To effectively reduce losses in oil and gas risks underwriting, insurance operators should provide financial tools to help manage or reduce their exposure to huge losses, experts have said.

According to these experts, the provision of financial tools to help manage or reduce their exposure to oil and gas risks is a key mechanism for achieving greater disaster resilience.

Accordingly, insurers can also use such financial tools to support the building of governments’ resilience to the financial shocks caused by large natural catastrophe events.

In a report by Standard & Poors, 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.

According to the report, 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 is, the higher the chances that an economy could be derailed, resulting in disruption to the local economy, budgets having 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.”

The report stated 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.

“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.

Therefore it is in the interests of the mature economies to ensure that emerging economies are protected and resilient to natural catastrophes and weather extremes.

The reinsurance market can help these catastrophe-exposed economies to better understand their exposure, reduce their liability and increase their economic stability as a result.

Reinsurers can offer support in modelling catastrophe exposures, educating stakeholders as to the importance of resilience, creating bespoke risk transfer solutions and acting as intermediaries for the capital markets, to paid up buyers and sellers,” the report stated.

“The key is putting these types of catastrophe risk transfer and financing facilities in place before disaster strikes.

The injections of capital possible from parametric insurance, reinsurance and catastrophe bonds, as well as other contingent forms of catastrophe or disaster risk financing, can make measurable differences to the way economies recover from major loss events.

If reinsurers take the lead in developing these forms of catastrophe and disaster risk transfer and financing, they could find and reinforce the industry’s relevance in new regions, open up new markets and position themselves for future growth in emerging and rapidly growing economies,” the report stated.