Global Assessment Report on Disaster Risk Reduction 2013
From Shared Risk to Shared Value: the Business Case for Disaster Risk Reduction

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200 Part III - Chapter 13
Creating an enabling
environment for effective
Insurance can potentially play an important role in disaster risk reduction, but only where the enabling environment allows for appropriate pricing and coverage. Governments and insurance companies are yet to take full advantage of this potential.
Insurance pricing and availability has a major influence on business investment decisions and behaviour. Unless assets such as factories and other facilities can be insured, businesses cannot obtain loans and other forms of finance. Expensive premiums may make the investment unattractive, making the business look elsewhere. Conversely, however, when premiums are too low, businesses may be encouraged to overly discount the risks and invest in hazard-exposed areas, accumulating disaster risks for themselves and creating wider risks and costs.
Insurance is one of the main financial tools for households and companies to strengthen their disaster resilience. This is achieved by spreading the risk of exceptional disaster loss among a large number of policyholders and over a long time. Insurers compensate disaster damages in return for the premiums each insurance buyer paid ex-ante, in accordance with the agreed contract. Although few financial institutions undertake an overall assessment of disaster risk, most require insurance coverage as a condition for
providing loans to businesses. This chapter will discuss how insurance can be a useful financial tool for businesses and individuals to strengthen their resilience, competitiveness and sustainability.
Although the details of insurance coverage vary widely, insurance rarely guarantees business continuity or protects businesses from the wider impacts of disaster. Insurance can provide protection from asset loss and even supply chain interruption, but does not compensate for wider effects like low employee morale, increased absenteeism, stress or unrest, low productivity, declining customer demand and goodwill, and other impacts (GAR 13 paperKataria and Zerjav, 2012

GAR13 Reference Kataria, S. and Zerjav, B. 2012.,Private Sector Investment Decisions in Building and Construction: Increasing, Managing and Transferring Risks: A Literature Review., Prepared for the 2013 Global Assessment Report on Disaster Risk Reduction., Geneva,Switzerland: UNISDR..
Click here to view this GAR paper.
). In other words, insurance is not a substitute for sound risk-based investment decisions.
Additionally, the insurance required when applying for a loan does not necessarily cover all hazards, resulting in limited payouts to affected households or businesses and even countries, in the case of national catastrophe insurance. For example, in Australia, an ‘insurance gap’ exists whereby different definitions of flood by insurers limited the insurance payout after the 2010–2011 floods, and brought confusion and frustration among insurance buyers (World Bank, 2011

World Bank. 2011.,The changing Wealth of Nations : Measuring Sustainable Development in the New Millennium., Washington DC,. .
Similarly, when governments insure their sovereign risk, instruments such as catastrophe bonds may be effective in avoiding short-term welfare losses and reinforcing macroeconomic stability, but generate no net income. If, following a disaster, income

Insurance pricing and availability has a major influence on business investment decisions and behaviour. Currently, a number of disincentives work against the adequate pricing of disaster risk: on the one hand, expensive premiums may make investment unattractive; on the other hand, overly low premiums can exacerbate the discounting of future risk, potentially resulting in the creation of new disaster risk.

In rapidly growing economies, particularly in Asia, insurance penetration is spreading faster than disaster risks are being reduced. The over-supply of capital through insurance-linked securities may also distort risk pricing. It also generates fiscal risks when premiums are not risk-based and public sector institutions with limited experience of the insurance market are involved.

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