By providing financial protection against disaster, calamity and misfortune, re/insurance helps individuals, households, businesses and entire communities to absorb financial shocks and bounce back at a faster pace. Based on this role, re/insurers make a major contribution to economic and social resilience, further enhanced by their expertise in risk prevention and mitigation. This contribution is most effective if embedded in conducive legal and regulatory frameworks such as public and private sector disaster preparedness and response, adequate social safety nets and a strong commitment of governments and businesses to sustainable development.

The role of re/insurers in fostering disaster resilience is evolving across the following spectrum:

  • Risk transfer: The traditional main purpose of re/insurance is financial loss absorption. This includes major disaster risks. As a result, the global property catastrophe re/insurance market has grown to an annual premium volume of more than USD 130 billion and is set to expand further, as climate change pushes up both the frequency and severity of disasters. Having said this, the natural disaster risk protection gap remains massive, at an estimated USD 250 billion globally expressed as re/insurance premium equivalents. With an increasing frequency and severity of climate-related disaster risks it will become ever more challenging to narrow this protection gap: Loss potentials are growing, both single and accumulated, the global nature of climate change is an increasingly important obstacle to geographical diversification and risk-based re/insurance pricing may prove prohibitive, making risk protection unaffordable or undesirable. Against this backdrop, the capital markets are often described as the natural bearer of large-scale disaster risks. Their combined global valuation exceeds USD 100 trillion, more than 50 times the surplus of the global property & casualty re/insurance industry. And indeed, over the past three decades, insurance-linked securities (ILS) have emerged as an additional source of disaster risk capacity. However, their total asset value of about USD 100 billion is not sufficient to bridge the gap between economic and insured disaster losses.

  • Risk modeling: For about three decades, reinsurers in particular have been using sophisticated quantitative models to assess and predict catastrophe risks such as hurricanes. More recently, by analyzing not only historical but also real-time data, re/insurers can even more effectively help identify areas that are particularly exposed to climate-related risks. Similarly important, through richer datasets and advanced analytics, e.g. IoT sensors, the insurability of disaster risks may improve. Machine learning algorithms can analyze vast amounts of data to identify potential disaster threats, including in the cyberspace, and help underwriters price insurance policies. Furthermore, new technologies and data enable innovative risk transfer instruments, such as parametric insurance, which can provide additional re/insurance capacity for disaster risks, with payouts determined based on physical parameter values, such as wind speed or rainfall levels, rather than the insured loss.

  • Risk prevention and mitigation: Insurance can incentivize individuals and businesses to invest in (climate risk) resilience by offering lower premiums and deductibles. For example, insurance companies may offer discounts for homes that have been retrofitted to better withstand hurricanes or wildfires. Such sustainable insurance solutions enable insureds and their communities to address their vulnerability to disasters proactively. Risk mitigation can also help maintain insurability which is increasingly challenged by the systemic nature of global climate change. By embracing risk prevention and mitigation re/insurers can effectively safeguard their social utility and relevance even if loss exposures might be too large to be absorbed on their balance sheets.

  • Public private partnerships (PPPs): Another powerful option to foster disaster resilience and insurability is government involvement. If a risk is not insurable either on the commercial re/insurance market or the broader financial market, PPPs have proven to be an effective approach to manage societal risks by combining re/insurance sector expertise and capacity with sovereign funds. There are different variants: For example, PPPs can sit alongside the insurance market to preserve insurability for a specific peril. The California Earthquake Authority (CEA) is an example. Another structure sees PPPs serving as a reinsurer. A portion of (systemic) risk is covered by the commercial market before a reinsurance pool steps in. Flood Re in the UK is an example. However, like the CEA its capped capital base prevents it from covering systemic risks. Therefore, some PPPs operate with a limited government backstop, such as the Terrorism Risk Insurance Program (TRIA) in the US. However, in order to meaningfully address the systemic risks of the future, such as pandemics, cyberattacks on critical infrastructure and climate change, an uncapped (or very high) government backstop might be critical for governments to harness the re/insurance sector’s skills, expertise, data, infrastructure and funds.

In summary, the re/insurance industry plays an essential role in building a world that is resilient to climate-related or other extreme threats. However, with surging loss potentials, this role is evolving beyond (pure) risk taking. In order to remain relevant, re/insurers will have to get involved across a wider spectrum ranging from the practical implementation of government-led risk schemes, risk assessment and prevention services, to limited risk transfer which is compatible with the industry’s overall solvency and financial viability.