The gap between insured losses and total economic losses remains stubbornly large.
Swiss Re estimates that only 30 percent of global catastrophe losses in the 10 years prior to 2015 were covered by insurance. Consequently, the remainder of the loss, $1.3tn, was borne by individuals, firms and governments, and this burden is increasing.
Swiss Re estimates that uninsured losses more than doubled from 0.08 percent of global GDP for the 10 years from 1976 to 1985 to 0.17 percent for the years 2006 to 2015.
Statistically, this may not appear to be a huge burden on GDP, but averages may not capture the full story and the impact can be substantial.
For example, the 16 April Ecuador earthquake this year, in which more than 650 people died, incurred losses estimated at $5bn, with no more than 10 percent covered by insurance.
In an effort to finance the cost of recovery, the government of Ecuador increased the sales tax from 12 percent to 14 percent, imposed an immediate one-off wealth tax of 0.9 percent on net worth greater than $1mn and a one-time income tax charge of one day's pay and five days' pay on monthly incomes of more than $1,000 and $5,000, respectively. The government also increased taxes on corporations and announced the sale of some state-owned assets.
Mind the gap
The protection gap also exists in more developed parts of the world. Europe has been hit by several catastrophes this year.
Significant events include flooding in southern Germany in May and in Paris in June; the destruction of acres of commercial greenhouses and other property damage by tennis ball-sized hailstones in the Netherlands; and the Italian earthquake of 24 August.
Munich Re has estimated catastrophe losses from European hydrological events alone in May and June 2016 at $5.2bn, with only 46 percent of the loss covered by insurance. In 2011, the German federal government hastily established a state fund of EUR8bn to cover the costs of infrastructure and private property flood losses.
Transferring risk from the public sector to the private sector is an important means of mitigating and reducing the cost of catastrophic losses to public finances. The use of pools and other mechanisms to spread the potential cost of losses to the private sector is well established in Europe, with many schemes operating to cover natural catastrophes, terrorism and nuclear risk.
Nevertheless, gaps remain and in Europe the growing severity of the flood peril, driven by climate change, has been a catalyst for new developments. Most notable was the launch of Flood Re in April 2016, a UK government scheme that enables insurers to reinsure the flood element of homeowners' insurance policies at a fixed reinsurance premium based on the properties' taxable valuable.
It is supported by a small levy on all policies and enables insurers to offer cover on flood-prone properties that ordinarily might be considered uninsurable. The scheme has generated significant interest in Europe, and Guy Carpenter has a leading role in developments.
An integrated and coordinated approach to collaboration between the insurance industry, governments and other public bodies is increasingly recognised as an effective method of creating sustainable risk transfer mechanisms.
Further strategic discussions among governments, non-governmental organisations, the scientific and academic communities and the insurance industry will help to promote better disaster risk management and the implementation of pre-event insurance solutions.
New risks
The protection gap presents opportunities for the (re)insurance industry far beyond the catastrophe segment. New risks in areas such as technology, science, medicine, climate change, population growth, food security and urbanisation offer challenges and provide opportunities for profitable growth.
Some of the risks are very complex or were previously little understood, yet today we better understand risk than at any time in history. We have better science, data and analytics, and tools to understand, measure and price risk. Concurrently, significant market capacity exists due to the inflow of large amounts of capital looking for opportunities to transfer risk.
Guy Carpenter, GC Securities* and Marsh are committed to helping our clients understand the evolving landscape and advising them as they engage and take advantage of promising opportunities. We believe these opportunities will expand as public and private sector entities work more closely to improve societies' resilience to risk.
Nick Frankland is CEO, EMEA, at Guy Carpenter.
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd (MMCSEL), which is authorised and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC, MMC Securities LLC, MMC Securities (Europe) Ltd and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.