Friday, April 20, 2018

Bridging the protection gap with PPP

When it comes to natural catastrophes, the term “protection gap” is a totally inadequate description of the size of the uninsured exposures. Even in the US, property insurance penetration is just 3.3%. That isn’t a “gap”. It’s a yawning chasm.

And, needless to say, that chasm is even greater in emerging Asia, where property insurance penetration is just 1.1%, only slightly higher than in sub-Saharan Africa. In India, the Philippines and Indonesia, it is around 0.5%. Yet as we have seen time and again, natural catastrophes occur with devastating regularity across the region — earthquakes, tsunamis, typhoons and floods are perennial threats.

This year, several thousand people have died in India, Nepal and Bangladesh as a result of unusually heavy monsoon rains, creating a humanitarian crisis that is only made worse by severe economic losses.

Across all of Asia, including developed markets such as Japan and Taiwan, Munich Re’s NatCatService databank reveals that just over 8% of all natural catastrophe losses have been covered by insurance in the period since 1980. This is equivalent to US$135 billion, compared to the total loss amount of US$1.65 trillion.

Public-private partnerships might offer the best hope of bridging the gap, according to Munich Re. “Beyond traditional loss-based insurance covers, tailor-made approaches can efficiently balance out the negative effect, especially in poorer countries,” the company says in an article due to be published in January.

One example it points to is the Caribbean Catastrophe Risk Insurance Facility (CCRIF) in the Caribbean, which includes Haiti. The premiums for the insurance coverage concept were paid by the Caribbean Development Bank. When Hurricane Matthew struck in 2016, Haiti had still not fully recovered from the devastating earthquake of 2010. Within just a few days, the CCRIF paid out US$23.4 million to the Haitian government.

“This may only be a small share of the total loss, but thanks to the rapidity with which the money was transferred, the country received desperately needed financial funds for immediate emergency measures,” says Munich Re. “International relief programmes often do not kick in until many weeks have passed.”

The facility was developed in 2007 under the technical leadership of the World Bank and with a grant from the government of Japan, and uses parametric triggers to pay out against tropical cyclones, earthquakes and excess rainfall. If a natural catastrophe has a certain severity, or if a specified modelled total loss amount has occurred, the facility provides immediate payments. This year, it has paid out US$61.5 million in response to hurricanes Irma and Maria, which triggered payments across the entire Caribbean, including more than US$20 million for Dominica.

These types of solutions can work particularly well for poor and exposed countries, and are typically constructed as public-private partnerships with insurance companies working alongside national or supranational agencies.

In 2017, the Philippines launched a pilot scheme for 25 of its most vulnerable provinces and other emerging markets have established insurance pools for property owners and primary insurers. In Indonesia, primary insurance companies are obliged for regulatory reasons to participate in a pool concept, while Thailand set up a state-subsidised insurance programme in response to the 2011 floods.

As these pools grow in size, they should seek to expand their capacity even further, says Munich, by ceding risk to the reinsurance market.

“In countries such as India or China, new national nat cat pools are conceivable at national or regional/community level, as in the Philippines,” it says. “These pools could be organised by the state, and international reinsurers could be involved in shaping, advising and covering these pools.”

For some of the poorest countries, such as Laos, Cambodia, Vietnam and Myanmar, supranational pools similar to CCRIF could help to increase the amount of insurance coverage available, as well as fostering stronger ties between governments in this region.

“It is an integral objective of our industry to explain and clarify the mutual benefits of risk-transfer solutions via insurance for all potential stakeholders,” says Munich. “Public-private partnerships with subsidised premiums could be one solution to achieve greater insurance coverage in certain countries or even in groups of countries.”

It is not just countries that need to work together to make this happen. The industry, which has a strong incentive to grow the global reinsurance pie, also needs to cooperate to promote these types of innovative solutions that can deliver a genuine win-win. In countries with poor institutions and weak fiscal balances, providing access to liquid capital during catastrophes can truly alleviate suffering and help to rebuild lives. That is a worthy goal.


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