Political will an obstacle to narrowing insurance protection gap

Political will and the role of governments is an obstacle that makes it harder for the insurance, reinsurance and ILS industry to effectively begin to narrow the protection gap, according to a Swiss Re representative.

The protection gap – underinsurance in emerging and developing economies, or the gap between economic and insurance losses after catastrophe and weather events occur – is one of the hottest topics in the reinsurance market right now, with voices beginning to call for real solutions and a way forwards towards fixing what has been viewed as a market failure.

But without the direct backing and support of governments, as well as perhaps a lack of understanding of the best ways to engage with policy makers and get them onside, the insurance, reinsurance and ILS or capital markets are fighting a difficult battle.

Ivo Menzinger from Swiss Re recently explained at the Asian Development Bank (ADB) and OECD´s Global Seminar on Disaster Risk Financing, held in Kuala Lumpur, Malaysia, that the political will of government representatives and politicians is a key obstacle that needs to be overcome.

The obstacles to providing efficient and sufficient disaster risk capital and financing, in insurance, reinsurance or capital market instrument form, is often not due to the supply or technical side, but rather down to political will, Menzinger said.

Also at the event, Michael J. McCord, Chair of the Microinsurance Network, highlighted the need for governments to develop standards for their provision of disaster relief, explaining that government guidance is required to help facilitate and encourage greater insurance uptake.

“Until the role of governments is clear, others will find it difficult to enter the market through insurance or other means, as, if people presume the government will take care of them, they will feel no need to buy insurance,” McCord explained.

Menzinger of Swiss Re went on to explain that capacity is not an issue, the insurance and reinsurance market is awash with capital and the capital markets and insurance-linked securities (ILS) investors and fund managers can bring a wave of new capital to use, if the opportunities can be created to put it to work.

Menzinger however explained that capacity alone is not the answer, as governments short time-frames and reluctance and unwillingness to put long-term planning and spending strategies in place, mean that insurance and reinsurance companies are not confident to put capital at risk in some markets.

Only once governments have their house in order, planning in place and a strategy for disaster risk finance in place can the insurance and reinsurance industry come into a new market, Menzinger implied.

McCord agreed, explaining the role that microinsurance has to play but adding that government alignment and support is required; “It is clear that microinsurance has a critical role to play in disaster risk management in terms of helping prepare low-income people for disaster – helping them immediately after the event and helping them rebuild their lives and businesses. Along with governments, and relief organisations, insurers are a key pillar in disaster risk management.”

The meeting also discussed that, as well as immediate post-disaster risk capital and responsive insurance products, longer-term strategies for rebuilding businesses and lives are required. Here again the support and alignment with governments is vital, if goals on resilience targets are to be met.

The importance of government engagement cannot be underestimated, however the insurance, reinsurance and ILS market need to take ideas to governments and political players that demonstrate the value of responsive disaster risk transfer and how a tiered approach to risk financing and transfer can help to support the governments resilience goals.

Read our series of articles focused on the insurance protection gap – underinsurance in emerging and developing economies and the gap between economic and insurance losses – an opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.