ILS aids integrated approach to managing extreme events: Geneva Association

Insurance industry think tank, the Geneva Association (GA), has underlined the necessity of reducing the financial impact of extreme weather events across the globe, an area where the features and capacity of the ILS market has the potential to play an important role.

The GA has called for an “integrated approach to managing extreme events and climate risks” across the globe, which continue to hinder the financial and economic development of emerging regions, and also test the resolve of more developed parts of the world.

According to a new report from the GA, between 1980 and 2015 15,700 relevant loss events occurred throughout the world, of which 91% were weather-related extreme events, which combined to cause economic losses of beyond $3 trillion.

Within this period, 90% of overall insured losses were a result of extreme weather-related events, while 79% of economic losses were caused by extreme weather-related events, highlighting the need for increased insurance penetration in all corners of the globe via innovative risk transfer solutions from the insurance, reinsurance and insurance-linked securities (ILS) space.

The GA has called for a concerted effort between the risk transfer industry – which includes insurers, reinsurers and ILS players – the scientific community, governments around the world, and other public and private sector organisations, in order to reduce the adverse economic and financial impact of extreme weather events.

“The insurance sector can help design and launch relevant and innovative risk transfer solutions in response to known risks, particularly in regions where insurance is still in its infancy.

“Examples include reinsurers’ support of innovative regional sovereign risk-pooling schemes such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), African Risk Capacity (ARC), and Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) or the structuring of catastrophe bonds on behalf of sovereign issuers, as in the case following Superstorm Sandy in New York City,” explains the GA.

Insurers and reinsurers are skilled at originating risk, establishing pricing for risk transfer, and together with the re/insurance industry, catastrophe modelling experts have valuable knowledge and data concerning risks around the globe.

The GA highlights the need for the risk transfer industry to share its knowledge and risk pricing expertise, while facilitating the use of the market’s capacity to increase penetration and efficiency, ultimately improving global disaster resilience.

Utilising ILS solutions and the expanding pot of capital markets backed capacity, alongside insurance and reinsurance, can increase the efficiency of risk transfer schemes, which can facilitate the expansion of existing schemes and the creation of new ones, while hopefully resulting in cheaper protection for the end-user.

In parts of the world highly susceptible to a range of adverse weather events, such as parts of Asia, it’s often the case that poorer, less educated and aware regions are hit by weather-related events, which can cause extremely high economic losses owing to a lack of preparedness and low insurance penetration rates.

For the vulnerable, poorer parts of the world many challenges have hindered the development of adequate and affordable risk transfer, including a lack of market knowledge, limited modelling capabilities, and the simple fact that people can’t afford the cover.

By working with the public sector, private sector entities can help to increase the awareness of natural disaster events throughout the globe, with the risk transfer industry providing the knowledge and capacity, and local governments helping to expand the reach of re/insurance and ILS solutions to those that really need it.

“A sound disaster risk financing and insurance strategy helps to increase the financial resilience of governments, businesses, communities, households and individuals. Research has revealed that countries with a robust penetration of market-based disaster insurance coverage recover faster from the financial impacts of extreme events. Von Peter et al. (2012) show that it is the uninsured part of catastrophe-related losses that drives macroeconomic costs, whereas well-insured catastrophes can be inconsequential or even positive for economic activity,” says the GA.

Increasing insurance penetration via the establishment of risk transfer pools that utilise insurance, reinsurance, and ILS features and capacity, along with the creation of innovative solutions that facilitate affordable and adequate protection against the world’s perils, is vital to building disaster resilience and better managing the impacts of extreme weather events.

The GA underlines research from the Lloyd’s of London specialist insurance and reinsurance marketplace, which claims that a 1% rise in insurance penetration can result in a 22% reduction on the burden that falls on taxpayers following an event.

In order to achieve a more integrated approach at managing the impacts of weather-related extreme events and climate change, the GA highlights four key points. The first relates to increasing the awareness of the benefits of an integrated approach, with the GA then stressing the need to harness the risk knowledge and modelling expertise of the re/insurance and ILS space.

Furthermore, the GA says that the insurance industry needs to engage in improving the resilience of critical infrastructure, and also develop insurance solutions that address the resilience needs of expanding, and emerging cities with rising asset values and increased concentration of citizens.

Improving disaster resilience and creating a more integrated approach and developing solutions will require a concerted effort from all aspects of the public and private sector. And while it stands to benefit the regions and people who can’t afford protection or were simply unaware of their options, it could also provide the re/insurance and ILS space will ample opportunity to innovate, and create solutions that will generate additional and diversifying revenue.