The key role of insurance in economic development

The key role played by insurance and reinsurance in supporting economic growth were highlighted by John Nelson, Lloyd's of London president, in a speech Monday.

The role involves "improving resilience, taking risk out of the country, and helping economies recover after catastrophes – in short, we can help protect the success of emerging economies," Nelson told the Fides conference in Chilean capital Santiago.

Latin America is a region particularly susceptible to natural disasters, from earthquakes to hurricanes, where insurance can make a big difference when it comes to recovery, according to Nelson. He cited the examples of Chile, which has been able to recover from a 2010 earthquake, one of the strongest ever recorded, in a matter of a few years largely thanks to proper insurance coverage, and Haiti, which had poor insurance coverage and suffered a far milder earthquake the same year but is still struggling with the effects.

To increase low insurance penetration in the region in the face of higher costs of catastrophes was named by Nelson as one of the challenges for coming years. "While insurance penetration rates remain low, the burden falls on governments and businesses to fill the gap," he said. "This will become unsustainable as the costs of natural catastrophes increase."

The cost of global disasters has risen from an annual average of about US$50bn in the 1980s to close to US$200bn over the last decade, "and this is likely to rise exponentially because of industrial development, risk concentration and climate change."

To foster growth, infrastructure is a key area where Latin America needs to speed up development. "The region is, therefore, still lagging behind many other parts of the world in infrastructure areas, particularly in sanitation, telecoms, energy and transportation," according to Nelson. "A recent Inter-American Development Bank study showed that a 1% reduction in transport costs would increase exports by as much as 4% in Mexico and 8% in Colombia."

As an example of the impact of insurance Nelson cited the results of Lloyd's research that shows that "a 1% rise in insurance penetration translates into a 13% reduction in uninsured losses, a 22% reduction in the taxpayers' contribution following a disaster, and increased investment equivalent to 2% of national GDP."

Nelson also stressed the need for insurance to cover manmade threats, such as a market crash or cyber attack.