14 September 2015 Insurance

Low penetration represents a ‘serious market failure’

The fact that such a small proportion of risk globally is covered by the re/insurance industry represents a “serious market failure”, James Vickers, chairman of Willis Re International, claimed at a press conference in Monte Carlo yesterday.

He said that despite the excess capital available in the market, re/insurance is still only covering a fraction of catastrophe losses in many parts of the world.

Vickers showed that half of $101 billion in global economic losses came from floods and cyclones in Asia last year. However, insurance penetration in the region is just 8 percent.

The earthquakes in Nepal in April and May this year caused damage of $5 billion, although insured losses amounted to just $160 million.

Vickers claimed that this issue is not unique to developing countries, however. He also stressed “countless assets in developed economies” also lack suitable protection from the true risks they face.

“There is enough capital, so there is a serious market failure taking place here where we are not able to match the capital that the industry has against the risk that society faces as a whole,” he said.

To combat this issue Willis, along with other private and public sector partners, has developed the 1 in 100 Initiative, which is designed to integrate natural disaster risk into the financial system, promoting disaster resilience and protecting against climate risk.

At the initiative’s core is the one-in-100-year financial ‘stress test’, similar to that developed in recent decades by the insurance sector to assess its own ability to underwrite risks. The test evaluates the maximum probable annual financial loss that a company, city, or region could expect once in 100 years and enables them to manage their risk in a more informed and effective way.

“The 1 in 100 Initiative is an enormous opportunity for the insurance industry to completely reposition in terms of its role to society as a whole. It is also an enormous growth opportunity,” Vickers said.

“This would revolutionise the way the insurance industry can actually sell more product to help people manage that risk.”

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