Lloyd’s cat fund to help emerging economies12th January 2016
Lloyd’s $400m initiative could be a big first step in tackling the problem of uninsured catastrophes in developing economies.
The gap between economic and insured losses has never been greater than today in developing economies, argues Mike Krefta, Hiscox Re’s Chief Underwriting Officer. “I’ve seen at first hand the damage and dislocation that catastrophes such as mud slides and flash floods can cause in developing economies where there is no economic safety net.
“While there is no question that it is in everyone’s commercial interests to build and develop an insurance market in these areas that is strong and vibrant, we also have a social responsibility to help build local resilience to catastrophic events and this is one way in which the wider reinsurance community can contribute.”
Eight Lloyd’s syndicates, including Hiscox, will initially provide reinsurance capacity to support the development of insurance across Latin America, Africa and Asia. These regions contribute up to 40% of global GDP but only represent 16% of global insurance premiums. While typical perils in these areas can include wind, flood, landslides as well as volcanic eruptions and drought, there are also the man-made disasters such as explosions and fires that largely go uninsured.
There is no one entity that can increase insurance cover in these regions on its own. It will need a collaborative effort from a range of experts.
Thinking differently about distribution
The initiative’s success will hinge on thinking beyond the traditional methods of insurance product development and distribution, says Krefta. “The model of insurance distribution will have to be very different in emerging economies from what we’re used to. The incredible growth of mobile telephony in Africa, for instance, provides an opportunity to use SIM cards as a method of insurance distribution and point of sale. We’ll need to be open to doing things differently if we’re to achieve real penetration.”
I’ve seen at first hand the damage and dislocation that catastrophes such as mud slides and flash floods can cause in developing economies where there is no economic safety net.
Tackling this insurance shortfall will also require the co-operation of many different parties, says Krefta. “There is no one entity that can increase insurance cover in these regions on its own. It will need a collaborative effort from a range of experts: those who can get distribute the products locally; those who can understand the issues and intricacies of the local markets; those who can structure innovative products that work in the local market context; the micro-financiers / lenders and insurers that are willing to be pioneers; and then reinsurers globally that have the understanding of non-modelled catastrophe risk.”
Beginning of a long journey
The ultimate measure of success for this initiative, and others that may follow, will be how quickly a country can get back on its feet after a catastrophe, concludes Krefta. “This Lloyd’s fund is a modest start but I can see the fund picking up significantly in time as capacity increases and other syndicates join. But we’re on a long journey that will require a multi-decadal injection of energy, thought leadership and capacity by the reinsurance market. It’s an exciting challenge that we’re proud to be part of.”