Despite the insurance, reinsurance and ILS landscape being awash with “smart capital,” the majority of the world remains either underinsured or uninsured, highlighting the challenge for the risk transfer industry to develop the right mechanisms to enable capital deployment where it’s needed most.
Rowan Douglas, Chief Executive Officer (CEO) of the Capital, Science and Policy Practice at Willis Towers Watson, addressing an audience at the Start Talks 2016 regarding insurance as humanitarian action, underlined challenges facing the global risk transfer landscape.
One of the drivers of the current softening reinsurance landscape has been the abundance of capital from both traditional, and increasingly alternative reinsurance providers via a range of insurance-linked securities (ILS) instruments.
At the same time, underdeveloped, or emerging economies/regions, such as parts of Asia, Latin America, and Africa, face a growing threat from a range of natural disaster events, and other non-weather related catastrophes that the ILS and re/insurance sectors of the world are designed to manage and mitigate.
“Most of the world is uninsured, most of the world does not know the risk it faces.
“We are incredibly resilient because we have applied science, we’ve got smart capital, and we’ve got a regulatory framework. So now, our challenge is actually growth. We have bags of capital, stacks of investors looking to say, we need to take risk,” said Douglas.
Part of the problem, as highlighted by Douglas is that many of the poorer, most vulnerable parts of the world to extreme risks aren’t actually aware of the dangers they face, or that solutions are available to mitigate, or lessen, the post-event financial impact.
That being said, the fact that some of these countries have extremely low incomes means that insurance penetration take-up remains low owing to a lack of education about its benefits, but also an inability to pay for any kind of solution, with food and housing often taking up the majority if not all of incomes.
The challenge then, is to create innovative solutions that utilise the features, expertise, and ultimately capital of the insurance, reinsurance and ILS space to address the evolving risk landscape and develop adequate solutions in order to connect this “smart capital” with the risks that need covering.
With the task at hand so vast and the global protection gap (difference between economic and insured losses post-event) so broad (even in more developed peril regions like U.S. flood, for example underinsurance remains detrimental to social and economic growth post-event), it will require a concerted effort from public and private sector entities.
“Our challenge is that we’ve got all this capital, all this access to communities who want to bring their capital to bear to protect against natural disasters and other issues,” said Douglas.
Since the Paris COP21 discussions and other meetings of world leaders, disaster resilience has been viewed as vital to protecting the world against the growing threat of natural disasters, and also climate related events, such as rising sea levels.
The countries most likely to be impacted by the perceived increase in frequency and severity of natural catastrophe events, and also climate related events are typically those with low average incomes and low insurance penetration levels.
So mechanisms that utilise ILS and reinsurance capacity, features, experience and expertise are required to improve resilience and bolster financial and economic stability post-event.
Schemes like the African Risk Capacity and the CCRIF SPC are examples of this, which utilise the capacity and features of the broad risk transfer landscape to provide cover to citizens and countries in the face of natural disaster events, where insurance penetration and average income levels are lower than parts of the developed world, such as the UK and the U.S., for example.
Without mechanisms such as the ones noted above and others that exist throughout the world, when disaster strikes the burden falls on governments and taxpayers, meaning it can take a very long time to get back to the financial and economic state that a region was pre-event, especially for poorer parts of the world.
This has driven a desire from governments to work with private sector entities in order to establish disaster resilience and post-event financing mechanisms and schemes, but as underlined by Douglas, there is still a long way to go.