Private insurance and capital markets are playing a much smaller role in managing global catastrophe risk, a new report says, adding that the promise of global risk sharing is becoming less of reality as natural disaster risks grow.
“We find that the risk of disasters is shared internationally to a surprisingly limited extent,” the authors state.
According to the report, the mean portion of global economic natural disaster losses offset by private market reinsurers is less than 5%. On a value-weighted basis is 7.5%.
The declining use of global reinsurance agreements — combined with a continue decline in primary insurance at the country level — will result in government and local taxpayers holding a growing portion of all natural catastrophe losses, the report says.
“The lack of international risk-sharing against the background of low insurance coverage poses profound questions about the role of government,” says the report from researchers from from academics at the Oxford University and Portland State University. “The practical alternative to [pre event] insurance, however organized, seems to be demand for government spending to serve as [post event] insurance. “
The researchers use two natural disasters, which occurred in 2011, to reveal the economic impact on an economies that take divergent paths sharing catastrophe risk in the international market: the Great East Japan Earthquake and New Zealand’s Christchurch Earthquake.
According to the researchers, optional earthquake insurance in Japan covered only 16% of the direct costs of the losses at the time of the 9.0 magnitude Great East Quake. In turn, reinsurance covered less than a quarter that 16%.
The result was that only 3.6% of Japan’s direct losses ($225 billion) were shared outside of the country.
In comparison, New Zealand’s near compulsory quake and fire insurance regime resulted in over 90% of households and 70% of losses covered following the Christchurch Earthquake that same year. In addition, government earthquake agency reinsured an estimated 60% of insured losses internationally.
As a result, the global capital markets shared 42% of New Zealand’s direct losses, the researchers said.
Even though New Zealand’s catastrophe risk sharing regime was more robust than Japan, if fell short of what is needed to make the country truly resilient its most prominent catastrophe risk.
“Even if one takes the roughly half of New Zealand’s earthquake risk that is internationally shared as a demonstrated, practical benchmark, observed internationally risk-sharing falls short by an entire order of magnitude,” the authors say.
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