Pre-disaster financing with quick payouts a solution to catastrophic events: AXA XL

When natural disasters strike around the world the single biggest solution to aid recovery is pre-disaster financing (predominantly insurance or reinsurance based products), with the ability to payout rapidly, according to AXA XL.

Working alongside the Centre for Risk Studies (CCRS) at Cambridge Judge Business School, AXA XL has published a report that seeks to demonstrate the value of insurance and reinsurance products in aiding recovery from natural disasters.

Insurance and reinsurance has a clear impact on the speed and quality of recovery following natural disasters, the research concludes, with the ability to channel significant amounts of funding rapidly after disaster happens a key feature of products that provide the greatest benefit.

Jonathan Gale, Chief Underwriting Officer, Reinsurance at AXA XL, commented on the research findings, “This report shows pre-disaster financing (predominantly (re)insurance) with the ability to channel significant funds instantly and without recourse as the single biggest solution to catastrophic events.”

That sounds like parametric trigger insurance and reinsurance solutions, or indeed capital market solutions such as parametric catastrophe bonds, could be the single product with the most utility, when it comes to aiding recovery.

Of course, that’s trigger dependent, as a well-designed, transparent and rapid paying structure needs to have a defensible and robust trigger design, to ensure payouts are fast and above question when disaster events occur.

The research found that for every percentage point increase in insurance penetration (non-life premiums divided by a country’s GDP) the recovery time from disaster can be reduced by almost 12 months.

As a result, countries with high insurance penetration (3% – 4% including in Western Europe, Japan, Australia, South Korea) have an average recovery rate of under 12 months, where as events in countries with very low insurance penetration (Bangladesh, Haiti, Nepal, Philippines) have a recovery rate of over 4 years.

It’s not a level playing field though and availability and continuity of insurance protection is key in making recovery faster, meaning that even the United States is on the slower side of disaster recovery.

The US enjoys very high insurance penetration (>4%), AXA XL noted, but “the fragmented nature of coverage, particularly flood, disaster response and scale of loss has resulted in a recovery rate average of just over 3 years (e.g. Hurricanes Andrew (1992), Katrina (2005) and Sandy (2012), and the Great Mississippi and Missouri River Floods (1993)).”

In addition, “The quality of recovery for very high and high insurance penetration countries is better than pre-loss levels, and the reverse is true for countries with lower insurance penetration although the differences are quite small. There is potential for product development in terms of “building back better”,” the research found.

Gale commented, “The case for (re)insurance is clear but is seldom adequately explained. We wanted to bring out comparative information related to speed of recovery – how quickly employment and productivity returns to normal (economic) and how quickly people are back in their houses and power is restored (societal). We also wanted to focus on the quality of recovery, that is whether the post-disaster normal is better than the pre-disaster state in terms of the economy and the resilience of the community to future events from the perspective of infrastructure and economic resilience.

“Unfortunately, private insurance penetration is not at sufficient levels, government pools do not have sufficient capacity, and disaster management is generally not coordinated or thought through enough. Good disaster management means reformative recovery within 12 months and bad disaster management may mean never recovering.”