Insurance solutions enhance the financial response capacity of countries in the face of natural disasters, and more and more regions are showing a willingness to improve risk management and utilise ex ante solutions, according to Joaquim Levy of the World Bank.
The need and desire from both the public and private sector to close the global protection gap (difference between economic and insured losses post-event) has become apparent in recent times, and emphasised by the efforts of global organisations such as the World Bank, the UN, and a range of insurance and reinsurance companies.
Underlining the steps the World Bank continues to take to increase the resilience of vulnerable countries against the immediate and lasting impacts of natural disasters, during a recent a speech at the 12th Chief Risk Officer Assembly in Munich, Germany, Levy, , Managing Director (MD) and Chief Financial Officer (CFO) of the World Bank Group (WB), noted the high costs of catastrophe events and protection inequality across the globe.
“We know that higher insurance penetration can build more resilient societies; however, insurance coverage in most developing economies remains stubbornly low,” said Levy. Continuing to explain that financial savings measures and insurance is only utilised by roughly 17% of people in low and middle-income countries, compared with 45% in high-income countries.
This figure drops to just 5% in the majority of developing countries when considering catastrophe risk insurance, apart from places where certain coverage is mandatory, such as Turkey earthquake risks and the Turkish Catastrophe Insurance Pool (TCIP).
Levy highlights the increasing desire among countries to utilise ex ante (focused on funding being available pre-event and on forecasts, rather than post-event funding and actual results) insurance solutions to support increased resilience and to ensure faster recovery times post-event.
In his speech Levy outlined a number of insurance solutions that are currently being utilised to address the growing protection gap, which incorporates elements of the traditional insurance and reinsurance industry, but also the capital markets.
Catastrophe risk insurance pools, such as the CCRIF, the TCIP, ARC, and so on, enable smaller, poorer regions to participate in insurance schemes, promoting reduced premiums and utilising a parametric structure, which ensures rapid payout post-event, something that is considered vital for poorer countries.
The same can be seen with catastrophe bonds, one of the largest sub-sectors of the insurance-linked securities (ILS) space, also highlighted by Levy as a useful and effective solution that can help address the protection gap and expand the reach of insurance and reinsurance coverage.
Levy noted the $30 million CCRIF catastrophe bond as an example of the role the capital markets can play, ultimately supporting the broader insurance and reinsurance markets and providing a diversified and willing base of capacity to protect against natural disasters in emerging regions.
Ultimately, stressed Levy, regional and international public sector entities will only be able to achieve the target with the help of the private sector, and this notion has been highlighted a number of times in recent years.
“Our work is characterized by a strong collaboration with the private sector in the area of inclusive insurance. Over the past 15 years, we have seen a growing number of client countries asking for more focus on risk management to help them solve complex problems. Together with the insurance industry, we have risen to address this challenge.
“The insurance industry plays a pivotal role in the way we build donor-funded risk-absorption capacity and mobilize private resources for innovative forms of risk-sharing aimed at closing the protection gap effectively and efficiently,” said Levy.
Catastrophe bonds, along with the broader insurance and reinsurance market and their solutions and skill sets will likely prove vital in the fight against natural disasters and the overall improvement of resilience in both emerging and developed economies.
As reported by Artemis previously, the World Bank estimates that catastrophes cost $520 billion annually and pushes roughly 26 million people into poverty. Figures that could be greatly reduced with a focus on ex ante financing, utilising the insurance, reinsurance, and ILS sector.