Making societies more resilient to large risks

At a time of increasing resource constraints, governments are faced with an ever broader array of risks ranging from natural catastrophes, such as earthquakes and hurricanes, to pandemics and terrorism. Adapting to climate change is another major challenge for most countries, particularly in the developing world. The recent earthquakes in Haiti and Chile were tragic reminders of the enormous strain that one single disaster can put on a government and a whole nation. But they also poignantly revealed how a country’s level of preparedness and management of risk can make all the difference when a disaster strikes.

These challenges require a joint response from the public and private sector. Yet, the exact role of insurance as a partner in delivering new risk transfer solutions for large risks is not widely known among governments. Swiss Re's 2010 Global Risk Briefing for Ambassadors, held on 3 March, sought to shed more light on the possibilities of such collaboration. Designed for foreign diplomats based in Switzerland, it provided participants an opportunity to learn more about innovative partnerships that enable governments to transfer large risks to the private sector and use this approach to make their societies more resilient. The discussions illustrated how governments can manage large risks more systematically and how insurance can contribute to these efforts along the way.

The stakes are high and the risks are rising. An estimated 3.4 billion people worldwide are already threatened by natural hazards, and insured losses from natural catastrophes have jumped from an average $5.1 billion per year in the period 1970-89 to $27 billion annually over the last two decades. By 2030, increasing climate risks could cost countries up to 19 percent of their total gross domestic product, according to the report "Shaping Climate-Resilient Development", published in 2009 by the Economics of Climate Adaptation (ECA) project.

With the prospects of a post-Kyoto deal hanging in the balance, governments are increasingly turning to the domestic front to protect their societies against the growing threats of a changing climate. "An international agreement on climate change is an important policy tool to curb global carbon emissions," says Dan Maxim, a senior diplomat from Romania who attended the Global Risk Briefing, "but the growing uncertainties associated with a range of interconnected risks will concern us in any case, and so we urgently need to find ways to address them."

The case studies in the ECA report were designed precisely to respond to these demands. Covering eight different regions of the globe, from Maharashtra in India to Florida in the United States, they showcase a common methodology to analyse and manage climate risk across hugely diverse locations. The findings reveal that up to 68 percent of expected losses from climate change can be averted using cost-effective adaptation measures. And for those damages that cannot be prevented at a justifiable expense, governments can off-load risk to the private insurance and capital markets.

Swiss Re believes that public-private partnerships are a good and efficient way to provide adequate coverage to local populations exposed to large risks. "We need creative solutions to problems emanating from climate change, terrorism, pandemics, and other risks," says Pakistan's top diplomat in Bern, Ambassador Ayesha Riyaz. In her view, enhanced dialogue between public and private sector partners is critical for finding "tailor-made solutions that make societies more resilient to large risks."

The global insurance and reinsurance industry is a natural ally to governments seeking to secure financing before a disaster occurs. Such partnerships have already produced a number of innovative transactions. Among them are weather index solutions in Africa and India, catastrophe bonds in Mexico, and parametric natural catastrophe covers for Caribbean nations including Haiti. Insurance solutions such as the 2009 Mexico MultiCat Program, designed to provide funding for immediate disaster relief, have substantial potential for being replicated elsewhere because they can readily be adapted to the specific risk exposure of other regions.

But since one approach clearly does not fit all countries, meeting the challenges of a changing risk landscape requires constant innovation. The combined resources and expertise held by public and private institutions have much to contribute toward this endeavour.

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