Emerging economies have $160bn insurance gap

Thu 18 Oct 2018

An estimated $163bn of assets are underinsured in the world today, leaving an exposure gap that poses a significant threat to livelihoods and global prosperity, according to new research from Lloyd’s and the Centre for Economics and Business Research (CEBR).

Key findings

Countries with the lowest levels of insurance are among the most exposed to climate change risks and least able to fund recovery.
The average insurance penetration rate in developed markets is twice as high as in emerging countries.
Bangladesh, India, Vietnam, Philippines, Indonesia, Egypt and Nigeria each has an insurance penetration rate of less than 1%.
Indonesia has the second highest insurance gap relative to GDP (1.4%) equivalent to $15bn.
China is the most underinsured country in absolute dollar values with a gap of $76bn.
Underinsurance gap has closed by less than 3% over a period of six years.

The average insurance penetration rate (total insurance premiums as a percentage of GDP) in developed nations is twice as high as the average in emerging, or lower income countries, which account for almost all ($160bn) of the global insurance protection gap.

Many of the countries with the lowest levels of insurance are among the most exposed to risks such as climate change and are the least able to fund recovery efforts. Bangladesh, India, Vietnam, Philippines, Indonesia, Egypt and Nigeria each has an insurance penetration rate of less than 1%.

The country with the highest expected annual loss from natural disasters, Bangladesh, also has the largest insurance gap relative to GDP (2.1%). Expressed in absolute dollar values this equates to an insurance gap of almost $6bn in Bangladesh. Second highest is Indonesia at 1.4% of GDP, equivalent to an insurance gap of $15bn.

Countries with more wealth stand to lose more in pure financial terms. China is the country with the highest insurance gap expressed in dollar values ($76bn) due to the size of its economy and the fact that its insurance market is still developing.

Global economic losses from natural disasters are substantial and growing with annual expected economic losses of $165bn, according to Lloyd’s City Risk Index. They will continue to increase, driven by greater wealth, hazard exposure and, for some events, climate change.

The underinsurance gap, however, is hardly closing. In 2012 Lloyd’s and CEBR revealed that $168bn in assets globally were underinsured. This means the gap has closed by less than 3% over a period of six years.

The impact of disasters can be reduced by investing in greater resilience. A range of studies suggest that, on average, the benefits of resilience (broadly defined) outweigh the costs fourfold (see UNISDR (2007), OECD (2015) and UK Government Office for Science (2012)).

Lloyd’s today published a new report, produced in association with the Centre for Global Disaster Protection, Risk Management Solutions (RMS) and Vivid Economics, detailing four potential new financial instruments that could be used to incentivise investment in resilience.

The report also underlines the important role that risk financing can play by providing liquidity after a disaster, protecting government balance sheets and buffering taxpayers. The Indonesian government, for example, is reportedly looking at disaster risk financing, with support from global reinsurers, following the recent devastating Sulawesi quake and tsunami.

More detail about the structure of these financial instruments is provided below.

Insurance is a major contributor to disaster recovery often providing the quickest financial crisis relief available. The terrible earthquake and tsunami disaster on the Indonesian island of Sulawesi underlines the important role that insurance can play by increasing financial liquidity in catastrophe affected areas. Innovative insurance solutions can provide governments with access to financial relief rapidly after a disaster strikes, easing the burden on them and tax payers. If insurance is not available catastrophes can have a much greater impact on economies and lives.

The insurance sector wants to work with government to help people understand the insurance products that are available and to provide improved access to those products. Together we can help tackle the crippling underinsurance crisis and give people in the world’s most exposed economies the security they so desperately need.

Bruce Carnegie-Brown, Chairman of Lloyd’s

Those who can’t afford the additional costs of building resiliently are even less likely to be able to afford to rebuild after a disaster. Being able to quantify accurately the benefits of investing in resilience is therefore fundamental. The four products have been designed with this in mind. The objective is twofold: to reduce the initial costs of building resiliently and to finance the residual risk. In this way the benefits of insurance can be enjoyed by those who need it most.

Daniel Stander, Global Managing Director, RMS

Lloyd’s Underinsurance Report is available at www.lloyds.com/news-and-insights/risk-reports/a-world-at-risk

What do you mean by underinsured?

A country is said to be underinsured if expected losses exceed insurance coverage.

Insurance–linked loan package: an infrastructure loan, which has a built in insurance component. Insurance cost savings are based on subsequent risk reduction derived from the insurance cover and are used to offset the loan’s interest repayments.
Resilience impact bond: a pay–for–performance contract between a donor funding greater resilience and social goals, and a group of investors. The donor makes payments to the investors depending on their success in delivering physical, operational and financial resilience measures. A Resilience Impact Bond is just like other impact bonds that are already in use (such as Development Impact Bonds and Social Impact Bonds).
Resilience bond: an innovative risk–linked financing mechanism that builds on the existing catastrophe bond model to take account of the impact of resilience measures. Under this structure, when resilience measures are implemented, coupon payments on the bond are reduced. The reduction in coupon payments can be securitised, thereby providing a way of funding investment in greater resilience.
Resilience service company (ReSCos): The idea of the ReSCo was inspired by the innovative financing mechanisms employed by energy service companies (ESCOs). A similar mechanism could be used in conjunction with insurance policies to generate resilience savings for particular assets. Retrofitting a building, for example, could reduce risks and result in lower insurance premium. The ReSCo would offer to undertake the retrofitting of the building at its own risk and realise a return by receiving some proportion of the savings from reduced insurance costs.

About Lloyd’s

Lloyd’s is the world’s specialist insurance and reinsurance market.

With expertise earned over centuries, Lloyd’s is the foundation of the insurance industry and the future of it. Led by expert underwriters and brokers in more than 200 territories, the Lloyd’s market develops the essential, complex and critical insurance needed to underwrite human progress.

Backed by diverse global capital and excellent financial ratings, Lloyd’s works with a global network of over 4000 insurance professionals to grow the insured world – building resilience for businesses and local communities and strengthening economic growth around the world.

About the Centre for Economics and Business Research

The Centre for Economics and Business Research is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. Since 1992, Cebr has been at the forefront of business and public interest research. Cebr provides analysis, forecasts and strategic advice to major UK and multinational companies, financial institutions, government departments and agencies and trade bodies. For further information about Cebr please visit www.cebr.com.

About the Centre for Global Disaster Protection

The Centre for Global Disaster Protection was launched by the UK Prime Minister in July 2017, to help developing countries strengthen their disaster planning and get finances in place before disaster strikes. It brings together partners including the UK Government, the World Bank, civil society and the private sector with the shared goal of enhancing resilience to natural disasters.

About Risk Management Solutions

Since 1988, RMS’ mission has remained constant: to make communities and economies more resilient to disasters through a deeper understanding of catastrophes. Today, RMS is a leading provider of products and services that help governments, financial institutions and their clients quantify and manage exposure to extreme events. Operating from twelve offices across the Americas, Europe and Asia, RMS serves numerous governments and investors around the world, collaborating with them to help them build the capacity required to manage their risk.

About Vivid Economics

Vivid Economics is a leading strategy economics consultancy with global reach. We strive to create lasting value for our clients, both in government and the private sector, and for society at large. Vivid Economics is a premier consultant in the policy-commerce interface and resource and environment intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world. The success it brings to its clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations.