With its pool of financial reserves, the global insurance market provides considerable adaptive capacity for weather-related damage to property, life, and health. The global insurance market—perhaps the world’s largest industry—represented $2.9 trillion in premiums in 2003, or approximately eight percent of global gross domestic product (GDP). To put this in perspective, the insurance industry’s revenues make it equivalent to the third largest country in the world in terms of GDP.

In 2003, total premiums in emerging markets represented $314 billion (up from $270 billion just a year earlier) or 11 percent of the global total, with growth rates often dramatically higher than those in the industrial world (twice as high, on average, between 1980 and 2000) and often exceeding GDP growth rates. Emerging markets are poised to represent half of world insurance premiums by the middle of this century.

Insurance premiums are rising in part because the economic costs of natural disasters are growing, as is the insured share (up from a negligible level in the 1950s to approximately 20 percent of the total today). Insurance market conditions vary regionally. Current insurance penetration (premiums per GDP) is lowest in Africa and Asia and highest in Latin America. Premiums as a percent of GDP are lowest in the Middle East/Central Asia and Latin America and highest in Africa. The smallest market by total premiums is the Middle East/Central Asia, and the largest is South and East Asia (excluding Japan).

The economic costs of weather-related events are high, totaling $1 trillion worldwide from 1980 through 2003. During this period, insurance covered four percent of total costs of weather-related disasters in emerging markets compared to 40 percent in high-income countries. While relatively small, insurance payments to people in emerging markets associated with these losses were three-times the magnitude of international aid. The potential for changes in weather patterns, including both average conditions and extreme events, would likely raise the demand for insurance whether the changes are a result natural variability or human-induced climate change. At the same time, increases in weather-related damage create uncertainties and challenge insurers’ ability and willingness to assume or affordably price these new risks. Sustainable development can contribute to managing and maintaining the insurability of these risks and thereby reduce the need for individuals and governments to absorb the costs.

Because of the multi-national structure of the insurance and reinsurance markets, and other factors, the economic consequences of extreme weather events are becoming increasingly globalized. The growth of foreign insurers’ premiums in emerging markets averaged more than 20 percent per year through the 1990s. During the late 1990s, the U.S. alone was collecting approximately $40 billion in premiums each year for policies placed in other countries. This globalization of the risks and consequences of natural disasters is a significant reason for the insurance industry to seek to reduce the risks of claims worldwide.

Cost-effectively mitigating the damage from (and thus the costs of) natural disasters would be a boon not only to the insurance industry and developed nations but to public health and sustainable development in emerging markets. One of many strategies is curtailing deforestation, which reduces risks of wildfire, malaria, mudslides, and flooding as well as reducing greenhouse gas emissions. Sustainable energy technologies can also mitigate risk; for example, distributed power systems coupled with efficient energy end-use technologies reduce business interruptions resulting from damage to the power grid.

In sum, involving the insurers of extreme weather events in the development and execution of strategies that contribute to public health and sustainable development would enhance disaster resilience, reduce the magnitude of losses, and thus help increase insurers’ willingness to establish, maintain, and expand a constructive presence in emerging markets. We offer the following principles for establishing priorities:

• • Focus on efforts that enhance the fundamental insurability of weather-related risks.
  • Couple insurance efforts with core development activities.
  • Foster efficient domestic government and private insurance risk sharing.
  • Utilize public-private partnerships.
  • Build domestic/local insurance and risk-management capacity.
  • Discourage complacency in response to insurance availability or government aid.
  • Respond to insurers’ regional priorities.
  • Address life and health insurance issues along with those related to property damage.
  • Raise awareness within the insurance sector.
  • Harness market-pull forces (e.g., foster aggregated demand for insurance products).
  • Understand insurers’ relationship to the security implications of climate change.
  

Using these principles, this report outlines a sampling of specific initiatives that could be undertaken to develop improved information and analysis, sustainable technologies to enhance resilience to disasters, and innovative insurance products and services. Specific criteria should be developed to help prioritize the opportunities. As insurers have many “fires to fight,” and environmental issues such as natural or human-induced climate change must compete for attention among other strategic concerns, key target markets (economic, demographic, and geographic) should be identified, and proposed initiatives should clearly define their relevance to the insurers. It is incumbent on public entities seeking partnerships with insurers to establish and demonstrate the value of these partnerships. This study is a step toward that goal.