Bigger cities open opportunities to insurers
Thu 13 Sep 2012
The world’s cities are growing at an unprecedented rate, creating increasing demand for specialist insurance and reinsurance products.
The majority of the world’s population is now urban. And the trend shows no sign of slowing - three quarters of us are expected to be living in cities by 2050.
Cities have long been the world’s economic dynamos, but the speed and scale of today’s urbanisation is unprecedented, according to consultancy firm McKinsey in a new report, Urban World: Cities and the rise of the consuming class.
Developing markets such China, Brazil and Turkey are moving quickest towards the urbanisation trend. And by 2025 the largest 440 cities are expected to contribute 47% of global growth, say McKinsey. Emerging markets already boast 20 mega cities – such as Shanghai, Sao Paulo and Istanbul – which will collectively contribute $5.8 trillion to global growth by 2025.
Consumer and construction boom
Urbanisation and per capital GDP move in close synch, and incomes in emerging markets are increasing at rates never before witnessed. According to the report emerging cities will produce one billion new consumers by 2025.
Annual infrastructure investment in cities will rise from $10 trillion to $20 trillion by 2025, the lion’s share in developing economies: the resulting building boom would require $80 trillion of construction. Cities of the future will require an extra 80 billion cubic metres of water and two-and-a-half times the level of today’s port infrastructure, the report says.
Insurance demand
The trend towards urbanisation provides an enormous opportunity for Lloyd's, says Kent Chaplin, Head of Asia Pacific and Managing Director at Lloyd's Asia.
“Growth in cities and the related rise in consumption directly correlate to an increased demand for insurance,” he says.
For example, Asia makes up nearly 60% of the world’s population, and whilst GDP is growing exponentially, insurance penetration is still very low in most Asian countries, says Chaplin.
“As a specialist insurer and reinsurer with a physical underwriting presence in Asia, Lloyd's is very well placed to provide specialist insurance products to cope with this increased demand,” he says.
As cities expand they require more and different types of insurance. Higher demand is likely in onshore and offshore energy, power generation and utilities insurance coverages. Lloyd's is a leader in marine, property, engineering and construction risks and is able to respond to the increasing requirement of insurance for urban housing, office buildings and air and sea infrastructure, says Chaplin.
Catastrophe exposures
Well planned cities can create huge efficiencies, but they also concentrate risk, increasing exposure to catastrophes, says Bryon Ehrhart, Chief Strategy Officer for reinsurance broker Aon Benfield.
“In more recent decades we have seen stronger population growth in cities along seacoasts that present tropical cyclone exposure as well as significant earthquake fault lines. Flooding risks are also a feature of many of the larger cities and growth in more flood prone areas is generally a late-stage development,” he says.
The insurance industry has a crucial role to play in helping communities and economies recover from devastating natural disasters, says Neil Smith of Lloyd’s Exposure Management team.
“Insurance and reinsurance is a valuable tool to manage and mitigate the potential economic impact of a major catastrophe,” says Smith. “It helps manage concentrations of natural and man-made catastrophe risk by spread them among financially robust international markets”.
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