National safety net

Thursday, 1 June 2017 00:00 - - {{hitsCtrl.values.hits}}

The lack of insurance for emerging economies is becoming more of a problem as the costs of natural disasters increase. The Sri Lankan Government’s move to insure all houses in the country against floods was perhaps the best policy decision made last year. The move also gives the insurance industry a chance to increase its scope to deliver a societal need more cheaply than the Government can.

This gap between economic and insured losses — called the protection gap — is a major determining factor of how well a country recovers from a natural disaster. The gap is much wider among emerging economies where insurance penetration is low. Yet there appears to be a growing sense of urgency among policymakers and insurers to address the problem.

Last year the National Insurance Trust Fund (NITF) paid off Rs. 15 billion in applications and will likely be called on to repeat the process this year.

But it also means that country’s such as Sri Lanka will have to put aside larger bags of public funds for reinsurance purposes. After the latest Cabinet meeting the Government announced that this year the reinsurance premium has increased to Rs. 15 billion from Rs. 10 billion in 2016 with an additional Rs. 500 million to be allocated to expand the existing coverage. In May 2016 the Government turned to claim flood insurance just six weeks after it was gained.

Sri Lankan non-life insurers have low retention in the non-motor segment, with more than two-thirds of the fire class, which typically covers flood-related policies, being reinsured. The fire class accounted for just 5% of total non-life net written premium in 2015, according to Fitch Ratings. Local regulations require insurers to cede 30% of their reinsurance to NITF, with the balance reinsured with the global reinsurance market. Natural catastrophe losses such as floods are covered under reinsurance treaties and excess-of-loss reinsurance covers.

Fitch, in a report published last year, predicted floods are likely to raise awareness and increase demand for non-life insurance. Sri Lanka’s uninsured population is high, with non-life penetration at around 0.6% of GDP. The non-life insurance market is dominated by motor insurance (65% of gross written premiums in 2015). Motor is covered under excess-of-loss reinsurance covers in the event of a natural catastrophe.

Changing weather patterns, leading to increased frequency and severity of errant rainfall, raise long-term risks and highlight the need for insurance and proper pricing of such risk, as well as robust flood defence mechanisms.

In April 2016 Sri Lanka was among 20 new countries that were added to a global ranking listing climate vulnerable nations or V20. Since then the Insurance Development Forum, a collaboration of insurers, the World Bank and the United Nations have grouped together to help developing countries pool risk to make insurance from natural disasters more accessible to governments.

Sri Lanka’s timely step undoubtedly helped the real economy recover faster in 2016 and resulted in a payout larger than what was given after the 2004 tsunami. It is time both the insurance industry and policymakers joined together to build a national safety net.