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Regulators urged to take action over insurance protection gap

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The gap between the insured and the uninsured from natural catastrophes is cause for growing concern

Bermuda’s model of insurance supervision has been highlighted for its net effect of increasing capacity for insurance coverage of natural catastrophes.

A report this month from the International Association of Insurance Supervisors represented a call to action for insurance regulators to do their part to address the gaps in insurance protection against natural catastrophes for global communities.

The report comes as natural catastrophe protection gaps, and the interest in reducing them, are increasing.

The global professional services and management consulting firm Aon recently estimated that more than 400 natural catastrophe events in 2019 generated economic losses of $232 billion, yet only $71 billion was insured.

There is a growing consensus for a need to close that gap by managing the impact of factors such as climate change to improve the future of more of the world’s communities.

Uninsured losses are increasingly seen as a global problem, affecting emerging nations more so and more directly. But the more-developed, more-insured countries, which can recover much more quickly after a natural disaster, will also face challenges.

Urbanisation and regional development, value accumulation and concentration, together with climate change and far more powerful storms means even rich communities can outgrow insurance cover.

The report outlined five major areas of supervisory activity to narrow “NatCat“ protection gaps.

They are assessing what gaps exist; improving consumer financial literacy and risk awareness; incentivising risk prevention and reduction of insured losses; creating regulation supportive of insurance availability and uptake; and advising government and industry, including on the design and implementation of public-private partnerships or insurance schemes.

The report includes a discussion on catastrophe bonds used to support reinsurance capacity and respond to NatCat events.

It said: “They can be used by insurers to transfer risk to investors, freeing up capital to be used to underwrite new policies. From an ex-post perspective, cat bonds can provide capital to governments and organisations for disaster relief and recovery.

“Several jurisdictions have created a regulatory framework for ILS to facilitate the issuance of cat bonds and provide an additional risk transfer option for insurers.

“For example, Bermuda’s framework for the regulation and supervision of the ILS sector has resulted in steady growth in cat bond issuances, allowing an increase and capacity and available coverage to NatCat risks.”

The report notes that globally, certain regulatory requirements can impede access to the necessary reinsurance. Examples include requirements for minimum local retention thresholds, restrictions on access to cross-border reinsurance and mandatory cessions to local reinsurers.

The report notes: “While such thresholds might be introduced due to prudential reasons (such as lack of oversight of foreign reinsurers) or to reduce dependency on the global reinsurance market pricing and capacity cycles, they can go beyond the level of retention that local insurers are willing or able to take on. This could reduce their willingness and capacity to write NatCat risks.”

Bermuda’s commercial reinsurance sector incurs billions of dollars for gross claim payments to policyholders to cover the damaging effects of hurricanes, including Hurricane Ian in 2022, when they paid about 25 per cent of the industry losses; and Hurricanes Harvey, Irma and Maria in 2017 when they paid around 30 per cent of the industry losses associated with those events.

The IAIS is an organisation of insurance supervisors and regulators from more than 200 jurisdictions promoting effective and globally consistent insurance supervision.

The international standard-setting body is responsible for developing principles, standards and other supporting material for the supervision of the insurance sector and assisting in their implementation.

The International Association of Insurance Supervisors is an organisation of insurance supervisors and regulators from more than 200 jurisdictions promoting effective and globally consistent insurance supervision

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Published November 20, 2023 at 7:59 am (Updated November 20, 2023 at 7:20 am)

Regulators urged to take action over insurance protection gap

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