A new report recently published by the World Economic Forum, in collaboration with a range of private sector companies including re/insurers, outlines recommendations to reduce the impact of natural disasters through improving both physical and financial preparedness. The report also advocates utilising the resources of both the public and private sectors to effectively manage natural disaster risks.
Titled ‘A Vision for Managing Natural Disaster Risk’ the report discusses the role of risk transfer in disaster risk management and recovery and highlights that financial preparedness is key. It says that insurance and risk transfer can protect individual livelihoods from catastrophic impacts and help reduce the burden on public budgets. The goal of risk transfer should be to ensure that risks are spread across capital bases which are sufficient to absorb losses without leaving society and governments serving as sole risk bearers. This is where capital markets risk transfer can play a key role in a countries disaster risk management plan.
The report discusses traditional insurance and reinsurance, microinsurance, catastrophe bonds and insurance-linked securities and country catastrophe pools. Where traditional re/insurance markets have limited capacity, such as in emerging markets and developing countries, the report says insurance-linked securities can employ funding from global capital markets and be a more efficient way of transferring risks with a broader capital base and more capacity. Insurance-linked securities can cover catastrophe risks in a more targeted fashion and the size of the market and deals issued only limited by investor demand.
The report also discusses other forms of risk transfer such as index-insurance, mainly used to insure weather risks, and parametric insurance options which promise a quick and predictable payout.
The vision for increased financial preparedness which the report discusses can be summed up as a desire to make more of the risks faced by nations at risk of natural disasters insurable by utilising risk transfer mechanisms and public-private cooperation. This vision would also lessen the burden on individuals and governments by placing more of the risk with re/insurers and the global capital markets. They sum up this vision using the diagram below:
“On the one hand, we see losses from natural disasters rising, and on the other hand, capacities to deal with such burdens are limited. The most vulnerable countries are often the worst impacted, and the financial crisis has reduced the resilience of many industrialized countries as well,” said Michel M. Liès, Chairman, Global Partnerships, Swiss Re, who contributed to the report. “We see the demand for innovative public sector risk financing solutions and comprehensive sovereign risk management approaches increasing, to find ways of lessening the physical and financial impacts of disaster and allow for a swifter recovery.”
It’s an extremely comprehensive report and discusses many of the topics we cover here on Artemis. You can download the full report here in PDF format.