Working Session on Disaster Risk Transfer and Insurance
ISSUE BRIEF
I.
Stock taking
For many countries and regions affected by natural disasters, risk transfer and insurance are key measures
that can be employed to increase resilience in advance of these events and enhance recovery efforts in
their aftermath. While these tools enable governments, businesses, and households to protect themselves
against the financial losses brought by natural disasters, there is a growing awareness that these risk
sharing systems can deliver wider resilience benefits, and indeed play a more proactive role in curbing the
creation of new risk and in nurturing an enabling environment for risk-sensitive public and private
investment.
Global disaster risk has not been significantly reduced since the adoption in 1989 of the International
Decade for Natural Disaster Reduction (IDNDR). As GAR15i reports, despite reductions in mortality in some
countries (largely as a result of improvements in disaster management), economic losses from disasters
are now reaching an average of US$250 billion to US$300 billion each yearii,with expected average annual
losses (AAL) globally from earthquakes, tsunamis, tropical cyclones and river flooding now estimated at
US$314 billioniii in the built environment alone.
While observed increases in losses highlight increasing exposure and vulnerabilities, they may
underestimate the effects of disasters on the poorest and most vulnerable. As populations and economic
activity in hazard prone areas increase; new investment requirements will grow rapidly, for example in
urban infrastructure, which is currently estimated at US$90 trillion up to 2030iv. More critically, the
mortality and economic losses associated with extensive risks in low and middle income countries are
trending up.
Such losses threaten the very sustainability of development. Therefore the role that the insurance
industry plays in helping communities and economies address increasing exposure and rising losses, in
part through providing financial protection and security to at-risk communities, is crucial if the gains of
social and economic development are to be supported and preserved. This affirmation has been endorsed
by recent work undertaken by some entities of the Basel processv, which found that appropriate disaster
related insurance and reinsurance can have statistically and economically significant reductions on the
negative effects on economic growth following natural disastersvi.
The insurance industry’s core business is to understand, manage and carry risk. The risk management
process in insurance spans a continuum of activity—from identifying, assessing, preventing and reducing
risk—to pricing, carrying and diversifying risk. Insurance operates through the public, private and mutual /
cooperative sectors and diverse risk financing / transfer techniques and schemes have been developed
and practically implemented. These include governmental reinsurance schemes or insurance programmes
to support the development of insurance (or micro-insurance) markets that can help people and
communities cope with financial hardship and assist in prompt recovery in the aftermath of disaster – for
example, Japan’s Earthquake Insurance scheme, the New Zealand Earthquake Commission and the Turkish
Catastrophe Insurance Pool. Other approaches seek to build country capacity and contingency planning
capability, supported by insurance functions of risk pooling and risk transfer, so that countries can manage
their risk as a group in a financially efficient manner – as is the case with the African Union’s African Risk
Capacity or the Caribbean Catastrophic Risk Insurance Facility. Microinsurance provides protection to lowincome communities by insuring key assets (crops, livestock for example) and extends to accident, health,
and life insurance. Business interruption insurance provides protection for the consequential loss of
revenue when disaster strikes, and forms part of many business continuity plansvii.
A number of states finance disaster expenses only after a catastrophic event, and yet the costs of recovery
from disasters, consume scarce public and private resources, which could otherwise be used to develop
social, economic and natural capital. Ex post measures represent incomplete disaster risk management
solutions, and so the shift to investing in reducing the existing stock of risk, preventing and avoiding the
creation of new risk, and building resilience can provide positive returns and reduce the need for recovery.
Ex ante financing / risk transfer tools, including insurance, have a number of distinct advantages over postevent financing measures that are not restricted simply to assisting communities manage uncertainty, and
supporting the prompt reconstruction of affected people’s lives in the aftermath. The insurance sector has
contributed to an enhanced understanding of risk by translating science and engineering knowledge into
financial information that can inform investment and policy options, for example zoning laws and building
codes. Insurance schemes can provide incentives for enhanced disaster risk reduction measures and
compliance to existing standards. This can make a significant contribution to efforts to prevent the
creation and reduction of disaster risk, thereby supporting the building of resilience at all levels. However,
such contributions are not universally observed - particularly in emerging markets.
Although many countries have insurance sectors with a long history, and many more display promising
developments in recent times, disaster insurance penetration remains low, especially for those locations
with the highest exposure. Many communities are entirely unprotected from the financial risks of natural
disasters, and even in OECD countries, access to effective disaster insurance can be challenging, whether
through public, private or mutual solutions. As a result the contribution that risk transfer and insurance
mechanisms can make to reinforcing and promoting societal resilience as countries develop and grow, can
be entirely absent.
II.
Overview
The insurance industry is uniquely placed in our economies as a market mechanism for the sharing of risk.
Without this mechanism to support the pooling of risk, risks would be borne solely by individuals,
households, businesses, governments and other societal entities. However, gaps exist between economic
damage and insurance reimbursement; this is especially true in those countries with limited insurance
penetration or limited insurance absorption capacity. With almost 70 percent of the world’s population
not having access to adequate insurance solutions, the ability of these societies to prevent and mitigate
future losses is severely hampered.
Given demographic and climate change trends, the level of insurance penetration is lowest where
vulnerability is most acute. The Climate Demography Vulnerability Index (CDVI)viii takes into account
expected population growth rates over the next decades to highlight the regions of the world where
people are most vulnerable to climate change.
Figure 1.
Climate Demography Vulnerability Index (CDVI)
Source: Sampson et al., 2011
According to these trends, the greatest vulnerability will be in developing economies where insurance
penetration is essentially nonexistent for natural disaster. A scenario that may worsen with a changing
climate and evolving exposure.
Figure 2.
Property Insurance Penetration Map (USD per Capita)
Source: MunichRe, property insurance premium (non-life including health), per capita in 2008
In order to close these gaps, concerted multi-stakeholder efforts are required. These include a raft of
measures including but not restricted to: financial literacy; public-private partnership (PPP); microinsurance ; joint data collection efforts and compulsory insuranceix.
Governments develop and implement policy, regulatory and legal frameworks within which insurers
operate and compete. These frameworks are critical to how effectively and efficiently the insurance
industry is able to manage its risk exposures. Regulatory frameworks, incentives and public-private
collaboration are also critical to providing vulnerable communities, particularly in developing countries,
access to risk management services and risk transfer products offered by insurers. And it is from low and
middle income countries, that many of the more innovative policy and technical innovations in developing
effective disaster insurance are emanating.
Effective risk transfer mechanisms are those that reflect the type and scale of risks to which each country
or region is exposed, and which are aligned with prevailing policy objectives. In order to introduce an
appropriate solution, consideration should be given to the wider influence that public and private
insurance can have in preventing or avoiding new risk, in reducing existing risk, and in strengthening social
and economic resilience - including for example through conditional access to insurance, mandatory
insurance and pricing incentives.
A well-developed market for insurance and risk transfer solutions is a core component of economic
development, increasing investment, and strengthening the risk-taking capacity of the private sector.
Insured businesses need to hold less capital when risks are transferred and better managed, which frees
up savings for increased investment and consumption. Insurance and risk transfer solutions also enable
businesses to engage in higher-risk, higher-return activities that contribute to their growth. As insurance
and risk transfer solutions deepen, institutional investments by investors increase in sectors critical to
economic development, including infrastructure, social sector funds, and government securities.
III.
Way forward
In this context, and with the strain on public resources to manage economic and social costs due to natural
disasters, the adoption of the post-2015 framework for disaster risk reduction and other 2015 agenda,
present a real opportunity to revisit the social role and value of insurance. Given the recommendations of
the Intergovernmental Panel on Climate Change (IPCC) to include risk transfer and insurance-related
approaches for climate-resilient development, both public and private actors need to engage in a broader
societal discussion about the use of insurance and the role of the global insurance industry in partnership
with governments, in forging climate and disaster-resilient development pathways.
The range of measures available to further disaster risk reduction are diverse – from tailored regulatory
measures, to stress tests for extreme events, to advanced PPPs – and improvements are possible across
the board. The regulatory framework in many countries for instance, can be developed such that the
poorest can benefit. Regulation in the Philippines for example, was developed so that inclusive (disaster
related) insurance solutions could flourish. Insurance solutions can make disaster and climate risk more
transparent, and the progress that the re/insurance sector has made in evaluating the risks (particularly
those posed by extreme weather), has prompted calls for public and private sector organisations to be
required to report their financial exposure to extreme weather at a minimum of 1 in 100 (1%) per year risk
levelsx. Other states are examining specific risk transfer solutions that are designed to offer inclusive
insurance solutions for the poorest – micro-insurancexi and mutual-insurancexii for example. For the
poorest, it is critical that insurance solutions are both affordable, and fair, particularly with regard to
possible payouts – stark mismatches between expected and realized protection are currently common.
Deliberations on the future role of PPPs should not be limited to public subsidies for insurance premium
payments when at the same time solutions are sought to remove barriers to insurance; any role must be
considered in the context of a comprehensive disaster risk management approach. With its financial
capacity and risk expertise, the insurance sector has much to contribute towards efforts aimed at
achieving financial resilience and strengthening disaster risk management for the benefit of both business
and society alike. As with other pre-event risk transfer mechanisms and financing tools, insurance is a
valuable component of any disaster risk management strategy.
Increased natural disaster risk poses a shared risk to the insurance industry, governments and society, so
giving rise to a mutually dependent relationship that provides a strong incentive for collaboration.
Collaboration that can occur at each step of the insurance risk management value chain, including: risk
identification and analysis; risk prevention and reduction; and risk transfer.
a. Risk identification and analysis
Risk identification, data collection and risk analysis are at the core of risk management approaches.
Publicly collected, open-source data and open-source hazard modelling can contribute meaningfully to
national and regional risk management and investment decisions.
The data gathered through insurance risk assessments can help catalyse the establishment of data
repositories, while the insurance industry can motivate the standardisation of gathered data to improve
regional and international analysis.
Public authorities and insurance providers can collaborate to improve the availability, reliability and
accessibility of natural disaster risk data, including the development of loss models, in order to enhance
risk prevention and risk reduction measures and risk transfer products. Consideration in risk analysis
should be given to how risks interact and how to deal with uncertain future risks.
b. Risk prevention and reduction
It is in the interest of insurers to encourage policyholders to reduce their risk of loss. This not only reduces
the likelihood of unexpected losses and the associated financial hardship; it may also help to make
insurance more accessible, affordable and viable in the future.
Among others, risk prevention and reduction measures span land use, planning and management
(including zoning); infrastructure safety and resilience (including the enhancement and enforcement of
building codes); and the management, conservation and restoration of natural ecosystems (e.g.
mangroves, wetlands, sand dunes) to reduce disaster risk.
In the context of insurance, preventing and avoiding new risk prevention can be incentivised in a number
of ways, including but not restricted to: considering the timeframe of insurance cover for long-term risk;
making the issuance or renewal of insurance cover dependent on risk prevention and reduction measures;
and pricing risks at actuarially sound rates (providing a better indication of the nature and level of the risk).
c. Risk transfer
In the context of policy, legal and regulatory frameworks, public authorities and insurance providers can
explore the development of integrated risk management approaches and risk transfer solutions – be they
public, private or public-private insurance schemes – embedded in broader efforts to increase resilience.
The development of appropriate regulatory frameworks that improve the accessibility and affordability of
a range of risk management tools, including insurance, particularly for low-income and vulnerable
communities, and for low-emission power generation, transport, land-use, and energy efficiency projects.
Given the potential social and economic role, and value of insurance, the risk management expertise and
resources of the global insurance industry should be mobilised to help meet the challenge of building
disaster-resilient communities and economies. This can be done effectively and efficiently by focusing
action along the insurance risk management value chain, for instance to:
▫ Support the provision, co-ordination and standardisation of risk identification and analyses to facilitate
the management of natural disaster risk, particularly supporting the availability, accessibility and
quality of natural disaster risk data.
▫ Identify and develop incentives that will result in preventing and avoiding new risk, reducing existing
risks, and embedding risk transfer in wider resilience-building efforts, ensuring alignment in policy and
regulation.
▫ Facilitate, through insurance mechanisms, the provision of timely finance to reduce the financial
repercussions of volatility related to natural disasters and ensure more timely and targeted delivery of
support
i
UNISDR, 2015. 2015 Global Assessment Report on Disaster Risk Reduction (GAR15). UNISDR, Geneva.
http://www.preventionweb.net/english/hyogo/gar/2015/
ii
Munich Re, 2013: 2013 Natural Catastrophe Year in Review. January 2014. Munich, Germany. Swiss Re, 2014: Natural
catastrophes and man-made disasters in 2013: large losses from floods and hail; Haiyan hits the Philippines. No. 1/2014.
iii
Average annual loss represents the value of all future losses annualized over the long term and can be understood as the
amount that countries should be setting aside each year to cover future disaster losses. This figure would be even higher if it
included other hazards, such as drought, and other sectors, such as agriculture.
iv
Global Commission on the Economy and Climate, 2014: Better Growth, Better Climate: The New Climate Economy Report.
Washington: WRI. UNCTAD, 2014: World Investment Report 2014 - Investing in the SDGs: An Action Plan. Geneva, Switzerland.
v
The Basel process includes, for example the Bank for International Settlements (BIS), the International Association of Insurance
Supervisors (IAIS) and the G20 / Financial Stability Board (FSB).
vi
von Peter, G., von Dahlen, S. and Saxena S. 2012: "Unmitigated Disasters? New Evidence on the Macroeconomic cost of Natural
Catastrophes", in: Bank for International Settlements, Working Paper 394, December, Basel.
vii
and yet as the US Federal Emergency Management Agency (FEMA) reports, 40 percent of businesses in the US never reopen
after experiencing a disaster, and of those that do reopen, at least 25 percent fail within two years
(http://www.fema.gov/protecting-your-businesses). Similar data do not exist for low and middle income countries, but
anecdotal evidence suggests that businesses in these markets are at least as vulnerable, if not more so.
viii
Samson, J., D. Berteaux, B. J. McGill, and M. M. Humphries. 2011. “Geographic Disparities and Moral Hazards in the Predicted
Impacts of Climate Change on Human Populations.” Global Ecology and Biogeography 20 (2011): 532–544.
ix
The Geneva Association, 2014. The Global Insurance Protection Gap—Assessment and Recommendations. The Geneva
Association (The International Association for the Study of Insurance Economics), Geneva/Basel.
x
The Royal Society. 2014: “Resilience to Extreme Weather” November, London.
xi
IAIS, 2007: “Issues in the regulation and supervision of micro-insurance”, June, Basel.
xii
IAIS, 2010: “Issues Paper on the Regulation and Supervision of Mutuals, Cooperatives and other Community-based
Organisations in increasing access to Insurance Markets”, October, Basel.