Emerging Economies Have $160B Insurance Gap

The average insurance penetration rate (total insurance premiums as a percentage of GDP) in developed nations is twice as high as the average in emerging, or lower income countries, which account for almost all ($160bn) of the global insurance protection gap.

Source: Lloyd's of London | Published on October 23, 2018

Many of the countries with the lowest levels of insurance are among the most exposed to risks such as climate change and are the least able to fund recovery efforts. Bangladesh, India, Vietnam, Philippines, Indonesia, Egypt and Nigeria each has an insurance penetration rate of less than 1%.

The country with the highest expected annual loss from natural disasters, Bangladesh, also has the largest insurance gap relative to GDP (2.1%). Expressed in absolute dollar values this equates to an insurance gap of almost $6bn in Bangladesh. Second highest is Indonesia at 1.4% of GDP, equivalent to an insurance gap of $15bn.

Countries with more wealth stand to lose more in pure financial terms. China is the country with the highest insurance gap expressed in dollar values ($76bn) due to the size of its economy and the fact that its insurance market is still developing.

Global economic losses from natural disasters are substantial and growing with annual expected economic losses of $165bn, according to Lloyd’s City Risk Index. They will continue to increase, driven by greater wealth, hazard exposure and, for some events, climate change.

The underinsurance gap, however, is hardly closing. In 2012 Lloyd’s and CEBR revealed that $168bn in assets globally were underinsured. This means the gap has closed by less than 3% over a period of six years.

The impact of disasters can be reduced by investing in greater resilience. A range of studies suggest that, on average, the benefits of resilience (broadly defined) outweigh the costs fourfold (see UNISDR (2007), OECD (2015) and UK Government Office for Science (2012)).

Lloyd’s today published a new report, produced in association with the Centre for Global Disaster Protection, Risk Management Solutions (RMS) and Vivid Economics, detailing four potential new financial instruments that could be used to incentivise investment in resilience.

The report also underlines the important role that risk financing can play by providing liquidity after a disaster, protecting government balance sheets and buffering taxpayers. The Indonesian government, for example, is reportedly looking at disaster risk financing, with support from global reinsurers, following the recent devastating Sulawesi quake and tsunami.

Bruce Carnegie-Brown, Chairman of Lloyd’s, said:
“Insurance is a major contributor to disaster recovery often providing the quickest financial crisis relief available. The terrible earthquake and tsunami disaster on the Indonesian island of Sulawesi underlines the important role that insurance can play by increasing financial liquidity in catastrophe affected areas. Innovative insurance solutions can provide governments with access to financial relief rapidly after a disaster strikes, easing the burden on them and tax payers. If insurance is not available catastrophes can have a much greater impact on economies and lives.

“The insurance sector wants to work with government to help people understand the insurance products that are available and to provide improved access to those products. Together we can help tackle the crippling underinsurance crisis and give people in the world’s most exposed economies the security they so desperately need.”

Daniel Stander, Global Managing Director, RMS, said:
“Those who can’t afford the additional costs of building resiliently are even less likely to be able to afford to rebuild after a disaster. Being able to quantify accurately the benefits of investing in resilience is therefore fundamental. The four products have been designed with this in mind. The objective is twofold: to reduce the initial costs of building resiliently and to finance the residual risk. In this way the benefits of insurance can be enjoyed by those who need it most.”