Thailand is among 17 high-growth economies that are severely exposed to the long-term costs of catastrophic events, given their annualised US$168-billion (Bt5.15-trillion) in-surance deficit.
Thailand alone would face a $1.4-billion annualised insurance shortfall, meaning that it is severely under-insured, according to a new independent study conducted by the Centre for Economics & Business Research (CEBR) and commissioned by the world’s insurance-market specialist, Lloyd’s of London.
The research highlights clear risks for countries affected by this shortfall, including an unnecessary burden placed on the state and a higher cost of recovery after disasters.
With the cost of natural-catastrophe damage increasing every year, Lloyd’s is calling for more action by businesses, governments and insurance companies to adjust to the threat this insurance shortfall presents to jobs, homes and businesses in those economies most affected.
They are Hong Kong, Poland, Colombia, Thailand, Brazil, Mexico, Saudi Arabia, mainland Chile, China, Nigeria, India, Turkey, Egypt, the Philippines, Vietnam, Indonesia and Bangladesh.
“With Superstorm Sandy still fresh in all our minds, I hope that this research will stimulate a debate on how governments – and businesses – manage the risk of natural catastrophes,” said Richard Ward, chief executive of Lloyd’s. “It also raises an important question of the merits of risk transfer versus the use of public funds to cover the cost.
“Insurance exists for two simple reasons: to help prevent losses from happening in the first place, but to alleviate the financial consequences if disaster does strike.
“As this research underlines, too many high-growth countries are failing to take the steps required to prepare properly for these sorts of events, leaving people and businesses exposed. As high-growth economies continue to develop and supply chains become increasingly interconnected, now is the time to ask ourselves: can the world afford to keep taking such a big risk?” he said.
Thailand bears an excessive proportion of the cost of natural catastrophes in countries with a low level of insurance. A 1-per-cent increase in a country’s insurance penetration can reduce state liability by as much as 22 per cent. For example, last year’s floods in Thailand resulted in estimated damages of $30 billion, and yet just 3.47 per cent was covered by insurance. Because of the insurance deficit, this left the government with a bill of $18 billion.
Post-catastrophe recovery costs are lower in countries that have higher levels of insurance. A 1-per-cent increase in insurance penetration delivers a 13-per-cent reduction in uninsured losses, according to the study.
The pace and extent of global economic development have seen the cost of catastrophes grow by $870 billion in real terms since 1980. The level of natural catastrophes last year saw $107 billion of insurance claims – the second-costliest year overall for the insurance industry, and the costliest for natural catastrophe claims on record.
In the research, an analysis of five major global disasters showed that only 21 per cent ($115 billion) of total economic loss of $538 billion was covered by insurance across the world.
Mainland China insured just 1.4 per cent of losses arising from natural catastrophes between 2004 and 2011, with $208 billion in uninsured losses. In five of the 17 economies identified as severely underinsured, the average uninsured loss for major catastrophes is at least 80 per cent. The average uninsured cost of catastrophe in mainland China is $18.91 billion; in India, $1.96 billion; and in Indo-nesia, $1.45 billion.
Higher levels of insurance correlate positively to economic growth. A 1-per-cent increase in insurance penetration is associated with increased investment of 2 per cent of national gross domestic product.
“This ‘insurance gap’ has a huge and lasting impact on the ability of businesses, governments and people to recover from the earthquakes, hurricanes, flooding and forest fires that affect us all every year,” said Douglas McWilliams, founder and chief executive of CEBR. “This means lost orders, lost jobs and wasted taxpayer money as a failure to prepare ahead of such events creates costs that are more severe and unmanageable.”
Businesses need to take a more long-term view. Risk management needs to be a board-level issue and businesses should invest more in short-term preparation for long-term protection. This means better contingency planning to protect supply chains, he said. Governments need to invest more in mitigation measures, such as flood barriers and coastal defences, and promote strong building codes to minimise the damage done by the next big natural catastrophe in a fragile fiscal climate. Govern-ments can also help their economies by opening up markets to private insurers to increase the capacity available to underwrite risks, he added.
The insurance industry needs to take steps to understand better risk in growth economies – enabling them to research and price new risks. This could include investing in relationships with insurers in unfamiliar territories, where the problem of underinsurance is most severe, and doing more to develop a range of products and models for new clients in growth economies, said the CEBR chief.