Brought to you by:

S&P urges public-private unity on disaster resilience

Ratings agency Standard & Poor’s (S&P) has called for greater collaboration between reinsurers and governments on disaster resilience.

“In our view, government-backed insurance solutions, supported by the global reinsurance industry, could provide some protection and stability to government budgets, mitigating the potential for instability and growth retardation,” S&P says in a new publication.

“The global reinsurance industry is well-placed to help catastrophe-exposed states reduce their liability and protect their economic stability,” S&P says.

The publication says reinsurers can offer expertise in modelling and assessing catastrophe risk exposure, educating stakeholders on the level of their exposure, creating solutions that offer protection and acting as an intermediary with capital markets to pair buyers and sellers of protection.

Governments in some developing nations have already have made use of pooling arrangements, structured reinsurance solutions, and bespoke insurance policies. However, these are typically put in place after a major event, and S&P says they need to be in place before a disaster strikes.

Noting a “rising tide of losses in the wake of natural catastrophes”, the ratings agency says this is increasing economic instability in many developing economies.

“In our view, government-backed insurance solutions supported by the global reinsurance industry could provide some protection and stability to government budgets, mitigating the potential for instability and growth retardation.”

S&P says the higher the level of uninsured losses, the greater the financial shock and the potential for an economy's growth to be derailed. It says losses are increasing and uninsured losses are growing faster than insured losses, which should represent a growing concern for governments in underinsured economies.

In 2009, a working paper produced for the World Bank found that on average, a country's GDP five years after a catastrophe event is about 4% below what it would have been had the event not occurred.

In some cases, extreme events in both large developed and developing markets could not only derail growth but also cause a ripple effect, affecting the global economy. Extreme weather events are occurring more often and economic losses are increasing as populations and wealth grow.

S&P research shows that each of the top 20 nations most vulnerable to extreme weather are emerging markets.

Reinsurers will have to invest time and effort to change how politicians and the electorate consider the value of insurance, S&P says.

Market trends include regulatory changes, insurance growth in emerging markets and insurance-linked securitisation.

“We have also observed that in many emerging markets, the attitude toward insurance and risk awareness is changing and regulators are increasing capital requirements and mandating the purchase of insurance in some lines of business.”