Natural disasters are a major challenge for the global insurance industry

The insurance industry has faced numerous global challenges, including major natural disasters over the past few years, and the South African short-term insurance industry has certainly risen to the challenge.

This is the view of Keith Kennedy, managing director of Mutual & Federal, and president of the Insurance Institute of South Africa.

Worldwide, the insurance industry needs to prepare for further losses. 2010 has already seen significant catastrophes, including flooding in Central and Eastern Europe and Pakistan, severe weather in the United States, earthquakes in Chile and Haiti as well as the eruption of the Icelandic volcano which disrupted international air travel. If this catastrophic volatility continues, losses could reach three to five times more than what they were in 2009.

“A sample of international events since 2006 provides a clear illustration of the challenges the global industry has faced over the past few years,” says Kennedy.

The world has seen two ‘animal’ flu pandemics – bird flu and swine flu. 2007 and 2008 saw a number of large claims in the mining and energy sectors. 2008 was also one of the worst years for losses due to catastrophes and the total impact on the economy around the world added up to $269 billion.

Natural catastrophes and man-made disasters cost society $62 billion and the industry $26 billion in 2009. The magnitude 7.0 earthquake that caused catastrophic death and destruction in Haiti created hundreds of millions in economic damage, but insurance coverage for losses is minimal with insurance penetration being extremely low.

Locally, the industry has recently been dealing with claims resulting from extreme weather patterns across the country, and a high incidence of corporate claims.

“As far as global events are concerned, the largest crisis was the international financial meltdown of 2008 and 2009,” says Kennedy. “This caused the biggest global recession since the 1930s and the ongoing impact is not yet fully understood. It goes without saying that the resultant drop-off in equity market prices had a direct impact on the capital structure of the entire insurance industry. In South Africa, however, the impact of the global financial crisis was perhaps felt in a more indirect manner.”

Looking to the future, natural disasters are becoming more frequent worldwide, and, together with man-made disasters, are expected to increase dramatically over the next 40 years.

In 2006, natural catastrophes and man-made disasters claimed more than 31 000 lives and caused relatively low economic losses of $48 billion. Developing countries carried the brunt of the disasters. The lack of insurance cover meant that only one third of the loss ($15.9 billion) was covered by insurers.

In 2007 global catastrophe-related economic losses increased to $70 billion, while fatalities decreased to 20 000 fatalities. Europe was hardest hit in terms of insured property losses. The UK, Germany, Belgium and the Netherlands were struck by the winter storm Kyrill, which caused losses of $6.1 billion. Natural catastrophes caused the most fatalities in Bangladesh, India, China and Pakistan.

2008 experienced an exceptional increase in fatalities. Global catastrophic losses saw insurers across the sector pay out $52.5 billion in compensation for catastrophic damage, resulting in the deaths of 240 500 people globally.

According to Swiss Re, natural catastrophes and man-made disasters totalled 137 and 174 respectively in 2008. Asia suffered the biggest blow in terms of the number of lives lost, while the United States took the most significant knock with regards to insured property losses.

Globally, insured losses for 2009 were significantly lower due to a calm United States hurricane season. However, the insurance industry should prepare for higher losses this year. If the pattern of catastrophes continues, losses could be significantly higher than in 2009.

The most expensive disasters, in financial and economic terms, are floods, earthquakes and windstorms.

The social and economic cost of disasters varies from country to country and is particularly hard to estimate. Insurance claims do not provide a holistic estimate of the economic impact of disasters as it only provides figures on the costs related to the insured.

The devastating impact of natural and man-made disasters on those who cannot afford insurance is even worse. Even though South Africa is not a high risk area for natural disasters, insurers and reinsurers need to work together to provide insurance cover to the underprivileged.

Re-insurers and insurers play a vital role in rehabilitating communities that have been struck by catastrophes. They also need to join forces with governments to implement risk mitigation processes to significantly lower the financial and social impact of disasters before they strike, especially in developing countries where insurance cover is limited to those who can afford it.

“As risk mitigation specialists, it is the social responsibility of all players in the insurance industry to help reduce the economic impact and, more importantly, the fatalities associated with disasters,” says Kennedy.