Climate disaster support for insurers depends on political choices and the financial profile of nations, 3 insurance sector professionals said during a European Investment Bank conference last week. Countries with weak fiscal positions may resort to the support of international organisations such as the insurance development forum, to enhance insurance coverage and help in the aftermath of a catastrophe.
Who should bear the ultimate responsibility?
Making comparison with the banking crisis, 15 years ago, Marc Lauer, CEO, Foyer, stated: “at the end of the day, the state will always be the lender of last resort... if government wants it or not.” He explained that the support is sometimes implicit or sometimes explicit such as with the “assurance catastrophe naturelle” in France.
“We are capitalised in a way that we can support a certain level of uncertainty. But if it goes too far, I think the model will have to change which means premiums have to go up to finance part of that uncertainty,” stated Lauer.
I think it’s tricky to assume that nations are going to be the insurer of last resort because there needs to be a real desire and ability to be able to fund that insurance claim.
“[States] have become the insurers of last resort for the banking system [but] it hasn’t happened yet with the insurance industry,” said Nicholas Barr, professor, London School of Economics and Political Science. Shockingly for some taxpayers given the events of 2008-2009, he suggested that “that’s what needs to happen”. He thinks that we must have “sensible discussions” about the role and the split of risks and cost among the various stakeholders with the taxpayers “picking up the uncertainty.”
Funding the catastrophes: before or after?
Questioned on whether governments are prepared to be the last resort, Lauer thinks that the “state is well aware how big the risk is… it has to start funding for it.” After floods in the 1990s, the government looked at building up an insurance scheme, a public-private partnership, covering for all natural hazards. The idea was put in the drawer given that the premiums may have cost “eventually double as much.”
“You can pay for something by building up resources in advance, or you can pay for them afterwards, when stuff have happened,” said Barr. He commented that when governments are prudent and keep the national debt sufficiently low, the fiscal headroom enable them to deal “with things like the pandemic.”
Insurance coverage: a luxury not affordable by everyone
Saoirse Jones, head of insurance development forum engagement at Zurich Insurance Group, was more nuanced during the EIB conference about the likelihood of government support. “I think it’s tricky to assume that nations are going to be the insurer of last resort because there needs to be a real desire and ability to be able to fund that insurance claim.”
“There are countries in the Global South who cannot afford insurance,” said Jones, also a member of the Insurance Development Forum, a public-private partnership. She explained that some have high debt-to-GDP ratios that are only “ever increasing”, resulting into no additional financial capacity to fund insurance against the impact of climate change.
As these countries have not the technical and/or the financial resources, the IDF is looking at various ways to supporting countries including premium financing from public institutions, multilateral development, banks and insurance companies.
At the IDF, “we know that certain governments do not have an understanding, a good sense of the risks they face. So, they need to be able to get the tools to understand what they have to map out”, said Jones.
The vulnerable 20 looking for venerable solutions
Consequently, Jones explained that the IDF, in collaboration with the Vulnerable Group 20, established global risk modelling alliance aiming at bringing climate risk modelling to the public group. The insurers use open-source data coupled with the local data sources of these 20 countries to map out specific areas or even sub areas to identify “flood risk exposure,” for instance.
Jones explained that Pakistan, very aware of the detrimental economic impact of flooding, started to use risk analytics from the alliance to make informed decisions on where to allocate their budget, invest and rebuild. IDF can also advise Pakistan on how to rebuild to ensure stronger structures upon future floods.
The recent earthquake in Morocco is another case in point. Within a very short timeframe, “€270m could be globalised from a pre-arranged insurance” solution that has been set up with the Moroccan government, Jones said. “This is a great example of how public-private partnership works, and it works to benefit people. And we need to see more of that happen.”