Focus on benefit for society
Natural catastrophes cause much suffering, but also mean large financial losses for the people and economies affected. As many catastrophe losses are not covered by insurance, cooperation between governments and the private sector is becoming increasingly important as a way of closing the insurance gap – especially in emerging countries – and thus supporting sustainable economic development.
Incentives for prevention
Prevention – improving capacity to cope with and adapt to the consequences of catastrophes – starts long before an event actually occurs. The insurance industry can use its loss experience to provide both valuable input for precautionary measures and – by offering risk-based premiums – incentives for loss avoidance, and mitigate the financial shocks resulting from catastrophe events in the public and private sectors.
This, together with the fact that climate change is contributing to extreme weather risks in many regions, motivated the 2015 G7 summit in Elmau to formulate a clear insurance objective for developing and emerging countries. By 2020, an additional 400 million low-income people are to be given access to insurance solutions for climate risks. In many cases, achieving this will involve development partnerships, in which governments or supra-national organisations cooperate with the private sector.
Development partnerships are one option
In such partnerships, the insurance industry is responsible for developing and introducing the solutions, while the state defines the socio-political aims and the legal and regulatory framework.
Figures for the last few decades show just how large the insurance gap is in low-income countries – from 1980 to 2016, the overall economic damage caused by natural catastrophes amounted to around US$ 1,000bn, of which less than 3% was insured (source: ).Due to the lack of insurance protection, reconstruction was essentially reliant on donations and sporadic state action; it was often delayed and sometimes almost impossible to achieve. Many developing countries in particular have inadequate financial resources, and depend on external help when disaster strikes.
In many OECD countries, too, there is a substantial insurance gap and, even in industrialised countries, the economic cost of a catastrophe is nowhere near covered by insurance. The reasons for this differ considerably between low-income countries and OECD countries. Whilst the low insurance penetration in low-income countries is in many cases due to challenging economic and regulatory conditions, the situation is different in the OECD countries, where the insurance gap is partly the result of government emergency aid programmes – or at least of people’s belief that “the state will sort it out”. Demand for private insurance is quelled, or falls victim to the state assistance it is presumed will be provided.
Many examples of successful cooperation
The benefits of public-private development partnerships for society have already been there to see for many years. Examples are FONDEN (Fondo de Desastres Naturales), set up by the Mexican government in 1999, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and the African Risk Capacity (ARC). Even in areas other than climate risks and natural catastrophes, development partnerships are becoming more common, an example being the World Bank's Pandemic Emergency Financing Facility (PEF).
These successful initiatives are also the result of governments and private-sector insurers having a better understanding of the potential of risk-transfer solutions developed in partnership. Despite this, it is still not always possible to find the right people to speak to in the public sector – even when the private insurance industry has ideas that could create considerable added value for all concerned – because there is often no holistic risk management at state level. An independent body along the lines of a central bank that took decisions outside day-to-day politics would represent substantial progress. We have in mind a public body or function with a role similar to that of a “Chief Risk Officer” in the private sector.
Signs of a paradigm shift
The great importance attached to insurance in the UN Sendai Framework for Action, the Paris climate agreement and the G7 InsuResilience initiative suggest that a paradigm shift is on the way. Insurance is now seen not just as something that follows economic development, but also as an instrument that can make sustainable development possible in the first place through integrated risk management. This can reduce both economic losses and human suffering at the same time.
Munich Re is one of the drivers of such development partnerships. By bringing all of the stakeholders together, they contribute to controlling and reducing large risks. If we succeed in doing that, more will be achieved than with aid programmes funded by donations that include no prevention.