Executive Summary

July 2017

Background

RMS, a global risk modeling and analytics firm, was commissioned by the U.K. government’s Department for International Development (DFID) to research the potential for insurance to augment disaster aid. Conducting the first-ever comprehensive assessment of disaster losses and aid payments, RMS analyzed how insurance schemes could feasibly reduce the financial burden of disaster losses on the world’s poorest.

The Scope

To evaluate the impact of aid and insurance on economic losses caused by natural disasters in 77 low and low-middle income countries.

The Purpose

To inform government policymakers on the potential for insurance to make international aid more effective.

The research explored how a realistic expansion of insurance markets over the next decade would transform the interplay between disasters, aid and human suffering.

The Current Situation

Many of the poorest countries are in regions prone to earthquakes, hurricanes and typhoons, droughts and flooding. RMS calculated:

• Total economic losses from natural disasters across the 77 countries averaged US$29 billion per annum.
• On average, once every 10 years these countries experienced economic losses of US$47 billion due to natural disasters, with humanitarian impacts on 180 million people.
• The types of disaster that drive these “one-in-10-year” losses can devastate those countries. For example, the 2010 Haiti earthquake, which killed more than 220,000 people, cost the country 120 percent (US$8 billion) of its gross domestic product.
• Currently only 5 percent (US$2 billion) of the one-in-10-year losses are covered by insurance, and 12 percent (US$6 billion) are covered by humanitarian aid.
• This leaves US$39 billion that must be met by the people directly affected – or by their governments, which are among the world’s poorest.

Insurance Potential

By the end of the next decade, insurance schemes have the potential to reduce the one-in-10-year disaster loss by US$11 billion (24 percent). This is four times the current levels of insurance recovery and 1.5 times the current combined levels of insurance recovery and aid payments.

Economic Benefits of Insurance

Humanitarian aid is pledged only after it is apparent that a major crisis is occurring. There is often uncertainty about the size and timing of eventual aid payments from governments. It is well-documented that months or even years may pass with promised aid never arriving. This means humanitarian aid alone should not be relied on for pre-planning a disaster response. Delays to aid payments mean losses escalate, compounding economic and humanitarian impacts.

By contrast, insurance payments are determined and paid with much greater certainty and speed, especially if the trigger for payments is parametric. This means the parameters of the disaster (e.g., earthquake magnitude, hurricane strength, flood depth) would automatically lead to payment, without lengthy loss assessment.

Early, reliable payments have been shown to reduce loss escalation. RMS estimated that early intervention can have 3.5 times the impact of aid payments that are delayed. Insurance schemes can therefore provide a more reliable and cost-effective supplement (or alternative) to humanitarian aid.

Smoother Outcome

Insurance is a mechanism for reducing financial volatility, smoothing the financial impacts by spreading risk. Between 2000 and 2015 there have been significant peaks and valleys in humanitarian aid expenditure. Global aid expenditure was US$15 billion in 2004 in response to the Boxing Day tsunami and US$8 billion in 2010 in response to the Haiti earthquake. However, in all other years during the period analyzed, aid expenditure was less than US$3 billion. Additional insurance coverage would greatly reduce this volatility, mitigating the financial burden for both impacted countries and aid donors.

Wide-Ranging Benefits

Funding insurance schemes is economically effective for donors and represents greater value to the taxpayer compared with aid expenditure.

Expanded insurance markets have strong benefits for poorer countries:

• Increasing the speed and certainty of post-disaster finance
• Reducing the financial burden of catastrophic events
• Preventing losses from escalating to critical levels

As a leading financial services hub, London offers considerable risk management expertise that would be of value to low and low-middle income countries. This expertise, coupled with the U.K.’s academic leadership in the science of natural disasters, could be leveraged to build in-country capacity, thus maximizing the benefit from insurance premiums and payouts.

Realizing Potential

Insurance will not deliver its potential without a concerted government-sponsored effort in the affected countries.

The maximum value of insurance can only be realized if:

• Payment is guaranteed and rapid.
• Beneficiaries have a realistic disaster-response framework in place so that plans exist for how insurance payments will be used before any disaster strikes.

Disaster risk reduction (DRR) measures are also vitally important for reducing the consequences of disasters in developing countries. A similar analysis could quantify the impact of implementing the correct DRR measures.

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