Are we ready for a world without Insurance?

I have recently released a new book that explores new solutions for real estate, technology and climate change “Why Puerto Rico Now: A masterplan for resurgence, resiliency, and long-term economic growth.” In the book, I discuss our current challenges and opportunities for the insurance sector. www.whypuertoriconow.com

A NEW ROLE FOR INSURANCE

From a historical perspective, the management of our real estate has been predominantly decided by local governments who know the “lay of the land.” Local planning boards create a land-use plan that sets out a vision for green space, hospitals, residential, commercial, etc.?Both the insurance and financial sectors however are starting to realize that the risk to their specific investments is affected by the resiliency of the whole community. In essence, it is not enough to harden a single asset but that the entire system must work together.?

During Hurricane Maria in Puerto Rico, for example, many hotels sustained minor damages due to their reinforced concrete construction, hurricane windows, and backup electrical generators. However, with the port of San Juan closed (and employees unable to leave their homes to go to work), diesel fuel ran out. With no power, air-conditioning units turned off, and sealed hotels became humidity traps for bacteria and mold.?The result was millions of dollars in damages due to breakdowns in the whole system.?Insurance and capital increasingly realize that investments in specific projects are highly dependent on the resiliency of the local community.?

A WORLD WITHOUT INSURANCE

As we can observe from what is going on in Florida these days, our current insurance system is not prepared for this magnitude of climate change.?“Insurance is specifically geared towards the sudden and acute, not the gradual and chronic,”?explained Dr. Zac Taylor at a recent Urban Land Institute roundtable event held in Miami. Insurance premiums are decided on a year-by-year basis. Insurance premiums rise to compensate for the risk and eventually go back down as the memory of the crisis disappears. But how does insurance work if catastrophic events occur with more frequency? What will happen if insurance companies cannot create new profits to cover the losses??

The answer seems to be that as the “down cycle is prolonged,” private insurers will attempt to limit future liabilities by eliminating policies or leaving a high-risk location altogether. It is hard to imagine a world without insurance, but this might occur if we do not take collective action to mitigate this very real risk.

INSURANCE FOR INSURANCE

All 50 states, along with the District of Columbia and Puerto Rico, have insurance guaranty associations. Insurance guaranty associations are managed and regulated by the State. The mission of the guaranty associations is to protect the insurance industry when local insurance companies fail. The Puerto Rico Insurance Commissioner's Office (PRICO) was put to the test after hurricane Maria when it took over several defunct insurance companies, including Real Legacy Insurance, with losses of $41.9 million.??Today, Florida's insurance guaranty association is facing a multitude of challenges and millions of dollars in record lawsuits.

Insurance companies limit their risk by taking out insurance or reinsurance. Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to define their total loss in case of disaster.?Reinsurance is perhaps the most critical mechanism for managing climate risk within the built environment. Described as "insurance of insurance companies," the idea is that no insurance company has too much exposure to a huge event or disaster.

INSURANCE-LINKED SECURITIES

Insurance-linked securities or "ILS" emerged in the 1990s as a way for Reinsurers to tap into larger pools of global capital. ILS in the worldwide reinsurance industry is approximately $95 billion, representing about 20% of the total available reinsurance capacity.?

The positive news is broad-based securitization allows participants to access a new pool of global investors such as pension funds, sovereign wealth funds, and university endowments.??The challenge is that, like mortgage-backed securities in the 2008 Great Recession, ILS doesn't mitigate risk.?In the words of Lauren Compere, a managing director of Boston Common Asset Management, "they've just shifted it to another actor in the financial system."?

The interconnected global insurance systems mean that risk concentration will likely increase as climate-related losses spread across different geographic bounds. In other words, a hurricane will not have to happen in Puerto Rico or Florida for rates to go up in these locations.

RISK DIVERSIFICATION NOW

As the interconnected global insurance systems spread across different geographic bounds, we must figure out how to diversify risk protection from government-backed insurance programs to more of a private-centric system.??In my book, Why Puerto Rico Now, I discuss, how parametric insurance products for example make payments based on the intensity of an event. For example, wind speed, earthquake magnitude, the volume of rainfall, and the amount of loss calculated in a pre-agreed model.?

Unlike traditional indemnity settlements that require an on-the-ground assessment of individual losses, parametric insurance relies on a "triggering mechanism using a predefined methodology based on variables that are external to both the individual policyholder and the insurer. For example, if a hurricane hits 150 miles per hour, a payment is automatically made of x dollars.

For these and other ideas on climate resiliency and new technology, you may find my new book on Amazon?“Why Puerto Rico Now: A masterplan for resurgence, resiliency, and long-term economic growth.”

Available in Kindle, Audio and Paper (hardback and paperback).

www.whypuertoriconow.com

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