and at the same time are highly susceptible to natural disasters.

A point expanded on by Helen Clark, Co-Chair of the IDF and Administrator of the UN Development Program (UNDP), who said; “For many developing countries with scarce resources, rebuilding is often beyond their means. Typically, a disaster is followed by appeals to bilateral, regional, and international partners for aid relief and financial support.

“This support, however, often falls well short of what is required. Systemic lack of funds and recurrent inefficiency of recovery initiatives on the ground impede progress. Insurance can be an efficient, fast-disbursing mechanism to build back better in vulnerable countries and communities hit by disasters, but also to reduce risks and the costs of risks in the long term. I agreed to co-chair the Insurance Development Forum because I believe it can make a real difference in addressing these challenges.”

Clark notes how insurance mechanisms can enable rapid payout post-event, something that is often vital to emerging regions in their effort to rebuild both financially and as a society in the event of a catastrophe.

Features of the ILS space such as parametric trigger structures, which can be tailored to individual needs and payout very fast following a qualifying event, is an example of how the broader risk transfer market, including ILS, can assist the IDF.

Successful catastrophe risk pools in vulnerable, poorer parts of the world such as Africa, which is home to the African Risk Capacity (ARC) scheme, the Caribbean’s CCRIF SPC venture, and also the Turkish Catastrophe Insurance Pool (TCIP), also show how the pooling of risks and the use of insurance, reinsurance, and ILS features, including parametric triggers and also the use of catastrophe bonds, can support increased insurance penetration in many areas.

The capital markets can provide a liquid source of efficient risk capital, which could be put to work alongside re/insurer balance-sheets to help to increase insurance penetration to boost resilience. In partnership with the capital markets, using insurance and reinsurance expertise to analyse, price and structure risk, it may be possible to accelerate reaching the InsuResilience targets.

The IDF Steering Committee has also approved a proposal to create a Technical Assistance Facility (TAF), which will combine public and private insurance sector resources and tools needed to support government efforts to increase partnerships that grow the use of insurance in emerging regions and markets.

“Work has begun on securing the funds needed to launch the program,” explains the IDF.

Joaquim Levy, Co-Chair of the IDF and Chief Financial Officer (CFO) of the World Bank Group, said; “Many emerging market and developing countries lack sufficiently developed insurance markets, which does stifle growth and has a negative impact not only on business but on general welfare, notably among the poorest.

“The lack of insurance instruments or broader risk-pooling or risk-mitigation mechanisms is also evident in the public sector, affecting government’s ability to respond to natural disasters and other large-scale events. The World Bank Group is engaged in more than 40 countries in the design of financial protection strategies, including reforms on public financial management and financial instruments and also in the development of risk-mitigation strategies. But more needs to be done, and we cannot do this alone. We stand with the Insurance Development Forum and its partners to facilitate our activities and use risk management instruments in helping eradicate poverty and raise shared prosperity.”

Looking forward, Rowan Douglas, Chair of the IDF Implementation Committee and Head of the Capital Science and Policy Practice at Willis Towers Watson, expressed gratitude to the Steering Committee, while providing some insight into what needs to happen next.

“We will now move forward to the next stage of implementation with partners across the industry, governments, international institutions, NGOs and academia. My thanks to more than 200 experts and practitioners who have worked tirelessly over the past five months to bring this together and especially the Working Group co-chairs that have created a remarkable global organization so quickly.

“We all recognize a unique moment and opportunity to make a huge step forward in the protection of lives, livelihoods and communities – realizing the benefits of insurance across public, private and mutual and cooperative sectors. We will redouble our efforts between now and our next major milestone and the World Bank- IMF Spring Meetings in Washington DC next April,” said Douglas.

Engagement here is important and the ILS market should involve itself in these processes, with the TAF a prime opportunity to engage in a discussion of how ILS and capital markets structures can assist with building global resilience.