Insurance as an adaptation strategy for extreme weather events indeveloping countries and economies in transition
The insurance industry can play a material role indecreasing the vulnerability of developing countries and economies intransition to weather-related natural disasters while simultaneouslysupporting both its own market-based objectives and the objectives ofsustainable development. Although insurance is not a "silver bullet" forthe problems posed by natural disasters in emerging markets,public-private partnerships can enhance insurance's ability to spread therisks and manage the costs of weather-related disasters as well as toincrease the pool of people who have access to coverage. (For simplicityin this report, the phrase "emerging markets" is intended to encompassdeveloping countries and economies in transition.) Promising strategiesfor emerging markets involve establishing innovative products and systemsfor delivering insurance and using technologies and practices that bothreduce vulnerability to disaster-related insurance losses and supportsustainable development (including reducing greenhouse gas emissions).These strategies can enhance sustainable development efforts and increasethe insurability of risks, making insurance markets in emerging marketsmore viable. Emerging markets are especially vulnerable to extremeweather events, which impede development by causing physical damage,compromising human and ecosystem health, diverting scarce resources todisaster relief and recovery, and deterring future investment andinsurance availability by amplifying the risks faced by foreigninterests. An average of 300 million people are affected or killed eachyear by weather-related disasters in emerging markets. Characteristics ofemerging markets contributing to their particular vulnerability incontrast to developed nations include: greater frequency of poverty;weaker lifelines (transportation, communication, utilities, emergencyresponse, and hospitals); poorer quality of construction and absence ofor deficiencies in building codes and other regulations; and highdependence on resource-based industries (e.g., agriculture). Naturaldisasters such as drought often dislocate large groups of people,amplifying their vulnerability to future disasters. Development itselfcan compound these vulnerabilities by promoting population growth,urbanization, intensive coastal development, and concentrations ofclimate-sensitive physical and health-related hazards. With its pool offinancial reserves, the global insurance market provides considerableadaptive capacity for weather-related damage to property, life, andhealth. The global insurance market--perhaps the world's largestindustry--represented $2.9 trillion in premiums in 2003, or approximatelyeight percent of global gross domestic product (GDP). To put this inperspective, the insurance industry s revenues make it equivalent to thethird largest country in the world in terms of GDP. In 2003, totalpremiums in emerging markets represented $314 billion (up from $270billion just a year earlier) or 11 percent of the global total, withgrowth rates often dramatically higher than those in the industrial world(twice as high, on average, between 1980 and 2000) and often exceedingGDP growth rates. Emerging markets are poised to represent half of worldinsurance premiums by the middle of this century.Insurance premiums arerising in part because the economic costs of natural disasters aregrowing, as is the insured share (up from a negligible level in the 1950sto approximately 20 percent of the total today). Insurance marketconditions vary regionally. Current insurance penetration (premiums perGDP) is lowest in Africa and Asia and highest in Latin America. Premiumsas a percent of GDP are lowest in the Middle East/Central Asia and LatinAmerica and highest in Africa. The smallest market by total premiums isthe 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 thisperiod, insurance covered four percent of total costs of weather-relateddisasters in emerging markets compared to 40 percent in high-incomecountries. While relatively small, insurance payments to people inemerging markets associated with these losses were three-times themagnitude of international aid. The potential for changes in weatherpatterns, including both average conditions and extreme events, wouldlikely raise the demand for insurance whether the changes area resultnatural variability or human-induced climate change. At the same time,increases in weather-related damage create uncertainties and challengeinsurers ability and willingness to assume or affordably price these newrisks. Sustainable development can contribute to managing and maintainingthe insurability of these risks and thereby reduce the need forindividuals and governments to absorb the costs.Because of themulti-national structure of the insurance a
- Research Organization:
- Lawrence Berkeley National Lab. (LBNL), Berkeley, CA (United States)
- Sponsoring Organization:
- USDOE; US Agency for International DevelopmentENV-P-00-99-00003-00
- DOE Contract Number:
- DE-AC02-05CH11231
- OSTI ID:
- 888968
- Report Number(s):
- LBNL-52220; R&D Project: 43FM41; BnR: 400480000
- Country of Publication:
- United States
- Language:
- English
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