Global reinsurance plays a much smaller role in global disasters than anyone thinks

Private insurance and capital markets are playing a much smaller role in managing global disaster risk, a new report says, adding that the promise of global risk-sharing is becoming less realistic as natural disaster risks grow.

“We find that disaster risk is shared internationally to a surprisingly limited extent,” the authors say.

According to the report, the average portion of global economic natural disaster losses compensated by private market reinsurers is less than 5%. Based on the weighted value is 7.5%.

The report says the declining use of global reinsurance agreements – combined with the continued decline in basic insurance nationwide – will cause the government and local taxpayers to bear an increasing share of all losses from natural disasters.

“The lack of international risk sharing on the back of low insurance coverage raises profound questions about the role of government,” says the report, from researchers from academics at Oxford University and Portland State University. The practical alternative to [pre event] Insurance, however regulated, seems to be a demand for government spending to serve as [post event] insurance. “

The researchers used two natural disasters, which occurred in 2011, to reveal the economic impact on economies that take divergent paths sharing disaster risk in the international market: the Great East Japan Earthquake and the Christchurch earthquake in New Zealand.

According to the researchers, optional earthquake insurance in Japan covered only 16% of the direct costs of losses at the time of the 9.0-magnitude Great East earthquake. In contrast, reinsurance covered less than a quarter of that 16%.

The result was that only 3.6% of Japan’s direct losses ($225 billion) were shared outside the country.

By comparison, New Zealand’s compulsory and earthquake insurance scheme resulted in more than 90% of household downfalls and 70% of the losses covered after the Christchurch earthquake in the same year. In addition, the state earthquake agency has reinsured an estimated 60% of internationally insured losses.

As a result, global capital markets shared 42% of New Zealand’s direct losses, the researchers said.

Although New Zealand’s disaster risk sharing system was more robust than Japan’s, it did not achieve what was needed to make the country truly resilient to the more prominent disaster risks.

“Even if one takes approximately half of the New Zealand earthquake risk that is shared internationally as a proven working standard, one notes that the risk sharing internationally falls short by an entire magnitude,” the authors say.

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