Comment - The profits of doom.

(From Reinsurance)

The international forum convened to mark the tenth anniversary of the Kobe earthquake was charged to discuss international efforts at prevention and recovery from such catastrophes. As an industry, which in part seeks to profit from the certainty of catastrophes, the insurance delegation could be regarded somewhat suspiciously among the great and the good of the United Nations, academics and charities.

However, the insurance industry does have a role to play in preventing and protecting against such disasters though it is simplistic to assume that this role should be confined to selling more insurance in underinsured markets. There are myriad complexities accounting for the under-insurance of certain markets and the line is not simply drawn according to rich versus poor. Take Kobe which, ten years after suffering an economic loss of $150bn, has seen no real growth in the amount of earthquake insurance purchased by its citizens. Japanese state residential earthquake insurance may, in part, account for this nonchalance at the individual level and shows how a safety net can easily be mistaken for a hoist even in developed economies.

Cultural issues also account for under-insurance in some markets and are particularly acute in many countries affected by the recent tsunami (though even in California - 11 years after Northridge - we see less than 20% of homeowners buying earthquake coverage). The insurance industry perhaps should adapt to the cultural framework in much the way that banking has adapted the Shari'a principles governing financial investments. This is not to deny that economic development is still the main factor in insurance take-up in any country; the question is how to instil the need for insurance once personal assets reach a certain level.

Aside from education, the industry has considerable scope to improve its existing standards and systems. Gauging risks and the incorporation of exclusions and clauses to safeguard those risks is our very bread-and-butter, but it is surprising how badly it is performed throughout the sector. In the case of Thailand, under-employment of CAT modelling allowed for inaccurate pricing of ...