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Jul 2020

Public private insurance partnerships - does the industry know its clients?

Source: Asia Insurance Review | Oct 2019

Addressing economic and societal impacts of natural catastrophes is critical to economic sustainability in the Asia Pacific region. The insurance industry has made progress on various ends over the years, but it needs to become better at understanding clients if it aims to narrow the protection gap, says Guy Carpenter’s Michael Schwarz
Natural disasters, extreme weather events and failure in adapting to climate change were again listed among the top five risks in the 2019 edition of the World Economic Forum’s Global Risk Report. Furthermore, risk landscapes – be they global, regional or national – are changing rapidly and are becoming more complex. For instance, the impacts of climate change are not only limited to an increased frequency and severity of natural catastrophes, but there are also implicit secondary societal effects such as water and food shortages or spreading of diseases.
While many of these risks and their secondary effects present significant fiscal and financial challenges to nations, businesses and households, they offer insurers an opportunity to grow in a challenging, competitive environment and to future-proof its value to clients and society. Our industry can be a critical contributor to increased community resilience against volatility and shocks to their environments caused by catastrophic events and the disruptions brought to economic development. 
In recent years, the issue of low catastrophe insurance penetration across the growing economies of Asia and the so called protection gap (the difference between economic losses caused by natural disaster events and the losses covered by insurance) are receiving the attention they merit. 
Given the pace of growth across the Asia Pacific region, the (re)insurance industry needs to become more dynamic in order to keep up with higher asset concentrations and growth rates that are among the factors driving up economic losses. The United Nations Economic and Social Commission for Asia and the Pacific predicted that economic losses from natural disasters and weather catastrophes will reach $160bn per year by 2030 and only 8% of losses are likely to be covered by insurance.
Industry equipped with greater understanding of CAT risk
Over the years our industry has made significant progress in better understanding catastrophe risk. New data products from both private- and public-sector sources, such as flood hazard maps, have become more readily available, helping the insurance industry estimate flood hazard. This data, along with other data types, such as probabilistic event sets and defense information, improve loss calculation frameworks, allowing insurers and reinsurers to quantify the financial risk.
With parametric/index insurance, powerful risk-transfer tools have been invented that help to better address specific needs of enterprises and governments, or to overcome some of the hurdles that may exist in providing traditional insurance to specific population groups. Further product improvements, for example, trigger designs to reduce basis risk (such as Guy Carpenter’s GC QuakeCubeSM) will help address client needs. 
The impact of technology and its embedment along different links in the insurance production chain will directly or indirectly contribute to an enhanced value proposition that the insurance industry can offer to those exposed to catastrophe risk.
Understanding the needs on the ground 
Continued investments in risk understanding, insurance product development and technology will be important for increasing catastrophe insurance penetration, but there is uncertainty around whether these investments alone will be sufficient to translate catastrophe protection needs into customer demand. The insurance industry needs to invest more into understanding those at risk and what is needed in a first step to better address client needs in a more holistic manner, thereby nourishing demand. The provision of catastrophe insurance to the public sector is a case in point.
The lion share of the economic losses caused by natural disasters are absorbed by the public sector as governments, among others, need to rebuild public infrastructure, bear costs related to immediate disaster response and relief measures, and also provide financial assistance to affected population groups. Providing the public sector with customised risk financing and risk-transfer solutions has the potential to significantly narrow the protection gap.
The advantages of sovereign risk transfer are manifold. Aside from the benefits of a more diversified funding base, guaranteed access to external funds provides greater liquidity and budget planning certainty in the aftermath of catastrophes, thereby mitigating the need to divert national reserves. By contrast, post-event fundraising via national budget reallocation, tax hikes or relying on new debt financing, may not only take time to arrive, but also spark societal discontent.
Risk financing solutions
To implement insurance concepts successfully for the public sector, not only an increased awareness among political decision-makers for the various benefits of pre-event disaster risk financing and insurance is required, but risk financing solutions need to fit into a broader context. Different criteria apply to assess the impact of natural catastrophe risks on national interests: the economic shock that results from damage to property or reduction in business activity and growth; societal disruption caused by supply failure for key goods and services; or the suffering of population groups from famines.
One size doesn’t fit all, and hence the promotion of risk-transfer partnerships by the insurance industry should proactively take into account the prevailing political agenda and priorities beyond natural catastrophe management, for example, creating investor confidence, ensuring food security and/or alleviating poverty among the population, in order to position concepts properly. 
Furthermore, subject to the country exposed to risk, more investments are needed not only by development organisations but also by the insurance industry to build capacity and increase knowledge within public administrations and among stakeholders involved in disaster risk management and-financing decisions. Legal framework and processes need to be understood and insight gained into cross-cutting policies such as public financial management, financial sector development or climate change adaptation – all aspects to be considered if the industry aims to facilitate the development and implementation of specific catastrophe insurance solutions for the public sector. 
While the insurance industry can significantly contribute to a more disaster resilient world, one should finally also not forget about the interplay between investments in disaster risk reduction on the one hand, and how to best manage the residual risk on the other. Insurance can’t solve everything and hence solutions are ideally embedded in a broader disaster risk financing strategy that combines different financing tools to efficiently secure funding for when it is needed most.
Various governments in the region, for instance in Southeast Asia and the Philippines, have already started to transfer natural catastrophe risk in order to better shield their state budgets against the financial impact of typhoons and earthquakes. With the recently established Southeast Asia Disaster Risk Insurance Facility, additional countries will likely follow soon. 
There is much more work to be done by the insurance industry in terms of looking beyond what it is used to in order to close the protection gap. Bringing the knowledge and expertise that comes from working with over 100 public entities around the globe, Guy Carpenter and GC Securities bring capital to work by closely working with their clients and partners from both the private and the public sectors. A 
Mr Michael Schwarz is head of public sector asia-pacific and managing director at Guy Carpenter.
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