Lawrence Berkeley National Laboratory

The insurance industry can play a material role in decreasing the vulnerability of developing countries and economies in transition to weather-related natural disasters while simultaneously supporting both its own market-based objectives and the objectives of sustainable development. Although insurance is not a "silver bullet" for the problems posed by natural disasters in emerging markets, public-private partnerships can enhance insurance's ability to spread the risks and manage the costs of weather-related disasters as well as to increase the pool of people who have access to coverage. (For simplicity in this report, the phrase "emerging markets" is intended to encompass developing countries and economies in transition.) Promising strategies for emerging markets involve establishing innovative products and systems for delivering insurance and using technologies and practices that both reduce vulnerability to disaster-related insurance losses and support sustainable development (including reducing greenhouse gas emissions). These strategies can enhance sustainable development efforts and increase the insurability of risks, making insurance markets in emerging markets more viable. Emerging markets are especially vulnerable to extreme weather events, which impede development by causing physical damage, compromising human and ecosystem health, diverting scarce resources to disaster relief and recovery, and deterring future investment and insurance availability by amplifying the risks faced by foreign interests. An average of 300 million people are affected or killed each year by weather-related disasters in emerging markets. Characteristics of emerging markets contributing to their particular vulnerability in contrast to developed nations include: greater frequency of poverty; weaker lifelines (transportation, communication, utilities, emergency response, and hospitals); poorer quality of construction and absence of or deficiencies in building codes and other regulations; and high dependence on resource-based industries (e.g., agriculture). Natural disasters such as drought often dislocate large groups of people, amplifying their vulnerability to future disasters. Development itself can compound these vulnerabilities by promoting population growth, urbanization, intensive coastal development, and concentrations of climate-sensitive physical and health-related hazards. With its pool of financial reserves, the global insurance market provides considerable adaptive capacity for weather-related damage to property, life, and health. The global insurance market--perhaps the world's largest industry--represented $2.9 trillion in premiums in 2003, or approximately eight percent of global gross domestic product (GDP). To put this in perspective, the insurance industry s revenues make it equivalent to the third largest country in the world in terms of GDP. In 2003, total premiums in emerging markets represented $314 billion (up from $270 billion just a year earlier) or 11 percent of the global total, with growth rates often dramatically higher than those in the industrial world (twice as high, on average, between 1980 and 2000) and often exceeding GDP growth rates. Emerging markets are poised to represent half of world insurance premiums by the middle of this century.Insurance premiums are rising in part because the economic costs of natural disasters are growing, as is the insured share (up from a negligible level in the 1950s to approximately 20 percent of the total today). Insurance market conditions vary regionally. Current insurance penetration (premiums per GDP) is lowest in Africa and Asia and highest in Latin America. Premiums as a percent of GDP are lowest in the Middle East/Central Asia and Latin America and highest in Africa. The smallest market by total premiums is the Middle East/Central Asia, and the largest is South and East Asia (excluding Japan). The economic costs of weather-related events are high, totaling $1 trillion worldwide from 1980 through 2003. During this period, insurance covered four percent of total costs of weather-related disasters in emerging markets compared to 40 percent in high-income countries. While relatively small, insurance payments to people in emerging markets associated with these losses were three-times the magnitude of international aid. The potential for changes in weather patterns, including both average conditions and extreme events, would likely raise the demand for insurance whether the changes are a result natural variability or human-induced climate change. At the same time, increases in weather-related damage create uncertainties and challenge insurers ability and willingness to assume or affordably price these new risks. Sustainable development can contribute to managing and maintaining the insurability of these risks and thereby reduce the need for individuals and governments to absorb the costs.Because of the multi-national structure of the insurance and reinsurance markets, and other factors, the economic consequences of extreme weather events are becoming increasingly globalized. The growth of foreign insurers premiums in emerging markets averaged more than 20 percent per year through the 1990s. During the late 1990s, the U.S. alone was collecting approximately $40 billion in premiums each year for policies placed in other countries. This globalization of the risks and consequences of natural disasters is a significant reason for the insurance industry to seek to reduce the risks of claims worldwide. Cost-effectively mitigating the damage from (and thus the costs of) natural disasters would be a boon not only to the insurance industry and developed nations but to public health and sustainable development in emerging markets. One of many strategies is curtailing deforestation, which reduces risks of wildfire, malaria, mudslides, and flooding as well as reducing greenhouse gas emissions. Sustainable energy technologies can also mitigate risk; for example, distributed power systems coupled with efficient energy end-use technologies reduce business interruptions resulting from damage to the power grid. In sum, involving the insurers of extreme weather events in the development and execution of strategies that contribute to public health and sustainable development would enhance disaster resilience, reduce the magnitude of losses, and thus help increase insurers' willingness to establish, maintain, and expand a constructive presence in emerging markets.