When natural disaster strikes, it can be an arduous process to rebuild the affected region, and the financial impact can be immense. Policymakers need to assess the role that (re)insurers can play to ensure a sensible balance between public and private liability
The past 15 months mark one of the most tragic periods of loss from natural events in human history. The loss of life alone is staggering: 222,000 in Haiti, 56,000 in the Russian heatwave, and more than 20,000 in the recent Japanese earthquake and tsunami.
While there is no measure to value the personal impact on the lives and families of those affected or the societies in which they lived, governments and private sector interests, including insurers, have of course sought to measure the economic impact of these and other natural events. The projected insured and economic losses from 2010-11 are staggering.
Notable about these losses is that they occurred in areas with relatively low population and economic densities; yet the values are significant. Certainly this will affect the insurance industry’s assessment of risk and the psychology of potential loss in these and other areas at risk to natural perils that are difficult to predict and for which the industry has limited loss history. Over time, many lessons will be learned from the events of the past year; in particular, the value of hazard mitigation and other loss reduction measures.
Another lesson is already abundantly clear: the contribution of the global insurance and reinsurance markets to economic recovery will be evident in those cases where government policy encouraged reliance on the private insurance and reinsurance markets for protection against natural catastrophes.
The numbers are telling. In Chile and New Zealand, overall economic and property losses for homes and commercial structures will be spread broadly into the private sector, where the reinsurance markets will bear a large portion. In contrast, the Japanese government will bear most of the loss due to its policy of concentrating insured risk into government insurance and reinsurance programmes.
At a time when the governments of all of these countries are focused on human needs and public infrastructure, the influx of recoveries from global insurers will be an economic stimulus. It will be relatively greater in those situations where government policy shifted risk into private markets. Indeed it has been reported that the $6bn of reinsurance recoveries will push New Zealand into its first account surplus since 1973.
Governments around the world address natural events and insurance in a variety of ways. In the USA, for example, the Federal government bears all flood insurance risk for homeowners, which in essence means US taxpayers subsidise the insured risk. This policy is under review because of the $18bn debt owed by the National Flood Insurance Program (NFIP) to the US Treasury from the losses of 2005 alone.
In California, as another example, the quasi-governmental California Earthquake Authority (CEA) aggregates insured risk and lays much of it off to global reinsurers. The CEA benefits from this policy when an event occurs.
Policymakers should examine the balance between government policies that make coverage available to those who choose to live in areas at high risk from natural catastrophes at affordable rates and sound risk management, and the reliance on the private reinsurance market as a risk-spreading shock absorber.
The reinsurance market has shown itself to be responsible, resilient and committed to providing coverage for natural catastrophes. Government policymakers around the world should review their insurance programmes and policies to maximise the use of this extraordinary resource. GR
Franklin Nutter is president of the Reinsurance Association of America