Role of insurance in disasters

Increasing the speed of post-disaster finance means that aid reaches people when it is most critical

Role in SHEAR

Under the SHEAR Programme, the Department for International Development (DFID) commissioned Risk Management Solutions (RMS), a global risk modelling and analytics firm, to research the potential for insurance to augment disaster aid. Conducting the first-ever comprehensive assessment of disaster losses and aid payments in 77 low-middle income countries, RMS analysed how insurance schemes could feasibly reduce the financial burden of disaster losses on the world's poorest countries.

Context

Many of the poorest countries are in regions prone to earthquakes, hurricanes and typhoons, droughts, and flooding. RMS calculated that the total economic losses from natural disasters across the 77 countries included in the research averaged US$29 billion per annum. On average, these countries experienced economic losses of US$47 billion due to natural disasters once every 10 years, with humanitarian impacts on 180 million people, which can devastate countries. For example, the 2010 Haiti earthquake, which killed more than 220 000 people, cost the country 120 per cent (US$8 billion) of its gross domestic product.

Aim

The aim of this project is 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.

Approach

Funding insurance schemes comes with a wide range of benefits — it 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 UK's academic leadership in the science of natural disasters, could be leveraged to build in-country capacity, thus maximising the benefit from insurance premiums and payouts.

Innovation

Currently, humanitarian aid is pledged only after it is apparent that a major crisis is occurring. 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. Early, reliable payments have been shown to reduce loss escalation. RMS estimated that early intervention can have three and a half 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.