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Insurance Penetration

Cyclone Idai

Why is insurance penetration important? The recent intense Tropical Cyclone Idai, one of the worst tropical cyclones on record to affect Africa and the Southern Hemisphere, is a good case to look at.

This storm was long-lived and caused catastrophic damage in Mozambique, Zimbabwe, South Africa and Malawi, leaving more than 1,200 people dead and thousands more missing.

Cyclone Idai made landfall in Mozambique March 14 and 15, 2019 as a Category 2 storm. Then, a few weeks after, Cyclone Kenneth came ashore in northern Mozambique April 25, 2019, with hurricane-force winds and heavy rains. The storm arrived only six weeks after Cyclone Idai devastated a broad area of the country about 600 miles south of Cyclone Kenneth’s impact zone

The basic facts of the Cyclone Idai are:

  • Highest wind speed: 127 mph
  • Date: March 4, 2019 – March 21, 2019
  • Dates: Mar 4, 2019 – Mar 21, 2019
  • Damage: ≥ $2 billion (2019 USD); The cyclone caused overall losses in Mozambique and neighboring countries of $2 billion. The loss in Mozambique is equivalent to about one-tenth of the country’s gross domestic product.

However almost nothing was insured, so very few of the people affected were able to obtain prompt financial assistance for the loss of their belongings property and life.

Insurance provides a critical safety net for households, preventing them from falling into poverty by avoiding the damaging costs of emergencies such as the ones being felt from the above cyclones.

Specifically the new low cost microinsurance schemes are designed to grow insurance programs and are aimed at helping low-income people avoiding difficult, often devastating risk coping measures following such issues. This can be putting children to work, eating less food, or selling productive assets. All these have long terms impact on peoples growth.

Increasing insurance penetration promotes access to vital services, including health and agricultural services, and can promote healthier and more productive decisions.

How is insurance penetration measured? Penetration rate indicates the level of development of insurance sector in a country. Penetration rate is measured as the ratio of premium underwritten in a particular year to the GDP.

Looking at the overall figures for insurance penetration. In Emerging Asia, property insurance penetration is very low at just 1.1% – only slightly above the figures for sub-Saharan Africa. In India, the Philippines and Indonesia, insurance penetration is a feeble 0.5–0.6%. Compared to Asia’s developed countries with an average insurance penetration level of 2.4% – which is similar to western Europe – the US shows an insurance penetration of 3.3%.

These low levels of insurance penetration are particularly problematic in African and Asian countries, as many of them are exceedingly prone to natural catastrophes.

Apart from the humanitarian tragedies with high numbers of casualties, property losses after natural catastrophes invariably cause serious economic setbacks.

Studies have proven that high insurance penetration significantly reduces or even balances out these negative effects. The positive economic effect of risk transfer is thus particularly strong in emerging economies.

Social programs and technology is here now to support the delivery of microinsurance and new insurance programs to these countries. We are developing parametric solutions and programmes to support this backed up with AI and Machine Learning tech.