Insurance has particularly positive effect in emerging countries hit by natural catastrophes

A new study from Munich Re suggests that insurance has a particularly positive effect for emerging countries hit hard by natural catastrophes.

A previous survey conducted by the company’s economic research department suggested that in emerging countries, direct losses from natural catastrophes are on average about 2.9% of gross domestic product each year.

That compares with industrialized countries (0.8%) and developing countries (1.3%). Recent major losses in emerging countries include the 2011 floods in Thailand, which saw direct losses of $43 billion, or 12$ of GDP, and the 2010 earthquake in Chile, which had directly losses of $30 billion, or 14% of GDP.

“Whilst emerging countries already have a relatively substantial capital base, they often lack the resources or necessary effectiveness in their administration to protect themselves better against the consequences of natural catastrophes – for example, by means of structural measures,” Michael Menhart, chief economist at Munich Re noted in a statement.

“On top of this, there is the urbanisation of coastal regions, which in Asia, for instance, are at great risk from cyclones. This explains the greatly disproportionate burdens these countries suffer from natural catastrophes,” he added.

Munich Re also suggests that lower private insurance density leads to higher government debt per capita, another reason insurance is so critical in areas facing major catastrophes. In Chile following the earthquake in 2010, debt rose by 70%, the report suggests.

“Initially, insurance has an indirect loss-minimising effect as premiums represent an incentive to take prevention measures: insurance premiums give the respective risk a price,” the company says. “What is more, in the event of a catastrophe, losses are limited because the insurance benefits directly support reconstruction.”

“The study confirms how important it is for rapidly expanding emerging countries to develop a strong insurance sector and promote private-sector insurance solutions,” Ludger Arnoldussen, the Munich Re board member responsible for the Asia-Pacific region noted in a statement.

“In many countries, the establishment of public-private partnerships also makes sense in order to improve insurance penetration and thus increase financial protection against the consequences of natural catastrophes.

In particular, insurance protection can minimise consequential losses from natural catastrophes, supporting a quicker and more comprehensive return to a normal economic and social situation.”