The head of the Geneva Association spoke to Global Reinsurance about underinsurance, global regulation, climate events and the direction of the insurance industry’s thinktank
Underinsurance is a clear threat to global economic development. What steps can the Geneva Association – and the wider industry – take to close the protection gap?
Underinsurance (or the protection gap) is an important issue in both developed and emerging economies. It is global. We consider this issue sufficiently important to adopt it as an area for future research. Already we have published two reports on this subject: The Global Insurance Protection Gap and Insuring Flood Risk in Asia’s High Growth Markets unpeel some of the layers of this complex issue. We expect to be publishing more reports on the subject this year.
There is a wide spectrum of root causes of underinsurance, which necessitates a number of multifaceted solutions from (re)insurers. These causes range from attitudinal issues due to a lack of awareness, economic considerations down to a lack of affordability, and institutional hurdles. The latter might be anything from immature regulations to a poor or insufficient financial and legal architecture. There may also be more fundamental reasons such as a lack of insurability due, in particular, to quantification issues. As both the demand and supply sides of the equation need to be tackled, the most promising response to the insurance protection gap is a joint effort comprising the industry and its capital providers, consumer groups (both retail and wholesale), governments and regulators, and a coordinated approach to implementing the measures. This is why The Geneva
Association continues to place a strong emphasis on the importance of public-private partnerships.
How will increased global (re)insurance regulation reduce systemic risk in the industry? What is The Geneva Association doing to create the view that insurers pose no systemic risk?
In these discussions on potential systemic risk, the business model of the insurance industry is unfortunately not always sufficiently understood and delineated from the business model of other financial services providers, such as the banks. Strategies to deal with (potential) systemic risk should take into account the specific characteristics of the business models and the particular activities carried out by institutions. Therefore, and starting with the 2010 publication of our report, Systemic Risk in Insurance,
The Geneva Association has been producing research, and holding or facilitating discussions with a wide variety of stakeholders, not least supervisors and regulators, to facilitate the development of appropriate international regulation for the insurance industry.
The frequency and severity of climate events and natural catastrophes is increasing dramatically. What can (re)insurers do to improve societal resilience to these events?
We will shortly be issuing a research paper, which unpeels this issue in some depth. When a disaster strikes, funding is required for the immediate relief and response, early recovery and the reconstruction phase. As such, disaster risk financing – including insurance – is an integral part of a comprehensive risk management strategy. It is also instrumental in strengthening the financial resilience of governments, businesses and individuals.
There are a growing number of empirical studies (for example from the World Bank, the Organisation for Economic Cooperation and Development (OECD), and academia) showing that insurance can substantially reduce the cost of disasters and speed up recovery processes.
However, (re)insurers recognise that no stakeholder can succeed alone in solving the challenges of climate change. Through active engagement in public-private partnerships and close cooperation with policymakers, governments, regulators and other stakeholders, (re)insurers are dedicated to playing a key role as an integral part of global prevention, adaptation, disaster risk reduction and mitigation efforts.
Public-private partnerships are important mechanisms to support the development of more effective risk financing. Governments can play a role by developing legislation, legal and regulatory frameworks, while the industry can add risk expertise and financial capacity. Public-private partnerships with the insurance industry and other financial institutions have played a critical role, increasing availability of capital, technical expertise, operational efficiency and innovation as well as the development of sustainable and scalable insurance and risk financing.
And while there is a compelling case for risk transfer as a critical tool in reducing the financial impacts of disasters, there is a large, and in some places growing, protection gap, indicating that insurance is not used to its full potential. Globally, from 1980 to 2014, more than two-thirds of economic disaster losses remained uninsured. In middle- and low- income countries the average protection gap amounts to a staggering 95%, severely burdening governments, businesses, communities and individuals. Publicprivate partnerships are likely to be one of the key tools to address this huge gap.
The Geneva Association panel at Multaqa is titled ‘The strategic outlook for MENA insurance markets and its general context’ – what do you expect to be the main talking points in this session?
It’s clear that many of the issues that The Geneva Association is working on at the international level are also very relevant for this region. Not least is this issue of the protection gap. Research from Swiss Re in 2014 shows that both Saudi Arabia and the UAE appear to be among the most underinsured countries from a non-life perspective when taking the penetration of insurance against GDP per capita as a measure. Saudi Arabia is also at the bottom of the global league table for property insurance premiums as a share of GDP. It will be interesting to discuss this fact at the conference and look at some of the root causes as well as potential solutions.
What is on your agenda for The Geneva Association in 2016?
We will be continuing our work in our four main research areas, namely: financial stability and regulation; extreme events and climate risk; global ageing, and liability regimes. In addition, we are also engaged topics like the protection gap and cyber. We will be developing research and facilitating discussions in each of these areas through papers, conferences and other initiatives.
We are also looking forward to our annual General Assembly, which takes place in June. More than 50 of our CEO members will be meeting to discuss the key developments and trends facing our industry. Finally, we will be keeping a close eye on global economic and political developments that are relevant for the (re)insurance industry and the business of risk management. It’s a busy agenda.
Why delete this announcement. For those that are interested it will be the definitive guide to this new era of PPPs that will see insurers cooperating with governments.