Swiss Re, one of the world’s leading wholesale provider of reinsurance, insurance and other insurance-based forms of risk transfer, has called for co-ordinated efforts to tackle the shortfall in property insurance cover in the face of increasing natural disasters.
Underinsurance in property is a global and growing challenge, according to Swiss Re’s latest sigma study. Much of the underinsurance is due to global natural catastrophe risk, which has risen steadily over the past 40 years.
Trillion Dollar Protection Gap
Over the last 10 years, the cumulative total damage to global property as a result of natural disaster events was USD 1.8 trillion. Swiss Re say that only 30% of those losses were insured. In other words, 70% of the economic losses, or $1.3 trillion (US Dollars) were uninsured. Swiss Re refer to the $1.3 trillion figure, the total shortfall in insurance cover, as the protection gap.
Swiss Re’s catastrophe models estimate the global uninsured losses from future natural disaster events to be $153 billion annually. Out of these, the largest uninsured natural catastrophe exposures are in the US, China and Japan. In the emerging markets, 80-100% of the losses are uninsured.
When combined with other “general property risks”, there is global total property underinsurance of $221 billion in expected losses
Swiss Re say:
“The challenge for the insurance industry is to focus on the needs of those who are totally uninsured or insufficiently insured. Reducing underinsurance will require the industry to continue to develop data and analytical tools to track the evolving landscape of new risks and exposures…”
Flood Re and Microinsurance – Innovation in Insurance
Insurers can play a key role in strengthening the resilience of households and companies against property risk by adopting more innovative approaches. Swiss Re cite the example of the Flood Re programme in the UK, which is designed to provide affordable flood cover for properties at highest risk of flooding, as an example of insurance innovation.
Flood Re is a not-for-profit flood reinsurance fund, owned and managed by the insurance industry. It accepts the transfer of insurance companies’ risk above a specified flood-related risk. In the case of a flood event, insurers are reimbursed from Flood Re for the claims of the insured homeowners.
Microinsurance is another important area for innovation, especially for low-income populations. By providing small amounts of coverage and premiums per person, and using innovative product designs, microinsurance can make cover both affordable for consumers and financially sustainable for providers. For instance, many microinsurance programs use weather index-based products to cover crop damage. By paying claims according to local weather parameters rather than individual damages, index-based products reduce the cost of underwriting and claims processing.
Find out more about the Sigma study from Swiss Re here.