A new report from the World Bank Group highlights the benefits of catastrophe risk pools, and outlines the basis for a global partnership that brings together relevant parties from both developed and emerging regions, the public sector, and the private insurance and reinsurance markets.
The briefing note outlines the basis for the creation of a Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions, via the G20, in an effort to close the growing protection gap (disparity between economic and insured losses post-event) around the world, improve resilience and safeguard poverty reduction and development gains.
Despite more than 1 billion people lifting themselves out of poverty over the last 15 years, the increased severity and frequency of natural disasters, as well as the impacts of climate change, are a threat to these achievements, says the World Bank.
Natural disasters in 2017 are expected to cost insurers and reinsurers $136 million according to reinsurance giant Swiss Re, with the economic costs much higher, underlining the need for greater insurance penetration in both developed and emerging regions.
To address the growing threat and ensure both developed and developing parts of the world have access to affordable, effective and efficient protection, the World Bank notes the potential for catastrophe risk pools, such as the African Risk Capacity (ARC), to be replicated and utilised on a global and national scale.
Catastrophe risk pools utilise the capacity, expertise and experience of the insurance, reinsurance, and capital markets to provide vulnerable people and regions with access to parametric insurance protection, which enables rapid payout post-event and that can be seen to be effective in Africa with ARC, the Caribbean with the CCRIF SPC, and the Pacific with PCRAFI.
“There are opportunities to expand risk pools to new countries and regions. Given their high exposure to floods, cyclones, earthquakes, and droughts, a number of Asian countries are individually using disaster risk financing mechanisms, and a possible sovereign catastrophe risk pool for Cambodia, the Lao People’s Democratic Republic, and Myanmar is currently being discussed,” says the World Bank.
Furthermore, India, Pakistan, and the Philippines are exploring subnational structures for disaster risk financing, says the World Bank, and it is believed that other regions are also looking into the establishment of catastrophe risk pools in order to access much-needed re/insurance protection.
The report underlines the need for the public and private sectors to work together, as governments are often vital when developing such risk pools.
“The role of the government is essential in such endeavors, which must align incentives and generate a sustainable demand for catastrophe risk insurance, especially where insurance literacy and penetration are low,” says the World Bank.
Another benefit of risk pools is that they can promote more cost-effective risk transfer, via the facilitation of access to international reinsurance and capital markets, enabling risks to be diversified, and also by establishing joint reserves to self-insure a part of the risk managed by the pool.
“By helping countries develop standard products based on their respective needs, and structuring a portfolio of diversified country risks, risk pools offer larger transaction sizes that are more attractive to global reinsurance and capital markets.
“In addition, risk pools can reduce premiums by reducing the cost of capital, operating costs, and the cost of risk information. Pools cannot reduce the underlying climate and disaster risks countries face. But they can create incentives for risk reduction measures by putting a price on risk,” says the World Bank.
Adding; “The Global Partnership could bring together relevant partners from developing and developed countries, international organizations, the private sector, and civil society. To achieve maximum impact, the Global Partnership would leverage the comparative advantages of all partners and build on the work of existing platforms and initiatives. In particular, it would leverage the technical expertise and capacity of the private insurance and reinsurance industry.”
