8.3.2. Risk Sharing between the Private and Public Sectors
The private insurance industry is part of a larger community that bears the
costs of weather-related events (Ryland, 2000). The nature and cost of weather-related
losses vary considerably around the globe, as does the portion of the loss that
is privately insured. Private insurance pays a higher proportion of benefits
for storm-related losses than for any other weather-related event, although
flood insurance has a particularly low rate of coverage (Figure
8-6).
|
Figure 8-4:Trends
in U.S. natural disasters, insurance industry profitability, and solvency,
1969-1999: (a) Sensitivity of property/casualty insurance sector
net financial results to investment income and underwriting gain/loss.
Upper bars indicate investment income; lower bars indicate net result
of core business (premium revenues vs. claims paid). Curve is the net
result. (b) Annual number of insolvencies and natural disaster losses
(Mills et al., 2001).
|
Insurers bear only 20% of the total economic costs of weather-related
events globally. The ratio is far lower in developing countries (e.g., 7% in
Africa and 4% in Asia for the year 1998) (Munich Re, 1999b). Even in countries
where insurance penetration is high, insurance can account for less than half
of the weather-related payouts—for example, 27% in Europe, 30% in the United
States, 34% in Australia (Munich Re, 1999b), and 20% in Canada (EPC, 2000).
In a review of four major wildfire and flood catastrophes in Australia, Leigh
et al. (1998a,b) found that private-sector insurers bore 9-39% of
the total economic losses; a comparable amount was provided by local and federal
governments. Other entities assuming such costs include federal disaster relief
providers, local governments, and uninsured property owners (Pielke and Landsea,
1998)—as in the case of Hurricane Andrew, in which only half of the losses
were insured (Pielke, 1997).
One important risk-assuming group, the corporate self-insurance market, is
growing rapidly. In the United States, such premiums are approaching the level
of the traditional commercial insurance market (roughly US$134 billion) (Best's
Review, 1998; Bowers, 1999).
Where insurers will not or are directly or indirectly regulated not to accept
specific catastrophe risks, governments in many countries—including Belgium,
France, Japan, The Netherlands, New Zealand, Norway, Spain, and the United States—may
adopt the role of insurer or reinsurer or of regulator in establishing risk-pooling
mechanisms (III, 2000b). Programs in France, Japan, and New Zealand explicitly
define the governments' role as paying for "uninsurable damages"
(CCR, 1999; Gastel, 1999). In some countries (e.g., Canada, Finland, France,
Norway, the United States) this is the case for drought or other agricultural
risks, and in others (e.g., Japan) this is limited to earthquake risks. Such
schemes can grow rapidly, as illustrated by the jump in the numbers of policies
under the Florida Windstorm Underwriting Association from 62,000 to 417,000
between 1992 and 1997 (Anderson, 2000).
Government's role in providing resources for disaster preparedness and
recovery and insurance products related to natural disasters also is a key moderating
factor in insurers' involvement in such risks. It can be a two-edged sword:
It provides a platform for private industry to participate, but it also can
drive consumers away from commercial market solutions (Klein, 1997; Pullen,
1999a). The absolute value of government payments for natural disasters is poorly
documented, and the statistical record is fragmented. The United States made
disaster-related payments of US$119 billion (1993 US$) over the 1977-1993
period, equivalent to an average of US$7 billion yr-1 (Anderson, 2000). The
Japanese government has devoted 5-9% of its national budget to disaster
preparedness and recovery in recent decades (Sudo et al., 2000).
Flood insurance merits special mention, given the magnitude of risks and losses,
the difficulty of establishing fair and actuarially based rates, and the connection
between flood and climate change (see Chapter 4; Aldred,
2000). Recent analyses in the United States found that 25% of homes and other
structures within 150 m of the coastline will fall victim to the effects of
erosion within 60 years (Heinz Center, 2000). Sea-level rise will impact flood
insurance through inundation and erosion resulting from storm surge (see Chapter
6). Countries differ widely with regard to their approach to defining and
financing flood risks via private-sector (re)insurance versus public mechanisms
(Van Schoubroeck, 1997; Gaschen et al., 1998; Hausmann, 1998). Hybrid public-private
systems and government-only systems also can be found (e.g., in the United States),
as can systems with no formal flood insurance whatsoever.
| Table 8-3: Billion-dollar and larger insurance losses,
1970-1999, as of December 2000 (Munich Re, 2000). Figures are adjusted
for inflation (1999 values). |
 |
|
Year
|
Event
|
Area
|
Insured Losses (US$M)
|
Economic losses (US$M)
|
Ratio of Insure d /
Economic Losses
|
|
|
1992
|
Hurricane Andrew |
USA |
20,800
|
36,600
|
0.57
|
| 1994 |
Northridge earthquake |
USA |
17,600
|
50,600
|
0.35
|
| 1991 |
Typhoon Mireille |
Japan |
6,900
|
12,700
|
0.54
|
| 1990 |
Winterstorm Daria |
Europe |
6,800
|
9,100
|
0.75
|
| 1989 |
Hurricane Hugo |
Caribbean, USA |
6,300
|
12,700
|
0.50
|
| 1999 |
Winterstorm Lothar |
Europe |
5,900
|
11,100
|
0.53
|
| 1987 |
Winterstorm |
Western Europe |
4,700
|
5,600
|
0,84
|
| 1998 |
Hurricane Georges |
Caribbean, USA |
3,500
|
10,300
|
0.34
|
| 1995 |
Earthquake |
Japan |
3,400
|
112,100
|
0.03
|
| 1999 |
Typhoon Bart |
Japan |
3,400
|
5,000
|
0.60
|
| 1990 |
Winterstorm Vivian |
Europe |
2,800
|
4,400
|
0.64
|
| 1999 |
Winterstorm Martin |
Europe |
2,500
|
4,100
|
0.61
|
| 1995 |
Hurricane Opal |
USA |
2,400
|
3,400
|
0.71
|
| 1999 |
Hurricane Floyd |
USA |
2,200
|
4,500
|
0.49
|
| 1983 |
Hurricane Alicia |
USA |
2,200
|
3,500
|
0.63
|
| 1991 |
Oakland fire |
USA |
2,200
|
2,600
|
0.85
|
| 1993 |
Blizzard |
USA |
2,000
|
5,800
|
0.34
|
| 1992 |
Hurricane Iniki |
Hawaii |
2,000
|
3,700
|
0.54
|
| 1999 |
Winterstorm Anatol |
Europe |
2,000
|
2,300
|
0.87
|
| 1996 |
Hurricane Fran |
USA |
1,800
|
5,700
|
0.32
|
| 1990 |
Winterstorm Wiebke |
Europe |
1,800
|
3,000
|
0.60
|
| 1990 |
1990 WinterstormHerta |
Europe |
1,800
|
2,600
|
0.69
|
| 1995 |
Hurricane Luis |
Caribbean |
1,700
|
2,800
|
0.61
|
| 1999 |
Tornadoes |
USA |
1,485
|
2,000
|
0.74
|
| 1998 |
Hailstorm, tempest |
USA |
1,400
|
1,900
|
0.74
|
| 1995 |
Hailstorm |
USA |
1,300
|
2,300
|
0.57
|
| 1993 |
Floods |
USA |
1,200
|
18,600
|
0.06
|
| 1998 |
Ice storm |
Canada, USA |
1,200
|
2,600
|
0.46
|
| 1999 |
Hailstorm |
Australia |
1,100
|
1,500
|
0.67
|
| 1998 |
Floods |
China |
1,050
|
30,900
|
0.03
|
|
A central question is whether changes in natural disaster-related losses will
generate increased reliance on already overburdened government-provided insurance
mechanisms and disaster assistance. Governments already are showing decreased
willingness to assume new weather-related liabilities, and tensions concerning
risk-sharing between local and federal government bodies also are evident (Fletcher,
2000)
