Catastrophe risk modeller RMS has conducted analysis on the potential impact of insurance schemes in low and low-middle income countries against natural catastrophe events, revealing that such structures could increase the volume of average annual asset recoveries to $3.1 billion.
A new report from RMS commissioned by the UK Department for International Development (DFID), examines the role of insurance in low and low-middle income countries, and claims that with the roll out of insurance schemes vulnerable, poorer countries can mitigate their financial exposure against natural disasters, when compared with current loss metrics.
RMS analysis states that average annual asset losses from catastrophe events in low and low-middle income countries equates to $29.1 billion. Roughly 8%, or $2.2 billion of total losses is covered by humanitarian aid expenditure, with $0.9 billion, or roughly 3% of total losses currently being covered by insurance.
Clearly, insurance penetration against natural catastrophe risks is dangerously low in these parts of the world, and coupled with a lack of awareness and high vulnerability to a range of natural disasters, poorer countries often struggle to recover post-event, with much of the burden falling on already stressed governments and humanitarian aid.
By exploring existing insurance mechanisms and determining realistic insurance solutions that could be implemented in these regions over the next decade, RMS analysis shows that insurance structures can increase recoveries and lower financial exposure in low and low-middle income countries.
“Three different hypothetical insurance structures were chosen, and applied to a set of simulated losses at present day exposure and population levels. Sensitivity analyses were performed around base assumptions for each structure,” explains RMS.
The schemes chosen, were, insurance for public assets, insurance for private assets, and emergency response and insurance backed social protection.
Under the base assumptions, RMS states that the average annual asset recovery from all three schemes is $3.1 billion, which translates to roughly 11% of total losses. So an improvement from the $900 million, or 3% of total losses recorded today.
Furthermore, applying the two additional sensitivity assumptions gives a an annual average asset recovery range of $1.5 billion to $5.1 billion. For private assets, annual insurance average recoveries vary between $1.2 billion and $2.2 billion, dependent on low or high sensitivity analysis used.
For public asset, recoveries vary between $0.3 billion and $2.1 billion, and for emergency response and insurance backed social insurance, recoveries vary between $0.1 billion and $0.9 billion, again dependent on low or high sensitivity analysis used.
RMS continues to explain that, under the base assumptions, the one-in-ten-year return period insurance recovery is $5.2 billion, which compares to a one-in-ten-year asset loss of almost $49 billion.
“Under the base assumption, simulated one in ten-year asset losses are reduced from $48.3 billion to $40.7 billion, a reduction in financial consequences of $7.6 billion, or 16%. This is a 45% increase in the monetary value of the one in ten-year recovery of $5.2 billion,” explains RMS.
Despite insurance penetration being low in the parts of the world examined by RMS, there will likely be natural increases in insurance penetration. Applying plausible increases in insurance penetration over the next decade, RMS says lowers the simulated average annual asset losses to between $21.9 billion and $26.4 billion, “representing an annual reduction in financial consequences of between 8% and 24%.”
Adding; “Taking into account the positive impact of ex-ante risk financing that acts to mitigate the longer-term development of disaster losses, these recoveries reduce the financial consequences of catastrophe risk by $4.4 billion per year (approximately 15% of average total asset losses). ”
The analysis from RMS supports the need for improved disaster resilience and response, areas where both traditional and non-traditional insurance and reinsurance structures and capacity can play an increasingly vital role.