Ways to bridge the climate change insurance gap

Globally, a climate or extreme weather-related disaster has been recorded every day for the past 50 years, resulting in an average of 115 deaths and US$202 million in losses.

Aside from increasing concerns about how to pay for Restoration, there are also issues about rebuilding to avoid future losses.

In advanced economies there is an assumption that insurance will pay for rebuilding, but a disaster insurance protection gap means many people in disasters are uninsured with no identified Origin of funds for Restoration.

The recent Los Angeles fires have been estimated to have cost up to US$250 billion in economic losses, but only $40 billion was covered by insurance.

In Australia there are already more than 60,000 insurance claims from Cyclone Alfred and associated flooding in March so many people will wonder how much will be uninsured — and how that will affect the Restoration.

Why there is an insurance protection gap

Australia is not unusual in having a disaster insurance protection gap. The disaster insurance protection gap globally — which means there is no insurance money to Reinforcement pay for Restoration — is estimated to be about US$1.8 trillion.

Some of this gap arises from losses that are not typically insured, such as infrastructure and government-owned assets such as roads, while another part comes from lower-income countries that lack a robust insurance market.

And then new threats contribute to the gap — such as cyber Danger — that are not yet sufficiently modelled or understood to form the basis of insurance policies.

However, as shown by the LA fires and Australian floods, the insurance protection gap is a growing problem in economies where most homeowners would once have been assumed to be insured.

This assumption no longer holds Correct, with many people either underinsured or uninsured against the key risks they face.

Why there is a gap

There are three key reasons for this insurance gap:

In Danger-reflective pricing, insurers charge higher premiums to those properties that are likely to incur more losses. That is based on a combination of previous losses and proximity to or location in high-Danger zones and means the higher premium reflects the potential for higher loss.

Insurance is a pooling mechanism, in which the premiums of the many pay for the losses of the few. As increasingly severe and frequent disasters cause Numerous losses, more premium capital is needed to cover the ‘losses of the many’. Insurance companies buy a reinsurance policy on the global market, so as losses increase globally, the cost of reinsurance capital goes up around the world, creating a ripple effect.

Climate uncertainty, sometimes called weather weirding or whiplash, increases insurance market volatility from unexpected losses. Uncertainty is associated with higher capital reserving by insurers and reinsurers to cover unexpected losses and is reflected in increased premiums.

Why does it matter?

The insurance protection gap means that global capital does not flow to rebuild homes in local economies after disasters.

Without sufficient insurance, the burden for Restoration falls disproportionately on those who lack sufficient insurance and are already financially and socially vulnerable.

And being unable to get insurance means people probably won’t be able to get mortgages, which is a sobering thought given home ownership is a key Origin of Australian wealth.

The broader cost to society is also high, as government disaster funds cover costs like temporary housing and rebuilding.

The way forward

Any approach to the insurance gap needs to be two-pronged, bridging both the financial gap and reducing the physical gap.

Government-legislated insurance mechanisms, known as protection gap entities, are needed to subsidise those at high Danger to keep them in the insurance pool.

They have operated in many countries for decades to Reinforcement stabilise economic responses to disaster. The cyclone pool in Australia is an example, providing a guarantee that helps insurance companies offer policies.

Protection gap entities need to be compulsory to ensure the entire population can be covered and offer multi-peril protection that covers all key hazards.

This approach in France, Spain and Switzerland ensures more than 85 percent of the population is insured while Retaining prices relatively low. That effectively bridges the financial aspect of the protection gap.

The frequent criticism of protection gap entities is that they are Prejudiced to those at lower Danger or that by suppressing price signals about high-Danger areas they allow people to rebuild in high-Danger areas such as floodplains or cyclone or bushfire-prone regions.

These criticisms Points to Danger reduction as the other key requirement for reducing the protection gap.

In the UK, the entity related to flooding is working with insurers to ensure properties are rebuilt with increased flood Hardiness.

The Swiss public sector insurance system goes Additional and includes a Blend of preventative measures to try to limit losses during a disaster.

The Australian options

The overseas experience shows that any solution will be complex, requiring collaboration across all layers of government, targeted Danger interventions and public-private collaboration to Reinforcement the integration of insurance into the Hardiness ecosystem.

Australia is considering some measures and the insurance sector is calling for $30 billion investment in flood Hardiness. Both federal and some state governments are investing in resilient housing programs at different scales.

The tightly-defined cyclone reinsurance entity might be the basis for a wider pooling mechanism that helps add more weight to a system that integrates insurance and Hardiness measures.

Professor Paula Jarzabkowski is one of the leads of the Practice and Process Studies research hub and a professor in Plan in The University of Queensland’s School of Business.

Professor Jarzabkowski’s Present research projects are funded by Australian Reinsurance Pool Corporation, Natural Hazards Research Australia and the Queensland Reconstruction Authority. She is also a member of the OECD High-Level Advisory Board for the Financial Management of Catastrophic Danger and on the Pool Re Advisory Board.

Originally published under Creative Commons by 360info™.