Bermuda’s role in closing the protection gap
In 2019, more than 400 natural catastrophe events generated economic losses of $232 billion, but only $71 billion were insured, according to Aon. The numbers illustrate the “protection gap” between the level of insurance in place to cover global risks and the cost to governments, businesses and individuals of recovering and rebuilding after catastrophes.
The brunt of the uninsured losses is borne by developing countries. A 2018 study by the Lloyd's of London insurance market estimated the protection gap at about $162.5 billion, with $160 billion of that emanating from emerging economies.
Climate change is expected to exacerbate that situation, as warmer temperatures and rising sea levels contribute to an increasing frequency of storms, heavy rainfall, heatwaves and wildfires. Developing countries will suffer disproportionately, as they buy less insurance and are more prone to the impact of natural disasters.
Narrowing the protection gap is one of the goals of the Insurance Development Forum, a public-private partnership led by the insurance industry and backed by global organisations including the United Nations Development Programme and the World Bank.
Bermuda's re/insurance market, as the world leader in natural catastrophe risk management, is playing a key role in the IDF. Albert Benchimol, president and CEO of AXIS Capital Holdings Ltd, sits on the IDF Steering Committee, of which John Huff, president and CEO of the Association of Bermuda Insurers and Reinsurers, is an ex officio member. Ian Branagan, chief risk officer of RenaissanceRe Holdings Ltd, co-chairs the IDF's Risk Modelling Steering Group.
On the eve of the UN's Climate Risk Summit in September 2019, the IDF's industry members pledged substantial commitments towards achieving the InsuResilience Vision 2025 goals of increasing resilience to climate risks to benefit 500 million people in selected countries. These pledges included $5 billion of re/insurance capacity by 2025. In addition, they are contributing the technical expertise to develop and share an openly accessible modelling platform “to help build up risk management capabilities in those countries that need it the most”, Denis Duverne, chairman of the IDF and AXA, said. Building on the modelling work, the IDF intends to develop risk transfer solution options for countries and public-sector entities.
Ekhosuehi Iyahen is secretary-general of the IDF. She was directly involved in establishing two pioneering initiatives — the African Risk Capacity Agency and the Caribbean Catastrophe Risk Insurance Facility.
As a citizen of both Nigeria and Barbados, Ms Iyahen is keenly aware of the potential value of increased insurance penetration in developing countries. She believes that new insurance mechanisms need to be created to managing the world's ever-growing risks.
“Covid-19 has shown us that we're now at a point in time when it's impossible to think that global risks can be borne by either the private sector or the public sector alone,” Ms Iyahen said.
“We've seen the impact of the pandemic and we've seen the impact of climate change. Our systems are overwhelmed. What kind of new structures do we need to do better?
“That means having a lot more critical view of how we're managing these risks and then looking at new ways in which insurance could be leveraged.
“The challenge is how do we raise awareness of insurance as an institution? How do we promote a greater understanding of insurance as a set of tools that can be leveraged, something that the governments of these countries can wrap their heads around?”
Bermuda, with decades of experience in leading the world in natural catastrophe risk management, is an important partner of the IDF, Ms Iyahen said.
“We can't talk about climate risk without referencing the important role of Bermuda, it's a real hub of expertise,” she said.
“RenaissanceRe's contribution to the risk modelling initiative has been significant. It's invaluable because the more that we have these conversations with governments across the globe, the more they will see the value of insurance.
“ABIR has also played an important role as well in demonstrating the kind of commitments and investments that are required to move the needle when it comes to the protection gap.”
Ms Iyahen said there was a need for the industry to innovate to become more relevant to the needs of emerging markets.
“Bermuda has shown itself to be a hub of innovation, but I think now it will be further challenged at a time when we're dealing with not only climate risk, but also with Covid-19,” she said. “For these governments, the risks are increasing.”
The developing world's needs represented an opportunity for the insurance industry to demonstrate its value, Ms Iyahen said.
“I don't believe companies should view this as corporate social responsibility — it's part of the industry's future in a new reality that requires us to think of how we can contribute to the solution.
“Not in an ad hoc way, but in a systemic and structural way. That's what I hear in a lot of the conversations with the IDF and I think it's what many governments are looking for in their interactions.”
Mr Branagan has played a leading role in the IDF's risk modelling efforts. The aim, he said, was to lay out a strategic road map for the development of an open-source modelling ecosystem that would support the risk insight needs of the less developed world.
“What the Risk Modelling Strategy Group is trying to do is bring the risk modelling skills, capabilities and tools used in the insurance and reinsurance industry to bear on the public and intergovernmental sector,” Mr Branagan said.
“The broader goal is to lower the barrier to entry to quality risk insight and to make it more accessible to more people, in particular for the people and governments of the less developed world. Importantly the strategy relies on an open-source modelling environment and ecosystem.”
Collaboration between public and private sectors is key to make a repeatable, sustained and scaled impact on the resilience of emerging economies and their people, Mr Brangan said.
“Models tend to get built on a demand-led ad hoc basis for individual countries and perils, usually after something bad has happened. Instead of that reactive mode, we're trying to encourage a proactive, strategic development process which selects a large number of (potentially up to 40) countries for which to build models.
“We have several in the pipeline as we speak related to a project with the UN funded by the German government and projects initiated last year for Sri Lanka, the Philippines and Indonesia.
“The insurance industry is providing the open-source modelling infrastructure to do that and is contributing to the expertise and capabilities to build those models in an open ecosystem but the goal is that funding for the underlying model and data development will come from the public sector, in this public-private partnership.”
Mr Benchimol, who is chairman of ABIR as well as CEO of AXIS, said that addressing the protection gap in emerging economies, which are most vulnerable to climate change, was urgent.
“You need the supply of capacity to provide insurance, but importantly, you also need demand,” Mr Benchimol said. “Yet many emerging economies don't have a strong understanding of the value of insurance and how it can enhance societal resilience.
“Some don't have the legal systems to recognise and allow the practice of insurance. An education and awareness process with governments is needed to develop demand.
“Second, data analytics and modelling allow everybody involved in the risk transfer chain both to better understand the risk exposure and to evaluate the potential benefit of an insurance programme. One of the great contributions of the IDF is helping to develop these models.”
Among the IDF's ongoing projects are a programme to insure public schools in Peru, an agricultural programme targeting low-income farmers in Mexico, natural disaster coverage in Sri Lanka and earthquake risks in Pakistan.
Mr Benchimol said: “We in Bermuda are not doing this because we think we're going to get any immediate financial benefit. We think it's the right thing to do.
“Over time, in decades to come, as these economies develop and build a healthy insurance market, then we hope we'll be able to participate. But first and foremost, our goal is one of social responsibility.”