The global reinsurance industry is well placed to help protect both societies and the economy, but it’s important that the private sector works with governments amid the growing frequency and severity of disasters, according to a recent blog post by SCOR’s Vincent Foucart and Eric Le Mercier.
The need to improve the resilience of communities and economies around the world, alongside the desire to narrow the rising protection gap (disparity between economic and insured losses post-event), are two topics explored and debated heavily across the risk transfer space.
The reason for this is that the insurance and reinsurance markets of the world play a vital role in protecting both developed and developing parts of the world against the financial and societal impacts of natural disasters and adverse weather events.
In a recent blog, Vincent Foucart, Deputy Chief Executive Officer (CEO) of P&C Partners, and Eric Le Mercier, Chief Underwriting Officer (CUO) of Alternative Solutions at SCOR, examine the ways reinsurance helps to build resilience and bridge the protection gap.
“Natural disasters have the potential to undo years of development by destroying both human and physical capital across multiple channels…Conscious of the increased risks generated by combined human activities and natural disasters, United Nations (UN) members have formulated the Sendai Framework for Disaster Risk Reduction and Strengthened Resilience,” explains Foucart.
While disaster risk management programs and schemes are beneficial, the reality is that most kick in after an event has taken place and while funding is essential to rebuild and recover, there’s a real lack of preparatory risk management, which, has been shown to improve resilience.
“Once the catastrophe has happened, most countries focus on the fiscal response – usually by reallocating budget and increasing taxes. This, in turn, creates an increased burden, which in countries affected by severe shocks is usually more detrimental to recovery than beneficial.
“The key is to move from “ex post” to “ex ante” disaster risk management, layering different types of mechanisms that combine risk retention, risk transfer and risk financing,” explains Foucart.
As well as building resilience so that when a large event inevitably does happen the impact is less detrimental and recovery is faster, insurers and reinsurers often note a desire to help close the protection gap, which, according to most reports, is growing.
In vulnerable, poorer parts of the world the protection gap can be truly staggering as insurance penetration rates are so low and the susceptibility to extreme disasters is so high. However, by no means is the gap narrow in developed countries, with some of the most mature markets in the world lacking adequate insurance penetration. As an example, SCOR’s Le Mercier notes that only 52% of the total loss from Hurricane Katrina was covered by insurance.
“Reinsurers are in a unique position to help protect societies and the economy,” says Le Mercier.
He continues to explain that reinsurers can facilitate comprehension, mitigation and protection owing to their extensive expertise in risk analysis, risk modelling and risk transfer solutions, their shock absorbing capabilities, and also their function of risk pooling in order to optimise diversification.
However, reinsurers simply can’t do it done alone and there’s a very real need for public and private sector collaboration.
“Pooling risk is key. Addressing the growing frequency and severity of disasters requires the combined efforts of governments and the private sector in the form of strong and innovative public-private partnerships,” explains Le Mercier.
Adding, “Protecting the welfare of citizens and communities is an integral part of the reinsurance industry’s corporate mission.”
