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US$1.3 tln CAT protection gap in the last 10 years - Swiss Re

Source: Asia Insurance Review | Nov 2015

On average, in the last 10 years, only about 30% of catastrophe losses have been covered by insurance, this means that about 70% of catastrophe losses or US$1.3 trillion have been borne by individuals, firms and governments. This was revealed in a recent Swiss Re publication, Disaster risk financing: Smart solutions for the public sector.  
   In the said report, Swiss Re shows that the economic cost of natural catastrophes has grown markedly in the last 40 years. The protection gap – the difference between economic and insured losses – remains large despite the availability of innovative insurance solutions. Narrowing this gap helps strengthening a country’s financial resilience, the report said. 
   “The insurance industry is already rising to the challenge of underinsurance in both developed and developing countries through innovative risk management measures,” said Swiss Re’s Group Chief Executive Officer Michel M. Li├Ęs. “The risk landscape is becoming more and more complex as the world becomes more interdependent. No country can afford to be left unprotected.”
More needs to be done
As a first priority, governments should enable a functioning insurance market. This will help absorb a major part of disaster losses suffered by individuals and businesses. Pre-event financing solutions can alleviate the remaining financial burden on governments. Post-disaster financing (such as debt financing or donor aid) should only come into play to cover residual losses once all other risk transfer solutions have been exhausted, said Swiss Re. 
   The study – launched at the World Bank /IMF annual meetings in Lima – points to a number of countries working in collaboration with insurers to innovative solutions. Mexico, for example, is a pioneer in securitising earthquake and hurricane risk. Uruguay has developed an ingenious risk transfer mechanism to mitigate the risk of low rainfall on its hydroelectric power generation. Central American and Caribbean governments have insured their risk against hurricanes and earthquakes The Africa Risk Capacity insures several countries against drought risk.
   The publication also highlights activities in Thailand, Bangladesh and Africa, with more updates to be published on over the next months.
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