When volcanic ash halted air traffic, Seymour Matthews saw first-hand the devastation to Kenya’s export industry. Poorer countries need third-party contingency cover for such disasters, and reinsurers can and must work with governments to provide it
Having been stranded in Nairobi recently, during one of the periods of volcanic ash disruption, I observed the events from a different perspective to many. The main exports of Kenya are soft fruit, vegetables and flowers. These perishable goods industries rely on swift and efficient transport by air cargo to world markets, mainly Europe, for their survival. Lengthy periods of flight suspension meant that every day that went by was a disaster for Kenya and its people.
As a result, thousands of farm workers were being temporarily laid off every day, and with the possibility of disruption recurring sporadically over the coming months, this is an economic disaster for the country, which is not insured.
Such insurance policies are available, but only in sophisticated markets and for large clients. I remember placing such a contract for a large restaurant chain, where third-party coverage was given for suppliers who were either unable to produce or deliver their main ingredients, which were bread buns and meat. So, if the bun factory was destroyed or severely damaged and therefore unable to deliver their product, then the restaurant chain had a third-party claim.
In Kenya, some 60% of exports are perishables, so could, and should, be insured against the contingency of the airlines not being able to deliver their products due to a physical event.
Governments usually end up with the bill for these kinds of economic disasters and, as usual, it is the poorer countries that suffer the most. I am pleased to say that the insurance and reinsurance industries will contribute a considerable percentage of the Chilean earthquake cost, with insured losses estimated at $2bn-$8bn.
If third-party contingency cover was more widely available and purchased, then this could have been considerably more. If governments of poorer nations could work together with reinsurers, then economic disaster could be mitigated or at least greatly reduced. I am not suggesting that reinsurers are – or should be – in the charity business, but the purpose of the insurance and reinsurance industries is the spreading of risk, and reinsurers are continually looking to balance their books against the peak zones of the USA, Europe and Japan (soon to be joined by China).
So, if governments can work with reinsurers to provide simple products to protect householders against the relevant peril, such as earthquake, hurricane/typhoon or flood, then this would be progress.
For example, in Brazil, where flood coverage is typically not offered, a simple subsidised product could be created to give relief to a large percentage of the growing lower-middle and middle classes, at the same time removing substantial liability from the government’s balance sheet. It is easy to imagine a similar product that could be applicable to other countries like Bangladesh.
I am not generally in favour of government intervention in commercial products such as insurance, as every time I have seen this happen, the long-term results have not been positive. Typical examples have been with motor third-party liability or workers’ compensation where, for political reasons, governments have perceived advantages in taking over the insurance to keep prices competitive – no capital costs being the main saving. But we know what happens when civil servants run businesses! So, in my view, commercial and competitive companies should run the insurance businesses worldwide.
Nonetheless, as governments have major liabilities, they have a role to play and are therefore worthy partners, particularly for catastrophe coverage – be that man-made or natural – for first and third parties.
Partnerships between commercial companies and governments can take place in a variety of ways, for example subsidising original premiums for catastrophe perils; co-insuring or co-reinsuring with private companies; acting as a stop loss or catastrophe excess-of-loss reinsurer at far more competitive terms than the commercial markets are able to, because of the lack of capital requirements; and so on.
Micro-insurance is growing in a number of poorer countries, and catastrophe coverage is a simple product that could be added to the other small products sold. Yes, there would be problems with loss adjusting, but if the claims were only payable on major events defined by economic loss, then I am sure that a simple policy could provide total pay-outs without loss adjusters. This would allow the product to be kept very competitive, with around 80% of premiums going to claims payments and protection rather than the traditional, say, 50%.
Once the flights started again, I was back in London within a couple of days. I took some roses home that would have cost me 8p per stem the week before – retailing at £2-plus back in London – but which I was able to buy at 4p per stem. This was good value for me, but very sad for Kenya.
In contrast, the London prices presumably would have been pushed higher in the interim due to the lack of supply as, just like reinsurance and all other businesses, prices are driven by supply and demand, with fortunes made, and lost, in the process. GR
Seymour Matthews is chairman of reinsurance at Cooper Gay & Co