Advisen

Uninsured flood losses from Harvey highlight 'protection gap': Aon Benfield

By Erin Ayers, Advisen

Hurricane Harvey’s vast uninsured flood losses highlight a serious gap in insurance protection, with nearly 50 percent of natural disasters underinsured worldwide and overcapitalization in the insurance market, according to a new report from Aon Benfield.

“There is a very human dimension to this natural disaster, given the low proportion of homeowners in the affected areas that have insurance coverage for flood,” commented Aon in its Annual Global Climate and Catastrophe Report. “Beyond the immediate financial distress, it is already clear that economic losses will far exceed insured losses. As a result, the burden will ultimately fall mainly on US taxpayers.”

Aon attributed the global protection gap to concentration of exposure, increases in event frequency, and lack of innovation in the insurance industry.

“Product delivery has lagged the changing needs of corporate buyers in developed markets and personal lines coverage of natural disaster risk remains patchy. In emerging markets, insurance penetration rates generally remain very low,” wrote the firm in the report. Aon Benfield advocated increasing “the relevance of insurance” to the global economy and using available capital “to grow what is insurable and create new products that can address some of the underlying issues.”

Investors remain interested in taking on insurance risk via traditional and alternative capital vehicles, Aon noted. In the first half of 2017, capital flooded the reinsurance industry, bringing the sector’s totals to $605 billion as of June 30. Reinsurers had also shown good results in the first half of the year, driven by “benign” losses and stable investment returns. Insured losses prior to Hurricane Harvey for the first eight months of 2017 stood at $24.5 billion, lower than the 10-year average, and much of it contained within the primary insurance market.

Despite the hurricane losses, Aon Benfield predicted an “accommodating” reinsurance market for Jan. 1 renewals.

“The industry has proved itself to be very resilient over the last decade, a period that includes a major global financial crisis and the all-time record year for insured catastrophe losses (2011). Reinsurers are actively managing their catastrophe exposures and most of the larger players currently trade with extremely strong capital adequacy. It will therefore require an extraordinary loss event, or combination of events, for capacity to be materially impaired,” stated Aon Benfield.

Editor Erin Ayers can be reached at eayers@advisen.com.