As natural disasters proliferate, insurance protection gap must shrink

Leanne AlisyaLeanne Alisya | Updated: 15-06-2022 14:08 IST | Created: 15-06-2022 14:08 IST
As natural disasters proliferate, insurance protection gap must shrink
Image Credit: WikiImages from Pixabay

A recent report by insurers Aon has highlighted the staggering economic losses incurred by the growing number of natural disasters around the world. According to their calculations, the global economy lost some $343 billion in 2021, a mere 38% of which ($130 billion) was covered by insurance. Given that climate change looks set to make such events more intense and frequent going forward, addressing this widening protection gap will be a key step in mitigating the instability sparked by these catastrophes.

It is perhaps gladdening to see that strides are being made in that direction with the recent flurry of activity inside the reinsurance market since acquiring adequate secondary coverage for primary insurers will be instrumental in minimizing the economic fallout associated with the sector. However, it will take a wholly different approach to risk assessment, management, and prevention to avoid national economies – particularly in impoverished and developing nations – from becoming crippled in tandem with the environmental degradation occurring the world over.

Natural disasters are on the increase

The Aon report may have made for gloomy reading, but it shouldn't have come as a surprise to anyone who has been keeping an eye on the topic. 2021 was the sixth year on record that natural disaster-related losses have exceeded $100 billion, with all six occurring in the last decade. The situation doesn't look likely to improve any time soon, either; the UN estimates that the next eight years will see a 30% rise in droughts and a tenfold increase in extreme temperatures, with as many as 560 natural disasters occurring annually (or 1.5 per day) across the planet by 2030.

Given that low- and middle-income countries are expected to suffer economic repercussions that could be as much as 10 times more severe than their richer counterparts, ensuring they have adequate insurance policies in place will be hugely important in preventing further backsliding. That's an area that's sorely in need of addressing; just 40% of disaster losses have been insured globally since 1980, but in the developing world the figure falls below 10%. In the worst affected regions, it's close to zero. Clearly, the question of robust insurance is set to become more important than ever.

Reinsurance market responding

Despite increasing attention to the issue, many regions remain dramatically underinsured. In the Asia-Pacific region, just 12% of the $78 billion lost to disasters last year was insured. Even in relatively prosperous Australia, the protection gap increased from 40% in 2020 to 57% last year. Consultants PricewaterhouseCoopers estimate that the global gap could gape as wide as $1.86 trillion in as little as three years if left unchecked. But while the insurance industry is aware of the issue, some of its players remain powerless to help. In Florida, for example, two prominent insurers have stopped underwriting new business entirely in the run-up to hurricane season, claiming they must secure sufficient reinsurance coverage first.

That's a need that will occur more frequently all over the world as climate events become more commonplace, concentrated, and costly. As a result, the reinsurance market has drawn increased attention from investors of late. In one eye-catching deal, French insurer Covéa acquired the world's 12th largest reinsurance company PartnerRe for $9 billion, a deal which was recently given the thumbs up by the European Commission and which is just the latest example of an insurance firm seeing value in expanding its reinsurance activities. Elsewhere, Gallagher Re became the sector's third-largest brokerage after its purchase of Willis Re for $3.25 billion, rising to $4 billion based on future performance. These deals illustrate awareness of the increasing importance of insurance and reinsurance, sectors that have become important in mitigating the losses caused by natural catastrophes.

Technology and innovation can provide powerful tools

Indeed, in order to cope with these increasingly devastating disasters, we must take an entirely new approach to the way we examine, price in, and mitigate risk. The reinsurance sector can provide important insights here; whereas most risk assessment techniques rely on historical statistics, these are not quite so useful when dealing with rare climatic events (which are, admittedly, becoming ever less rare). Instead, the sophisticated modelling methods employed by reinsurance companies can provide a better overview of how catastrophes are likely to unfold.

These models are all the more effective when they incorporate data from a number of sources, such as satellite imaging and lidar technologies, and process them via highly advanced artificial intelligence and machine learning algorithms. One such promising development in the pipeline is the so-called 'digital twin' being pioneered by SaaS firm AiDash, which the company purports can predict the severity of storms and their specific impacts on local communities with an accuracy ratio of 85%. Meanwhile, research at MIT is looking at how to introduce downscaling to achieve granular detail of modelling at the localized level, even as long-term timescales are sacrificed.

Changing how we view risk

While the reinsurance sector has long seen how valuable these innovations are for quantifying the risk involved in climate change-related scenarios – and then pricing and providing coverage accordingly – it seems as though the rest of the world is lagging sorely behind. As such, it now falls to policymakers and private business interests alike to lean heavily on the latest technological tools and techniques for understanding how disasters unfold and equipping themselves with the information they need to prevent their worst repercussions from coming to pass.

Of course, significant investment is needed to address the issue, but throwing money at the problem will serve no purpose if it isn't directed to the right areas. The UN recently revealed that in the last 10 years, the donor community has spent some $117 billion on the developing world, but just 11% of that figure went to disaster-related causes. Even worse, a trifling $5.5 billion (0.5% of the overall amount) was funneled into prevention and preparedness, with the lion's share splurged on response and rehabilitation. As long as we continue to treat the symptoms of disaster-related economic downturns and not their root causes, we'll never address risk appropriately.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)

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