Collaboration between the public and private sectors, beyond just insurance, is essential to narrowing the so-called protection gap, as losses from natural disasters increase, said the head of a global insurance supervisors’ organization.
The protection gap refers to the difference between economic losses caused by an event such as a hurricane, drought or massive flood and the amount of those losses that are covered by insurance.
“With the protection gap expanding rapidly, it’s becoming hard to fully address the issue through insurance-based solutions alone,” said Shigeru Ariizumi, chair of the International Association of Insurance Supervisors, in an interview with Bloomberg on Wednesday. The IAIS is a global standard-setting body that develops, promotes and provides principles and guidance for insurance companies.
Insured losses from natural catastrophes may reach $145 billion this year — well above the 10-year average — as population growth, urban sprawl and climate change combine to supercharge risks, according to an estimate in April from the Swiss Re Institute.
The rising costs make it essential that the insurance industry “reach out not only to regulators and supervisors, but also to broader policymakers, government departments outside of insurance, academia, and even customers to work together and figure out how to tackle this issue,” Ariizumi said.
Ariizumi spoke near Durban, South Africa, ahead of a panel focused on the protection gap on Thursday. The event, held alongside the G-20 finance chiefs’ meetings, is expected to be attended by World Bank President Ajay Banga and the chair of French insurer AXA SA.
To address losses from natural disasters, Ariizumi said various forms of collaboration are possible such as the public sector agreeing to take on part of the risk when an event is deemed too great for private financial institutions to handle the costs on their own.
The IAIS chair also called for regulators to promote the development of alternative options such as parametric insurance, where policyholders get payouts when pre-defined disaster-related metrics are met, and also catastrophe bonds.
“It’s becoming increasingly difficult for insurance companies to take on certain risks, and in some countries, insurance availability and affordability are emerging as serious concerns,” Ariizumi said.
If the insurance sector can transfer some of these risks, then public markets offer a viable solution, he added, emphasizing the importance of thorough, clear disclosures for bond investors.
