Improving policy and practices for financing the aftermath of disasters

In summary

The (re)insurance industry has been severely tested by a growing level of natural disasters – some 70 per cent of which are not protected, with devastating economic consequences. The burden of rebuilding societies therefore often falls on aid organisations, tax payers and citizens, who themselves are often financially vulnerable.

By better understanding the role of Protection Gap Entities (PGEs) – the not-for-profit mechanisms that provide insurance products to cover unprotected global disasters – and the purpose they serve, it is possible to put in place more effective planning and cover for unavoidable disasters.

What did we explore and how?

Researchers conducted interviews and industry observations to analyse the interactions between governments, development organisations and insurance companies and find out how underinsured disaster risk is covered.

The research identified three key objectives of PGEs:

1. Resolving the disruption in reinsurance supply that occurs following major disasters
2. Mitigating the threat of unaffordable insurance such as high population areas in high risk of disaster
3. Increasing financial viability of disaster response in countries and sovereign states with fragile economies.

Inevitably this leads to conflicts between the short and long term, market and social objectives and individual and collective responsibility.

The research shows how reconciling these contradictions can help to process unprotected risk in society to create a virtuous cycle, or be exacerbated leading to conflicts of interest and a vicious cycle of escalating unprotected risk.

Benefits and influence of this research

The research has changed business behaviours of major firms, putting a spotlight on awareness and understanding of the global insurance industry as a powerful means of achieving social policy objectives on disaster protection.

Academics have produced diagnostic tools that are helping industry players position themselves strategically, as well as supporting partnerships between the industry and governments towards creating strategies for unprotected risk management.

In addition, several industry bodies, such as the International Forum of Terrorism Risk (Re)Insurance Pools (IFTRIP) and World Forum of Catastrophe Programmes (WFCP) have endorsed the research’s findings and recommendations and have distributed reports to their members.

On an organisational level, firms have used frameworks devised by the research in their own strategic planning. The UK Terrorism Pool, Pool Re, used the report to inform its Advisory Council and redistributed findings to its board to establish new strategic directives.

The research has also guided policy. It was used to inform the Australian Insurance Terrorism Act and was presented to the Canadian Finance Ministry to evaluate ways of managing Canada’s exposure to earthquake risk.