Emerging countries affected by insurance gaps

Natural catastrophe losses are on the rise. Many developing and emerging countries are hit especially hard. But good insurance programmes can help to mitigate the consequences.


In recent decades, overall and insured nat cat losses have increased significantly for two reasons. Firstly, the socio-economic factors involved have changed. There has been a sharp rise in exposed values in high-risk areas virtually worldwide, and particularly so in developing and emerging countries. This has meant growing accumulation risks, especially in regions to which state agencies and the insurance industry have, in the past, paid little heed when analysing loss potential.

Secondly, in a number of regions, weather-related natural catastrophes have grown more frequent and more severe in recent years. We expect this trend to play an increasingly prominent part in the changing risk landscape in the future. If the climate models are right, numerous regions will experience higher losses than in the past. Changes in many atmospheric processes will have a major impact on material assets unless appropriate adaptation measures are introduced. Even more importantly, such changes will affect the lives and well-being of millions of people.

Highest death tolls in developing and emerging countries

The data show that, worldwide, more than two million people lost their lives in natural hazard events between 1980 and 2012 – most (60%) as a result of weather and climatological events and the remaining 40% due to geophysical events. Although natural catastrophes occur throughout the world, sadly that the probability of dying in a natural catastrophe is greatest amongst those living in developing and emerging countries, regardless of geographic region. For instance, a storm surge in Bangladesh claimed 300,000 lives in 1970, while an earthquake in China killed some 242,000 people in 1976. Other examples of major humanitarian tragedies caused by natural disasters include the 2004 tsunami in East Asia (220,000 fatalities), the tropical cyclone in Myanmar in 2008 (140,000) and the earthquake in Haiti in 2010 (222,000).

The situation is quite different in industrialised countries with strong economies. Hurricane Katrina, in 2005 – the costliest natural catastrophe to affect the USA for many decades – claimed some 1,300 lives and the exceptionally strong earthquake and tsunami that hit Japan in 2011 around 16,000. While even these figures are far too high and the victims and their families must on no account be forgotten, they are far lower than natural catastrophe fatalities in developing and emerging nations.

Natural catastrophe fatalities were highest in developing and emerging countries in the period 1980–2012

Natural catastrophe losses are on the rise. Many developing and emerging countries are hit especially hard. But good insurance programmes can help to mitigate the consequences. In recent decades, overall and insured nat cat losses have increased significantly for two reasons. © Munich Re
The geographical distribution for the period 1980–2012 shows that natural catastrophe fatalities were highest in Asia and Africa.

Natural catastrophes worldwide 1980 – 2012 Percentage distribution of insured losses per continent

Natural catastrophe losses are on the rise. Many developing and emerging countries are hit especially hard. But good insurance programmes can help to mitigate the consequences. In recent decades, overall and insured nat cat losses have increased significantly for two reasons. © Munich Re
The proportion of insured losses for the period 1980–2012 was lowest in Africa and Asia, revealing a massive gap in insurance cover.

However, a further concern in addition to the effect on the lives of people in emerging countries is that when the ratio of insured losses to overall losses in emerging and developing countries is examined, a huge gap in insurance cover is revealed. According to the World Bank's definition, this primarily concerns low and low-to-medium income economies (i.e. with Gross National Incomes (GNI) of less than US$ 1,026 and US$ 1,026–4,035 respectively). In the period 1980–2012, they accounted for 10% of overall losses compared with a mere 1% of insured losses worldwide. For every euro of destruction caused by a natural catastrophe in Asia, on average only eight cents was covered by insurance during this period, while the average for the same period was 40 cents on the American continent (North, Central and South America).

Natural catastrophe losses are on the rise. Many developing and emerging countries are hit especially hard. But good insurance programmes can help to mitigate the consequences. In recent decades, overall and insured nat cat losses have increased significantly for two reasons. © Munich Re
Overall losses and insured losses by income group from natural catastrophes worldwide 1980 – 2012

Due to the lack of insurance cover, reconstruction following a disaster may be delayed or even impossible in poorer countries. This applies as much to individuals as to the state. Thus, natural catastrophes may adversely affect economic growth in emerging and developing countries in the long term.

Scientific studies on climate change impacts (e.g. the IPCC SREX report, 2011) indicate that this situation will further deteriorate as rising air and ocean temperatures cause more frequent and/or more extreme atmospheric conditions such as “too little water” (drought) or “too much water” (flooding). Given the complexity of such atmospheric phenomena, it is difficult to predict the impact climate change will have on a given country. Nevertheless, it is evident that disaster-prone developing and emerging countries find it most difficult to adapt to changes of this sort. They have a weak economic base and few available options for improving the overall resilience of their economies to exogenous shocks.

Risk management reduces vulnerability

As outlined above, we expect more frequent and more severe natural catastrophes, with dramatic consequences for emerging and developing countries, where insurance cover is far from adequate. What they need is effective catastrophe risk management.

In industrialised, developing and emerging economies, catastrophe risk management is most effective when it follows a two-tier strategy. In the first place, this means reducing the vulnerability of human beings and material assets to extreme atmospheric and geophysical events, even before such events occur, by adopting long-term ex-ante risk mitigation strategies. These strategies deal with issues such as land-use management in flood-prone areas, building codes in regions with exposure to windstorms or earthquakes and the development of information and warning systems advising private individuals and companies on how to reduce their vulnerability. The insurance industry has the data and the expertise needed to support policy makers and supranational organisations in these areas. However, the political and social responsibility for implementing appropriate regulations and ensuring they are complied with lies with government.

Secondly, comprehensive risk-based financing mechanisms must ba set up on a national scale to ensure funding is available to cover losses caused by a major event such as a natural catastrophe.

The most vulnerable population groups are also those with least access to affordable insurance cover by way of support to help them adapt to the economic consequences of natural events in the short and the long term. Due to their limited tax bases, high indebtedness and at best low nat cat insurance density, many highly exposed developing and emerging countries have insufficient financial resources. They cannot rely solely on donor aid to fully recover from the effects of a catastrophe because aid normally covers a mere fraction of the overall losses, and it is impossible to predict how much will be available and when with the necessary certainty. Being dependent on an uncertain source of funding following a disaster can exacerbate the consequences because reconstruction can start neither immediately nor on the requisite scale.

New partnerships must be formed between governments, supra-national organisations and the insurance industry to provide appropriate ex-ante funding for dealing with the effects of natural catastrophes. Innovative disaster risk financing mechanisms need to be developed (based, for instance, on national or international disaster loss pools) to ensure faster economic recovery from natural hazard events. They can help to close the gap between the overall losses and the insured losses.

Vital part played by governments and supranational agreements

Regardless of the strength of the economy in question, all forms of risk transfer mechanism, including public/semi-public and private-sector, require firstly a clear political will and secondly clear regulatory measures. Such measures usually incorporate funding components that may, however, vary considerably depending on the financial strength of the economies concerned. To implement effective post-disaster financing schemes (which also can be combined with pre-disaster loss mitigation elements) governments must:

- Engage in catastrophe risk management issues,
- Discuss realistic risk transfer options (including mandatory catastrophe insurance) with the relevant public-sector and/or private-sector organisations,
- Establish a framework of legal and regulatory measures to foster the development and operation of sustainable public-sector and/or private-sector risk financing schemes.

However, there is a significant difference between the options available to high-income and those available to low-income nations for paying the necessary risk premiums. In developed countries, risk financing is normally provided by private or commercial property owners, in some cases with co-financing by means of additional state support from public funds and/or tax relief for insurers and reinsurers. In each case, the financing solutions are created within the national economy and they normally involve the market.

By contrast, emerging and developing countries often lack the financial resources to establish an insurance system to cover future natural disasters. Adopting insurance-based funding solutions would allow them to substantially reduce the impact of natural catastrophes on the national budget and speed up economic recovery.


To reduce the gap in nat cat loss funding in emerging and developing countries, sustainable insurance-based coverage programmes have to be developed and implemented. The insurance industry has the experience to play a key part in breaking new ground in nat cat risk financing, both in private-sector nat cat risk management and in partnership with supranational and state civil protection agencies:

- Replacement of external ex-post aid (which often covers only a fraction of the overall loss) with financing by private or semi-private catastrophe insurance via international monetary funds. The requisite resources could be provided, in the long term, by the Copenhagen Green Climate Fund, for instance, first proposed at a session of the UN Conference of the Parties in 2009 and further discussed at COP 18 in Qatar.

- Long-term cooperation between aid and reconstruction organisations, development banks and the insurance industry, aimed at switching from ex-post disaster financing mechanisms to ex-ante risk transfer solutions linked to a clear regulatory and financing strategy.

Munich Re's SystemAgro: Public-private risk partnership tailored to disaster risk transfer

The agricultural sector is very much at the mercy of weather-related natural hazards. All too often, they have disastrous, and in terms of severity and extent, extreme consequences, as seen in recent droughts. The droughts of 2010 in Russia, 2011 in East Africa, 2011 in Texas and 2012 in the US Corn Belt caused dramatic falls in yield and production throughout the agricultural sector of the countries concerned as a whole.

There are many forms of agricultural insurance throughout the world but very few can protect a majority of producers against catastrophic events. Private-sector insurance covers at most named perils. At the present time, only strategic partnerships between the private insurance sector, governments and farmers are able to cope with catastrophic agricultural events caused by multiple perils. After analysing this type of cover over a period of many years to identify the key underlying success factors, Munich Re developed its SystemAgro. This is based on private-sector insurers specialising in agricultural cover and offering standard products at affordable cost on transparent terms and conditions. Since viability is guaranteed by the government, which co-finances premiums and catastrophic losses, a maximum number of farmers can participate. To ensure this type of risk management is sustainable, it is based on an agricultural insurance law which forms a key element of the government's agricultural policy.

Following the example of the USA, Canada, Spain and Portugal, the SystemAgro strategy is now also gaining a foothold in emerging markets, China being one notable example.

It is especially important to ensure that farmers in emerging and developing countries can cope with catastrophic weather events because of the limited asset base at their disposal. Farmers increasingly rely on seed, fertiliser and other external inputs and need loans to finance their business. Agricultural insurance as opposed to pledging limited assets as security against a bank loan, can improve access to funding and protect the farmers' property.

Catastrophic risk transfer works well in an agricultural insurance context if farmers have effective and reliable cover, if the private-sector insurers providing this cover have their downside limited and can operate within a stable economic and regulatory framework, and if the government can achieve its political goal of supporting the agricultural sector without repeatedly having to pay ineffective ad hoc disaster relief.

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