According to Lloyd’s of London Chief Executive Inga Beal, the governments of both mature and emerging markets are increasingly competing with the insurance and reinsurance industry, as governments take the lions share of catastrophe losses.
Speaking to Bloomberg in a recent interview, Beale said that the disaster load in 2017 highlights the issue of the protection gap and the fact that governments are taking a disproportionate share of catastrophe losses.
“We think this could be one of the costliest years on record,” Beale explained. “What it does for us is focus our mind again on climate change and the impact that is having, particularly on rising sea levels and then the impact that has when there are these disasters.”
But the insurance and reinsurance industry would like to be holding more of the risk, it seems, and right now Beale feels that governments are too willing to take this burden, resulting in re/insurers taking an increasingly small proportion of major event losses.
“One of our major competitors seems to be governments. If you look at the history of major losses in the U.S. over many, many decades, 50 years ago insurers were paying much more of each catastrophe loss than they are now. Each decade the government has been taking on more of the risk and that’s a challenge for us,” she said.
Continuing, “50 years ago insurers were paying 80% of the bill of these losses, now it’s about 20% it’s completely reversed.”
The protection gap is often discussed in the context of emerging economies and developing nations, where insurance penetration is lower and so the bulk of the loss goes uninsured.
But Beale sees the fact that governments are taking on an increasing amount of catastrophe risk as troubling and a challenge for the reinsurance and insurance sector.
As more risk goes uninsured, the burden on government finances and ultimately on taxpayers rises as a result. By insuring the risks at least the financing burden can be transferred to capital providers that can afford to bear the risk and have the experience to do so.
Beale said, “One of our challenges as the insurance sector, as a very important part of supporting human progress and the way the world has to move on, is that more and more governments are stepping in to look after their own citizens.
“It’s happening in mature markets and its predominant in some of the emerging markets where insurance isn’t particularly well known and they don’t buy very much insurance.”
The trend of governments bearing more risk is one that continues to increase. Perhaps the answer is for governments to utilise the international reinsurance and capital markets to pass on that risk, to reduce the burden for taxpayers.
“Governments don’t want to see any of their taxpayers stranded,” Beale said.
Perhaps at the same time as transferring the risk that the government bears, it should also be educating the population on the benefits of risk transfer and the importance of being insured.
Governments do not want to be seen as the competitors of re/insurance markets, but they have positioned themselves in this way by not seeking to transfer the risks that sit on national balance-sheets. If governments embraced risk transfer, insurance and reinsurance more wholeheartedly, it might encourage their people to do the same.