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The Actuary The magazine of the Institute & Faculty of Actuaries

High growth countries face $168bn ‘insurance deficit’, says Lloyd’s

Low levels of insurance take-up in fast developing economies mean governments are being left over-exposed to the cost of natural catastrophes, Lloyd’s of London said today.

Insurance market
Richard Ward, chief executive of Lloyd's

The insurance market’s Global underinsurance report identifies 17 countries as being ‘underinsured’ – where the penetration of non-life insurance was found to be below the minimum required for a country with their income level to be considered adequately insured.

These included some of the largest emerging economies, such as Brazil, China, Nigeria and Turkey. Underinsurance in China accounted for $79.57bn – almost half of the $168.11bn total shortfall in non-life insurance premiums identified by the research, which was carried out by the Centre for Economics & Business Research on Lloyd’s behalf. Of the 17 countries, eight were located in Asia, with Bangladesh by far the most uninsured.

Five of the eight countries identified as being most at risk of economic losses from natural catastrophe were among the 10 nations with the lowest levels insurance market penetration, the research also found. These were Bangladesh, China, Vietnam, Indonesia and Turkey.

Lloyd’s cited the example of China’s Sichuan earthquake as evidence of how low insurance penetration left the state to cover the cost of catastrophes. The 2008 earthquake resulted in estimated damages of $125bn, but just 0.3% of this was covered by insurance.

Increasing insurance market penetration by 1% can reduce state liability for meeting the cost of a catastrophe by 22%, it said.

Richard Ward, chief executive of Lloyd’s, said: ‘Too many high-growth countries are failing to take the steps required to prepare properly for these sorts of events, leaving people and businesses exposed.

‘As high-growth economies continue to develop and supply chains become increasingly interconnected, now is the time to ask ourselves: can the world afford to keep taking such a big risk?’

Douglas McWilliams, founder and chief executive of CEBR, said: ‘This insurance gap has a huge and lasting impact on the ability of businesses, governments and people to recover from the earthquakes, hurricanes, flooding and forest fires that affect us all every year. This means lost orders, lost jobs and wasted taxpayer money as a failure to prepare ahead of such events creates costs that are more severe and unmanageable.’

Lloyd’s called on businesses to take a more long-term view on insurance issues by making risk management a board-level issue and planning better to protect supply chains and absorb shocks.

Governments should invest more in mitigation measures such as flood barriers to minimise the damage done by natural catastrophes, while also taking steps to open up their economies to insurers.

The insurance industry should also do more to understand the nature of risk in high-growth economies so it can develop products and models for clients in countries where the problem of underinsurance is most severe, it added.