Insurance deficits leave the world at risk of catastrophe

SUPERSTORM Sandy was 2012’s reminder of the damage caused by natural disasters. It hit within a few of months of the anniversary of the Thai floods in 2011, which killed over 800, made millions homeless and inundated the business parks that underpin the country’s economy. Knock-on global supply chain disruption forced Honda and Acer to cut production, and the World Bank put the total cost at $45bn (£27.7bn). Only $12bn was insured.

In 2011, it was an extraordinary year for natural catastrophes, and I’m increasingly uneasy about how well-prepared governments and businesses are to face disasters. Their vulnerability was highlighted by a recent Lloyd’s global underinsurance report. Analysis by the Centre for Economic and Business Research thew up an alarming underinsurance deficit of an annualised $168bn in 17 out of 42 countries – eight of them in Asia, a region many assume will lead an eventual global recovery. China is a particularly extreme case. The economic cost of the Sichuan earthquake in 2008 was $125bn. Insurance covered less than $400m. This isn’t sustainable.

Closing the gap boils down to transferring the cost from government to industry – using the insurance industry to pick up more of the financial cost. We exist to pay claims, and last year global insurers paid out $107bn globally. But extending our reach into underinsured economies will require us to better understand new risks and to compile the data and models to price them effectively.

We’d also like to see governments share data more freely. Industry-led initiatives like Oasis, of which Lloyd’s is one of the founding sponsors, will launch next year to provide an open marketplace for models and data.

But we also need to encourage societies to mitigate risks and, critically, to adapt to a more uncertain climate. Some are already planning for the long term. After the Sichuan earthquake, China’s government rebuilt to a higher standard. Engineers in New Zealand are implementing structural lessons after its 2011 earthquake.

An established insurance market can help with this. The best result for insurers and clients is to minimise the impact of any disaster. In this vein, some travel insurers recently decided to insist that skiers wear crash helmets. Reducing casualties on the slopes reduces potential claims. But isn’t this good for everyone?

On a macro level, insurers stimulate safety by casting a second pair of eyes over risk management. This leads to more resilient communities. But insurers can’t do this alone. Governments need to invest in flood defences, for example, and establish strong building codes. This debate is currently playing out between the UK government and the Association of British Insurers, and it is essential that they reach agreement.

With global economic recovery uncertain, businesses and insurers need confidence that they can withstand disaster. How do they get this? They can invest in mitigation and protect their assets through transferring risk. Or they can take a gamble. Do you feel lucky? Can you afford another 2011?

Richard Ward is chief executive of Lloyd’s of London.
The report can be found at: http://www.lloyds.com/news-and-insight/risk-insight/underinsurance-report