Global underinsurance has barely decreased in six years: Lloyd's


The total sum of global underinsurance is $163bn, according to research from Lloyd's.

According to new research from Lloyd’s and the Centre for Economics and Business Research, the number represents the gap between the level of insurance in place to cover global risks, and the cost of recovery to governments and businesses.

The gap has hardly closed in the last six years – in 2012, a report by Lloyd’s and the CEBR found that there were $168bn of underinsured assets around the world.

Alongside emerging risks such as cyber, the increasing severity of catastrophic weather events is a major concern. Of the current $163bn of underinsured assets the research found, $160bn – 98% – are in less developed countries that are much more exposed to the effects of climate change.

Among the countries with the lowest insurance penetration rates of the 43 nations included in the report published by Lloyd’s are Bangladesh, Indonesia and the Philippines, all of which face significant risk of, for example, flooding due to rising sea levels and/or typhoons.

All three countries, as well as Egypt, Nigeria, India and Vietnam, have insurance penetration rates of less than 1%. The average insurance penetration rate in less developed countries was found to be half that of the rate found in more developed countries.

In Bangladesh, the rate is just 0.2% and the sum of underinsured assets is equivalent to 2.1% of the country’s GDP, or $5.5bn in absolute terms.

Nearly half of the underinsured assets identified by Lloyd’s and the CEBR are in China, which accounts for $76bn of the £163bn total, due to the size of the country’s economy.

The report concludes: “There is no one group that can close the insurance gap on its own. It requires action from all parties that have the expertise and tools to make a positive change.”

To that end, they have released a report in association with the UK’s Centre for Global Disaster Protection, Risk Management Solutions, Vivid Economics and Re:focus, which details potential financial instruments that could be used to encourage greater resilience in areas exposed to major risks.

These include insurance-linked loan packages with built-in resilience conditions; resilience impact bonds which pay out according to the implementation of resilience measures; resilience bonds that would function like cat bonds but reduce bond interest payments as resilience-building measures are implemented; and resilience service companies, which would perform risk-reducing work (e.g. retrofitting buildings) in exchange for a share of the savings from reduced insurance costs.

Bruce Carnegie-Brown, chairman of Lloyd’s, said: “Insurance is a major contributor to disaster recovery often providing the quickest financial crisis relief available.

“The terrible earthquake and tsunami disaster on the Indonesian island of Sulawesi underlines the important role that insurance can play by increasing financial liquidity in catastrophe affected areas,” he added, referring to the September disaster centred on the city of Palu, in which at least 30 people were killed.

“Innovative insurance solutions can provide governments with access to financial relief rapidly after a disaster strikes, easing the burden on them and tax payers. If insurance is not available catastrophes can have a much greater impact on economies and lives.

“The insurance sector wants to work with government to help people understand the insurance products that are available and to provide improved access to those products. Together we can help tackle the crippling underinsurance crisis and give people in the world’s most exposed economies the security they so desperately need.”

Daniel Stander, RMS’s global managing director, said: “Those who can’t afford the additional costs of building resiliently are even less likely to be able to afford to rebuild after a disaster.

“Being able to quantify accurately the benefits of investing in resilience is therefore fundamental. The four products have been designed with this in mind.

“The objective is twofold: to reduce the initial costs of building resiliently and to finance the residual risk. In this way the benefits of insurance can be enjoyed by those who need it most.”

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