Governments are failing to take advantage of opportunities to leverage risk with private insurers, according to Swiss Re.
Speaking about the reinsurer’s latest Sigma report, Swiss Re’s economist, Rudolf Enz said: “While many governments self insure or pool risks, there are opportunities for states to leverage the skills and growing capacity of private insurance to allocate risks efficiently and retain only the portion that is truly uninsurable.”
Enz also said state involvement in private insurance means risks become a budgeted cost and the impact of adverse events can be shared with private insurers.
The sigma study found that some states provide subsidised insurance in natural hazard prone areas which would otherwise be much more expensive to obtain in the private market which resulted increased building in dangerous areas.
“Subsidies like this have the unintended consequence of forcing some taxpayers – living inland or on higher ground – to subsidise the insurance of the owners of expensive beachfront homes. A damaging hurricane this summer would place severe strains on governments with such subsidies at a very inopportune time,” said Enz.
He recommended that “governments eliminate subsidies for coverage that private insurers are willing to extend, thus conserving increasingly scarce government resources for investments in infrastructure that reduce losses when catastrophes occur and to provide coverage only for risks that truly are uninsurable.”
In light of catastrophes in the first half of 2011, the report also found governments are rethinking catastrophe insurance.
“Japan, Turkey and Taiwan have come up with innovative earthquake catastrophe schemes. Mexico issued a MultiCat bond to smooth the impact of disasters on their annual budget,” said Enz.
“This allows Mexico to make a quarterly payment to investors in exchange for $290m earthquake and hurricane cover.”
Due to the global sovereign debt crises, governments are finding it increasing necessary to minimise risk expose in case of major catastrophes.