Everything is insurable; or is it?

Have a look at this article from Lloyd's website. I think it makes interesting reading.

Is everything insurable?

29 May 2009

Insurance can play a bigger role in providing vital financial assistance to catastrophe-hit areas and in helping some of the world’s poorest regions to prosper, but should not be seen as a panacea for the new risks being created by the white-hot pace of technological development, says the Chief Executive of Lloyd’s.

Insurers play a vital role, oiling the wheels of the economy, allowing entrepreneurs a safety net to take risks that will ultimately push the economy forward and benefit society as a whole, says Richard Ward, in a speech given to a meeting in Tokyo of the Geneva Association, the organisation for the study of insurance economics today.

There may be a great opportunity for the industry to increase its footprint in the longer term, but there are limits to what is insurable, says Ward.

New technologies

New technologies currently being developed—such as nanotechnology to treat illness and disease, genetic modification of crops to counter famine and carbon sequestration to respond to climate change—push the boundaries of insurability.

That is because there is insufficient data to price these risks and understand the frequency and severity of potential losses created by these new perils.

The impact on the environment of the accidental release of a synthetic biological agent is unknown, but could trigger claims so large they could threaten the industry’s capital base.

In these instances, insurers cannot assume such exposures alone.

“Governments should provide the backstop as they do for terrorism and other similar risks. Our industry does not want to be seen as Luddites; but we have to firmly require the condition of insurability before we risk our shareholders’ capital,” says Ward.

Resist pressure to go into long-term deals

Long-term insurance deals have been proposed to help pay for the changes needed to adapt to climate change, but should be resisted, says Ward.

Advocates argue that firms will be able to use the money they save through fixed-premium, multi-year insurance cover to pay for the measures necessary to protect their assets against rising sea levels and more frequent and violent storms.

But it is unclear what will be the effects of climate change, making it impossible for insurers to offer fixed cover for years ahead, says Ward. “Climate change means the risk is changing, but we don’t know how much or how fast. Now is not the time to start guaranteeing premium rates or even insurability over a long period—this could lead society to make the wrong choices as well as putting more risk than appropriate on our balance sheets.”

Insurance could be extended to communities

There are instances, however, in which insurance could be extended to provide tangible help to hard-pressed communities, such as offering much-needed cash in the immediate aftermath of a natural catastrophe.

A model similar to the Caribbean Catastrophe Risk Insurance Facility, which combines funding from governments and the World Bank with capital from insurers, reinsurers and the financial markets to pay out in the wake of a hurricane or earthquake, could be extended to offer pre-funded disaster aid to other regions such as Africa and India, suggests Ward.

Microinsurance

Microinsurance provides another large, untapped area of massive potential. Only 3% of the 4 billion people living on less than $2 a day have insurance and while some successful projects are already under way these could be significantly increased to offer the world’s poorest people financial stability to help them build greater prosperity, says Ward.

But he adds a note of warning: microinsurance needs to be offered in conjunction with the United Nations Framework Convention on Climate Change to promote development in sustainable areas, rather than vulnerable places that may have to be abandoned in future due to the effects of climate change.