The challenges of insuring against natural disasters
CEO, CCR - Chairman and CEO, CCR Re
2017 reminded us just how vulnerable societies are to natural disasters. In one year alone, more than 8,500 people were the victims of 183 natural disasters which caused almost 290 billion Euros of economic damages. Those disasters included Hurricane Irma, which had such a serious impact on the French Antilles. The number and unprecedented scale of climate events has led to growing awareness of the reality of climate change and its catastrophic consequences, which can no longer be ignored. According to a recent study published by the Caisse Centrale de Réassurance (French public reinsurer) and Météo France, the cost of natural disasters in metropolitan France, which is not the area most exposed to these risks, will increase by around 50% by 2050 (assuming constant wealth).
These particular factors make natural disaster insurance even more problematic. The first challenge is compensating for damages. We would all like insurers to pay out quickly, but the rate at which payments can be made depends on the pace of reconstruction. And while everybody wants compensation to be as complete as possible, how can operating losses associated with an interruption to the logistics chain be compensated in the absence of direct damage? The lack of natural disaster insurance represents the second challenge for the resilience of the areas affected. Globally, almost threequarters of the economic cost of natural disasters is still not insured. The reasons for this lack of insurance have been clearly identified. It is not due to lack of awareness of the risks, insufficient funds being available or issues to do with a country’s level of development: the examples of Germany (two thirds of households uninsured) and Italy (more than ninety percent) demonstrate this. The final challenge concerns prevention of natural disasters. Essentially, this requires collective actions or public infrastructure measures which it is not easy to convince people to accept, even after a disaster. Nevertheless, prevention is the key to the insurability of these risks.
These challenges cannot be met by either insurers or governments acting on their own. Clearly, insurers are the best equipped to assess the risks of natural disasters and to pay compensation for the associated damage; that is their job. But the support of the state is also indispensable, whether this consists of establishing a suitable framework for insuring these risks, mobilising public bodies and agencies to study and research them, or financing measures to mitigate their effects. The two parties must therefore work ever more closely together. It is a question of states’ responsibility and the economic and social utility of the insurance industry.