Munich Re Stresses Need for Nat Cat Coverage in Emerging Markets

October 30, 2013

According to a scientific study conducted by the University of Würzburg on the basis of loss data from Munich Re’s NatCatSERVICE database, “emerging countries are excessively affected by losses from natural catastrophes, as measured in terms of their economic output.

“At the same time, insurance against natural catastrophes makes particular economic sense in these countries.” Munich Re said that statement is backed strongly by evidence from a Survey it conducted. It found that “globally, natural catastrophe losses have increased substantially since 1980, due chiefly to rising economic values. Besides the urbanization of exposed river and coastal regions, the greater frequency of loss-relevant natural events in some regions also plays a role in this context.”

Munich Re stressed that there is “clear evidence that emerging countries are hit particularly hard by natural catastrophe losses.” For example, a survey by the reinsurer’s economic research department found that “in emerging countries direct losses from natural catastrophes total an average of approximately 2.9 percent of the gross domestic product each year.

“In industrialized countries, this figure was 0.8 percent; in developing countries 1.3 percent. Significant recent examples of major direct losses in emerging countries were the 2011 floods in Thailand (direct losses $43 billion, 12 percent of GDP) and the earthquake in Chile the previous year (direct losses $30 billion, 14 percent of GDP).”

Munich Re’s Chief Economist Michael Menhart noted that even though “emerging countries already have a relatively substantial capital base, they often lack the resources or necessary effectiveness in their administration to protect themselves better against the consequences of natural catastrophes – for example, by means of structural measures. On top of this, there is the urbanization of coastal regions, which in Asia, for instance, are at great risk from cyclones. This explains the greatly disproportionate burdens these countries suffer from natural catastrophes.”

The report also said: “Empirical studies such as those conducted by economists at the Bank for International Settlements, indicate that major natural catastrophes can also cause losses in wealth in the long term, as even an exceptional economic boom driven by reconstruction cannot compensate for the damage and losses in wealth suffered previously.

“At the same time, there is strong evidence indicating that effective financial and insurance markets aid a country’s recovery after a natural catastrophe. Accordingly, a lower insurance density would lead to higher government debt per capita resulting from major natural catastrophes.”

Additionally, a study by the University of Würzburg, supported by Munich Re Economic Research, has come to the conclusion that “emerging countries benefit most in economic terms from insurance against natural catastrophes. Initially, insurance has an indirect loss-minimizing effect as premiums represent an incentive to take prevention measures; insurance premiums give the respective risk a price. What is more, in the event of a catastrophe, losses are limited because the insurance benefits directly support reconstruction.”

Ludger Arnoldussen, Munich Re Board member responsible for Asia-Pacific, commented: “The study confirms how important it is for rapidly expanding emerging countries to develop a strong insurance sector and promote private-sector insurance solutions.

“In many countries, the establishment of public-private partnerships also makes sense in order to improve insurance penetration and thus increase financial protection against the consequences of natural catastrophes,” he added. “In particular, insurance protection can minimize consequential losses from natural catastrophes, supporting a quicker and more comprehensive return to a normal economic and social situation.”

Munich Re pointed out that it is “already involved in state-subsidized insurance solutions in countries such as Mexico, Taiwan, Turkey, Romania and a number of Caribbean nations.”

Source: Munich Re

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