By Rosemary Onuoha

The provision of financial tools to help governments manage or transfer their exposures to catastrophe and disaster risks is a key mechanism for achieving greater disaster resilience.

Standard & Poor’s latest report suggests that reinsurers have a huge opportunity to support the building of government’s resilience to the financial shocks caused by large natural catastrophic events.

Extreme catastrophe or disaster events can often derail the growth of an economy as well as create ripple effects which can impact the global economy, supply chains and heighten sovereign risk. Developing a market for products to protect governments from catastrophe risks will, according to S&P; “Help reinsurers reinforce their relevance to new clients and new risks should lead to a stronger insurance market and increased insurance penetration.”

S&P notes that growing middle class wealth in many of the world’s emerging economies outpaces insurance penetration growth, widening the gap between economic and insured losses and ultimately putting an additional burden on governments and other lenders into countries.

The higher the level of uninsured losses, the higher the chances that an economy could be derailed, resulting in disruption to the local economy. Budgets have to be reshuffled to support disaster recovery and often leading to more hardship for the population.

By building resilience and having disaster risk transfer and financing in place, governments can protect their economic stability, speed recovery and aid reconstruction with sources of contingent capital from insurance, reinsurance or the capital markets.

S&P believes that reinsurers can play a key role in this effort, as can the insurance-linked securities (ILS) investment community. Capital is required to support risk transfer products and many of these needed risk transfer products would not be covering typical insurable interest. Rather, protection and risk transfer for fiscal or budgetary interests are required, something that the ILS market has a real opportunity to play a key role in.

S&P research shows the potential opportunity in stark light. Its research shows that the top 20 most vulnerable nations are emerging markets and that insurance penetration (measured by premium as percentage of GDP) is just 0.9 per cent in these countries, compared to a global average of 2.1 per cent.

S&P’s report shows some telling figures, such as the fact that some modeled catastrophe events could erode huge percentages of the affected countries GDP. Also telling are figures on insurance penetration, where some catastrophe losses in recent history see as little as 3% of the costs covered by insurance (e.g. the Kobe earthquake).

Insurance penetration is rising and emerging economies are often rising the fastest. However, when you look at the types of insurance and the levels of cover available, the gap remains and is often not being narrowed as rapidly as exposure and development is increasing. This leaves a widening gap which the reinsurance and ILS market should aim to support closing.

The macroeconomic instability which can result from major catastrophe events in emerging economies of the world can go so far as to also affect the developed economies, due to the interconnecting nature of finance, supply chains and economics.