Sovereign Parametric Catastrophe Bonds as means to address the Protection Gap in emerging countries

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Summary

 

  • Of the $232bn. of economic losses from natural disasters in 2019, only $71bn. was insured.
  • 35% level of catastrophe risk coverage in advanced countries downsizes to only 6% in emerging economies.
  • Out of existing disaster risk finance arrangements, the Sovereign Parametric Catastrophe Bonds seem to be the most viable instrument for the ECIS region.

As mentioned by AON in their Weather, Climate & Catastrophe Insight: 2019 Annual Report, last year brought $232 billion of economic losses from natural disasters, whereby only $71 billion was actually insured. It outlined that the world continues to face a fundamental issue of insurance gap, especially in emerging and developing countries, where losses for businesses and governments are only increasing following a decade-long rise in natural catastrophes linked to climate change.

Sovereign Parametric Catastrophe Bonds as means to address the protection gap in emerging countries

As mentioned by AON in their Weather, Climate & Catastrophe Insight: 2019  Annual Report, last year brought $232 billion of economic losses from natural disasters whereby only $71 billion was actually insured. It outlined that the world continue to face a fundamental issue of insurance gap, especially in emerging and developing countries, where losses for businesses and governments are only increasing following a decade-long rise in natural catastrophes linked to the climate change.

Protection gaps exist in both emerging and developed markets. However, with estimated by Swiss Re 35% level of catastrophe risk coverage in advanced economies versus 6% in emerging economies, the issue is far more important for the developing world, where the cost of disasters is not just measured in the deaths and injuries that they cause, but also in their long lasting economic impact on survivors and countries. Natural disasters there do not just destroy homes, factories, shops and fields; they can altogether annihilate years of economic growth, which is essential for the low and mid-income countries.