A presentation from the Geneva Association (GA), the international insurance think tank for strategically important insurance and risk management issues, calls for a long awaited dialogue between the industry and all levels of government in the face of the rising costs from natural disasters.
The GA backed up its position with the release of a report – Insurers’ contributions to disaster reduction, a series of case studies – which examines examples of existing collaboration between insurers and governments around the world on disaster risk for best practices and areas where cooperation can deliver more human and economic benefit.
The report concludes that while natural catastrophes, particularly in the developing world, can lead to poverty and economic stagnation, greater cooperation between insurers and governments can reduce the scale of the disaster itself as well as its subsequent economic impact.
Dr Nikolaus von Bomhard, Chairman of The Geneva Association* and Chairman of Munich Re’s Board of Management, Michael Butt, Co-Chairman of The Geneva Association’s Climate Risks and Insurance project and Chairman of Axis Capital and Margareta Wahlström, the United Nations Special Representative of UN Secretary General Ban Ki-Moon on disaster risks, laid out the problems and the possible solutions.
Destructive events affect all societies at all levels, but poorer societies, where there is far less insurance penetration than in developed societies, suffer the worst. When a disaster strikes, people in those countries don’t receive a claims settlement from their insurers in three months, as an number of victims of Superstorm Sandy or the Japanese earthquake and tsunami did, as they don’t have insurance to begin with. National GDP doesn’t get a boost from a rebuilding boom; it usually decreases.
The governments in poorer countries must not only find ways to help their people, but also to rebuild their own infrastructure after a disaster. Wouldn’t it be better if the insurance industry cooperated with national and local governments in identifying risks, which is after all is one of the areas in which the industry excels, and helped find ways to reduce the damages and the losses when a disaster occurs?
Although disasters, both natural and manmade, have been part of human existence forever, an extremely rapid expansion in population growth and urbanization has taken place over the last 100 years. As a result the GA notes that economic activity has become more and more concentrated, which means that the “value of property and infrastructure in high risk areas has also increased.”
The GA also pointed out, howeve, that “disaster risk management has not always kept pace and much development has taken place, for example, on natural floodplains. Climate change will likely lead to more frequent and more extreme weather events.” Michael Butt explained that governments have been inclined to put concerns about climate change aside during the financial crisis; however, “the financial crisis will pass,” he said; “climate change won’t.”
Recent disasters have been wake up calls for both governments and the re/insurance industry. The floods in Thailand showed up the risks of having extended supply chains. Florida’s ongoing struggle to provide adequate insurance coverage in the face of its frequent hurricanes has raised question about the wisdom of rebuilding destroyed property along its coast, as has the destruction caused by Sandy along the Jersey shore.
It is in this sphere that governments and the re/insurance industry must try to find an accommodation, and it is precisely in this area where the greatest difficulties lie. The GA’s study, along with a report from the UN, and the panel all made the point that elected governments rarely address long term issues. The presidents, senators, congressmen, mayors, city council representatives, and, yes, even elected insurance commissioners, are really focused more on the next election than on the next hurricane, tornado or earthquake.
By contrast the re/insurance industry is more or less required to address long term concerns, as it needs to calculate adequate rates to address risks, and, increasingly to provide advice in addition to insurance coverage to mitigate those risks. This fact explains the growth of cat models, the increasing importance of risk managers – which most multinational corporations now also employ – the growth in the insurance linked securities market (ILS), and the increased commitment to underwriting discipline, even if it means losing business.
Decisions of that nature don’t come without a price. A report on CNN last night about the current flooding in Germany indirectly chided the insurance industry by pointing out a large section of a flooded town where most of the inhabitants were uninsured, as they had been refused coverage. Such comments appear frequently. The re/insurance industry’s image in this respect is not good, as it is rarely explained, and if it is, it’s rarely understood.
The re/insurance industry uses cat models and employs expert underwriters specifically to calculate the risks involved in writing an insurance policy. If they all agree that a certain area, perhaps built on a flood plain with no flood defenses, will be flooded, probably frequently, should they write coverage anyway? Should they raise the premiums they charge? Or should they deny coverage?
Closer cooperation with the governments involved might eventually offer a solution to those questions. Margareta Wahlström noted that the UN report concluded that 75 to 80 percent of the world’s economy is generated by the private sector; however, she also said “total disaster losses [in that sector] are underestimated by 50 percent.” SME’s [small and medium enterprises] suffer the most, frequently being forced out of business by a disaster. Damaged infrastructure remains unrepaired and social and economic stress increases.
The UN sees a role, and an important one, for the reinsurance industry. “We’re looking to the insurance industry to reduce exposures [to natural disasters] and we’re looking for innovation,” she said. “Insurers should not only analyze risks, but also be ‘proactive’ in reducing those risks. She added that most governments don’t really understand this aspect of insurance, and that their actions – in providing subsidies for rebuilding and pressuring the industry to cover at risk properties – “takes away the motivation for people to protect themselves.”
Michael Butt offered a similar analysis: “We have to learn from disasters,” he said. “After a catastrophe we can decide whether we want to rebuild, or if we make way for nature and relocate. When we rebuild, we can do so in a risk-resilient, energy-efficient way. Strong local government policy on land use and building codes, coupled with disaster recovery plans, will allow communities to rebuild quickly and sensibly. But people will need encouragement to adapt; policymakers and industry can work together on a shared vision for sustainable development.”
At the end of the presentation a somewhat unique solution was presented. Dr. von Bomhard noted that the GA is taking an increasingly active role in explaining industry positions to politicians, regulators and the press. What is needed “is more risk management,” he said. “Reinsurers use their expertise; they look at the whole market and the long term picture.” Those studies are coordinated by chief risk officers [CRO’s]. Practically every re/insurer has one as well as the support staff needed to adequately assess risks. Most multinational companies also now have CRO’s.
Wouldn’t it be a very useful step if countries, as well as large cities and other population centers, established their own risk management operation, headed by a non-elected CRO to assess and develop solutions to the risks they face? After all, you can’t start developing solutions to the problems you may face until you determine what they are.
*Dr. von Bomhard stepped down after the presentation. XL’s CEO Mike McGavick is the new Chairman of the Geneva Association
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