Lloyd's: Mind the premium gap

The world has been battered by natural catastrophes in recent years, revealing a serious gap between the economic cost of natural catastrophes and the levels of insured risk.

Recently published research for Lloyd’s reveals a $168bn annual shortfall between levels of insurance and actual economic losses caused by natural disasters across the world. Seventeen of the 42 countries analysed are significantly at risk.

Lloyd’s is urging governments, insurers and businesses to do more to close this gap.

Lloyd’s Global underinsurance report 2012

Commissioned by Lloyd’s, the Centre for Economic and Business Research analysed data from 42 countries to find out the difference between the minimum levels of insurance cover needed and those actually in place.

Last year alone, earthquakes, floods, storms, tsunamis and other natural disasters led to insurance payouts of over $116bn. Yet while 2011 proved the second costliest year on record for the industry, insurance covered less than a third of the $370bn economic loss.

In Japan, for example, only $35bn of the estimated $210bn of total damage wrought by the earthquake and tsunami was insured.

“Worldwide, the insurance shortfall for 2011 was estimated to be more than $250bn,” says Dr Kurt Karl, Swiss Re Chief Economist. “It also showed that both developing and advanced economies can be underinsured.

The earthquake in Japan, the most costly natural catastrophe of all time, revealed that earthquake insurance penetration is low in Japan, despite being highly exposed to this risk.”

In a difficult economic climate, these levels of financial exposure have a clear impact on economic recovery.

“After the devastating earthquakes in Japan and New Zealand, and severe flooding in Thailand and Australia, the impact of natural catastrophes is clear,” says Lloyd’s Chief Executive Richard Ward. “Economies across the world urgently need to address their disaster preparedness if they’re to cope with the fallout of events that are becoming both more frequent and more costly.”

Emerging Market Exposures

Lloyd’s research shows those countries most at risk combine the high likelihood of natural catastrophes with low levels of insurance penetration. Inevitably, it is these countries’ taxpayers who currently pick up the large proportion of disaster losses.

“In the absence of insurance coverage, the cost of reconstruction falls on the shoulders of governments, non-governmental organisations, charities and, frequently, the affected
households and companies,” says Karl.

Many, but not all, of these more exposed countries are in emerging markets. Although they are developing rapidly, with growing assets at risk, the level of insurance penetration, nevertheless remains low – as do other sources of post-disaster relief.

“The gap between economic and insured losses can be severe in low- to middle-income countries, where the magnitude of the losses arising from a catastrophe may outstrip the government’s ability to act as insurer of last resort,” says Karl.

As the world looks to the new high growth economies to become the financial powerhouses of the future, Lloyd’s Global Underinsurance Report provides a timely wake-up call to governments, businesses and the insurance industry alike.