Commonwealth Business Council wants more emphasis on insurance as a disaster risk management mechanism in emerging markets

Developing countries need to act urgently to implement disaster risk management mechanisms in order to reduce their vulnerability to economic losses resulting from natural disasters, according to a paper prepared by the Common-wealth Business Council (CBC) and discussed at last week’s Commonwealth Fin-ance Ministers Meeting in Georgetown.

The CBC paper is calling for more public/private sector partnership in developing countries and emerging markets to create insurance safeguards against the catastrophic economic losses which it says invariably follow natural disasters in poor countries and emerging markets.

Noting that emerging markets are far more vulnerable than developed countries the CBC paper notes that while the 2004 South East Asia Tsunami resulted in more than US$15 billion in economic losses only US$2 billion or 15 per cent of those losses were recovered through insurance. By comparison, following the 1994 Northridge earthquake in the United States more than 50 per cent of the economic losses were recovered through insurance.

According to the CBC paper while the average global penetration of disaster risk insurance as a percentage of GDP was around 7.6 per cent, similar insurance cover in developing countries was 3.6 per cent. The paper notes that the low level of insurance cover in developing countries meant that economies that were already fiscally challenged were compelled to fill the insurance coverage gap by providing social security systems and financing post-disaster relief programmes.

“A strong public/private sector partnership would narrow the gap between economic and insurance losses, stabilizing government finances and strengthening the insurance sector,” the paper says. It also points to the launch in recent years of “a number of successful public/private sector partnerships” which have included providing financing to government through catastrophe bonds, the creation of government catastrophe pools and by “designing affordable insurance solutions that can be distributed through channels that reach the poorest communities.”

Noting that private insurance companies were ‘enthusiastic” about promoting insurance markets, the paper points out that those companies face various obstacles including supply or demand-side constraints, The report also notes that low wages in developing countries make insurance unaffordable to much of the population. “Also, there tends to be low public risk awareness and understanding of insurance products,” the paper adds.

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