AXA XL report finds 1% increase in insurance penetration reduces disaster recovery times by 1 year
Every percentage point increase in insurance penetration reduces disaster recovery times by almost 12 months, according to a report by AXA XL and the Centre for Risk Studies (CCRS) at Cambridge Judge Business School.
The report, Optimizing Disaster Recovery: The Role of Insurance Capital in Improving Economic Resilience, analysed the impact that re/insurance has on the speed and quality of recovery following natural disasters. It also outlines the growing economic impact of natural disasters over the past three to four decades.
The report defined insurance penetration as non-life premiums divided by a country’s GDP.
The report found that events in countries with high insurance penetration of 3-4 percent, including in Western Europe, Japan, Australia, South Korea, have an average recovery rate of less than 12 months. Conversely, those with very low insurance penetration, such as Bangladesh, Haiti, Nepal and the Philippines, have a recovery rate of more than four years.
The US was found to be an anomaly, having high insurance penetration of more than 4 percent, but a recovery rate average of just over three years. This is due to the fragmented nature of coverage, particularly flood, disaster response and scale of loss, the report concluded.
The quality of recovery for very high and high insurance penetration countries is better than pre-loss levels, while the reverse is true for countries with lower insurance penetration, though the report noted the differences are quite small.
Economic recovery was found to be faster than societal recovery in almost 60 percent of the cases, and is particularly pronounced in the first six months.
The report also noted that annual average loss from such catastrophes rose from an average of $27 billion in 1970-1980 to nearly $200 billion in 2010-2019. It concluded the rise was driven by global economic development and the increasing value of assets in hazardous areas, particularly in fast-growing regions such as Southeast Asia.
Jonathan Gale, AXA XL’s reinsurance chief underwriting officer, said: “The case for re/insurance is clear but is seldom adequately explained. We wanted to bring out comparative information related to speed of recovery – how quickly employment and productivity returns to normal (economic) and how quickly people are back in their houses and power is restored (societal).”
Professor of operations research at Cambridge Judge Business School and academic director of CCRS Daniel Ralph said: “With climate change events, including floods and storms, increasing in frequency, it is more important than ever to understand the levers of recovery for communities and companies.”
