Global Under-Insurance

Research by the Centre for Economic and Business Research, commissioned by Lloyds Insurance, shows many countries severely under-insured and exposed to the long-term costs, to governments, insurers and businesses, of catastrophic events.

The research measured 42 countries’ levels of non-life insurance against the level and frequency of natural catastrophes, creating a global map of insurance levels across countries at various stages of economic and industrial development, and identifying those which are ‘better’, ‘moderately’ or ‘under’ insured. While the UK, the US, Germany, Austria, Australia and New Zealand, were identified as being ‘better’ insured, 17 other countries were estimated to be ‘under’ insured, with a total annual insurance gap of around $168 billion! Surprisingly, perhaps, some of the 17 under insured countries included high-growth economies such as China, Brazil, Mexico and Turkey. As their asset values and industrial sectors increase, could a growing economy cope with another year of natural catastrophes like 2011? Who would foot the bill?

The research findings also suggest that there is a virtuous cycle between levels of non-life insurance penetration, benefits to business and wider GDP growth. The cycle starts when businesses recognise the value of their assets and take out insurance to protect them, so freeing up more of their capital for investment. Insurers, in turn, invest premiums in domestic stock, creating GDP growth and a rise in the value of assets. A 1% increase in insurance penetration is associated with increased investment of 2% of national GDP.

Insurance clearly also protects against financial loss following a disaster. A 1% increase in insurance penetration, a significant investment, would lead to a 13% reduction in uninsured losses and a 22% reduction in taxpayer contributions to recovery following a natural catastrophe. The research also examined and ranked the levels of non-life insurance in 16 industries across 18 countries, including transportation, mining, manufacturing, financial services and construction. Some of the results are surprising, with construction and manufacturing, for example, both appearing very low down the ranking.

Overall, the research shows that a one percentage point increase in non-life insurance penetration is linked to an average increase in per capita GDP of around $6,000 across the 42 countries analysed. As countries become richer, non-life insurance penetration increases in tandem. However, the increased GDP per capita cannot be wholly attributed to growth in insurance penetration – as people become wealthier their demand for insurance is likely to increase. The relationship is complex; insurance is likely to be a driver of economic growth, but growth in the non-life insurance industry is also driven by economic expansion itself.