Underinsurance – the global scale

For Queensland, 2013 began as 2011 had done: with catastrophic flooding. 

Prime Minister Julia Gillard warned the whole country was being ‘challenged by nature’, and looking at the pattern of flooding events in much of this region over recent years, she has a point. Quite aside from the tragic loss of life, total economic losses this year in Queensland alone are estimated to reach US$2.5b.

Across the world, the question of how to respond to the challenge of natural catastrophes is being answered in different ways. For high-growth and established markets alike, the need to minimise the economic and human impacts of these catastrophes is growing. And, according to a report published by Lloyd’s, the impact on economic growth from natural catastrophes may be even more significant than previously thought.

Lloyd’s Global Underinsurance Report revealed an annualised US$168b insurance deficit which leaves 17 high-growth countries severely exposed to the long-term costs of catastrophic events.

The research, which looked at 42 countries across the world at various points in the development cycle, defines underinsurance as the gap between the economic cost of natural disasters and the level of insured cover.

It classified how ‘well’ a country is insured by the observed annual expenditure on insurance compared to the proportion of national income at risk from natural catastrophe.

Under this classification, the 42 countries analysed were categorised as ‘better’, ‘moderately’ or ‘under’ insured. The vast majority of underinsurance is found in developing and high-growth economies. Nearly half of those in the underinsured category are found in the Asia-Pacific region, with three – Indonesia, Vietnam and the Philippines – appearing in the bottom four. Only Bangladesh came lower.

While both Australia and New Zealand are in the ‘better’ insured category, the research provides no grounds for complacency for established economies.

The disparity between economic loss suffered and the level of insured loss across the world is clear. In the US, US$18b from a total economic loss of US$25b was insured, or almost three quarters. In Thailand, insured losses made up only a quarter of the total US$44b economic losses incurred.

Japan suffered an unprecedented level of economic loss from the chain reaction of earthquake, tsunami and the ensuing disaster at the Fukushima nuclear plant, totalling US$210b. Of the estimated US$35b covered by insurance claims, Aon Benfield puts commercial and industrial insured losses at around US$8b, a fairly negligible amount.

Cost to the state

When insurance doesn’t bear the cost of catastrophe losses, the state must. The Lloyd’s report highlighted the most extreme illustration of this model as China, where taxpayers effectively shoulder 100% of losses. The devastating 2008 earthquake in Sichuan, for example, caused an estimated loss of US$125b, with only 0.3% of that believed to be insured.

This ‘taxpayer’ model can also be found, albeit to a lesser extent, much closer to home. Over half of New Zealand’s US$30b economic losses in 2011 were covered by insurance, compared to only around 12% of Australia’s.

A one percentage point rise in insurance penetration can reduce the burden on the taxpayer by as much as 22%.

Insurance in Australia is a private affair. The flood losses paid by Lloyd’s in Australia, for example, were largely for mining interests, for which Lloyd’s is a speciality market. Treaty reinsurance was about 30% of incurred claims, which is atypical for the Lloyd’s market.

The discrepancy between insured losses between New Zealand and Australia is clearly due to the near-universal take-up of New Zealand’s flood pools. Yet many in the industry, including Lloyd’s, argue this kind of state-borne burden isn’t sustainable – and becomes even less so with time and economic development. The more assets and infrastructure is worth, the greater the impact of the insurance gap.

Key learnings

The insurance industry has a strong message to get across here: a one percentage point rise in insurance penetration can reduce the burden on the taxpayer by as much as 22%.

The beneficial ripple effects of greater insurance penetration don’t stop there, though. The research also found a link between levels of insurance penetration and GDP. This happens as insurers invest significantly into the domestic economy, both promoting the development of financial markets and increasing businesses’ access to capital.

The report found a one percentage point increase in insurance penetration is associated with increased investment of 2% of national GDP. Clearly, insurance provides additional security to that offered by the state, so reducing both the current and potential burden on government finances.

The Lloyd’s report shows the global insurance community the strength of the case it can make about the benefits an increase in non-life insurance penetration can make to communities, businesses and governments alike.

As the world’s high growth markets power ahead against a backdrop of on-going economic uncertainty, it is a story our industry should be telling as powerfully as possible.

Adrian Humphreys is the Lloyd’s General Representative, Australia.