High risks, low insurance penetration – a dilemma in many Asian countries
The images were appalling: several thousand people have died in 2017 as a result of unusually heavy monsoon rains in India, Nepal and Bangladesh. Some 40 million people were severely affected by the floods, and many lost everything they owned. In this part of the world, often only a fraction of these losses are insured. And this despite the fact that the primary purpose of insurance is to alleviate damage after a catastrophe and help people financially to get back on their feet.
A few facts: Across Asia, since 1980 just over 8% of all natural catastrophe losses have been covered by insurance. More specifically, our NatCatSERVICE databank reveals that this is equivalent to US$ 135bn, compared to the total loss amount of US$ 1.654tn. And this includes data from highly developed countries like Japan with comparatively high insurance penetration. In many other Asian countries, however, the amount of insured losses is drastically lower. In recent years, the insurance gap has narrowed slightly from a global perspective, but it is still considered substantial.
Low insurance penetration, high catastrophe exposure
If we look at the overall figures for insurance penetration, the gaps in Asian countries in particular become more evident. In Emerging Asia, property insurance penetration is very low at just 1.1% – only slightly above the figures for sub-Saharan Africa. In India, the Philippines and Indonesia, insurance penetration is a feeble 0.5–0.6%. Compared to Asia’s developed countries with an average insurance penetration level of 2.4% – which is similar to western Europe – the US shows an insurance penetration of 3.3%.
These low levels of insurance penetration are particularly problematic in Asian countries, as many of them are exceedingly prone to natural catastrophes. Apart from the humanitarian tragedies with high numbers of casualties, property losses after natural catastrophes invariably cause serious economic setbacks. Studies have proven that high insurance penetration significantly reduces or even balances out these negative effects. The positive economic effect of risk transfer is thus particularly strong in emerging economies.
Public-private partnerships to bridge the gap
Beyond traditional loss-based insurance covers, tailor-made approaches can efficiently balance out the negative effect, especially in poorer countries.
One example of innovative risk-transfer solutions is coverage with parametric triggers that pays out if the natural catastrophe has a certain severity, or if a specified modelled total loss amount has occurred, without the individual losses having to be evidenced in detail. This concept is particularly suited to mechanisms based on objective meteorological or geophysical data, aiming to finance emergency assistance or the fiscal stability of countries right after the event. Risk-transfer solutions based on parametric triggers are usually constructed in the form of public-private partnerships – in conjunction with supranational development banks or governments – and implemented in cooperation with private insurance companies. Premium subsidies often play an essential role for particularly poor and exposed countries.
An example of how such a pool might work is the Caribbean Catastrophe Risk Insurance Facility (CCRIF) in the Caribbean, which includes Haiti. The premiums for the insurance coverage concept were paid by the Caribbean Development Bank (CDP). When Hurricane Matthew struck in 2016, Haiti had still not fully recovered from the devastating earthquake of 2010. Within just a few days, the CCRIF paid out US$ 23.4m to the Haitian government. This may only be a small share of the total loss, but thanks to the rapidity with which the money was transferred, the country received desperately needed financial funds for immediate emergency measures. International relief programmes often do not kick in until many weeks have passed. Similar solutions also exist for Pacific island nations and – since 2017 – for 25 provinces of the Philippines. Some emerging markets have established insurance pools for property owners and primary insurers. In Taiwan, insurance is mandatory for property owners (TREIF) and in Indonesia primary insurance companies are obliged for regulatory reasons to participate in a pool concept (MAIPARK). Most of these existing risk-transfer solutions concentrate on earthquake risks. In Thailand, a consequence of the extreme losses caused by the 2011 floods was the establishment of a state-subsidised insurance programme that so far has not ceded any risk to the international reinsurance market.
Reinsurance coverage can expand the capacity of existing insurance solutions and pools, and thereby reduce the insurance gap. A closer look at the existing and possible future PPPs in Asia Pacific reveals a variety of opportunities for the participating countries:
- Unlike before, existing large national pools such as the Japanese earthquake pool, the agricultural insurance program in India or the natural catastrophe pool in Thailand could cede part of their risks to the international reinsurance market and thereby expand their insurance coverage.
- In countries such as India or China, new national nat cat pools are conceivable at national or regional/community level, as in the Philippines. These pools could be organised by the state, and international reinsurers could be involved in shaping, advising and covering these pools.
- Southeast Asia, with its significant exposure to natural catastrophes, is particularly suited for the establishment of supranational pools, such as those in various parts of the world under the auspices of the World Bank – for example, the aforementioned CCRIF in the Caribbean. Countries such as Laos, Cambodia, Vietnam and Myanmar could obtain much more insurance coverage for natural catastrophes such as typhoons or earthquakes if they pooled their risks. Here, the supranational structure ensures the required risk diversification. In addition, they could benefit from cost advantages whilst simultaneously strengthening regional cooperation.
It is an integral objective of our industry to explain and clarify the mutual benefits of risk-transfer solutions via insurance for all potential stakeholders, i.e. governments, supranational institutions, primary insurers, etc. Public-private partnerships with subsidised premiums could be one solution to achieve greater insurance coverage in certain countries or even in groups of countries.
Munich Re can contribute here by providing expert know-how and best-practice experience as a global risk carrier and strong partner for our clients. Being part of successful public-private partnerships that have already demonstrated a very positive impact on societies, we are proud to shape the future and make it a better place.