Nepal is one of the world’s most disaster-prone countries. The recent 7.8 magnitude earthquake, which marked the worst natural disaster to hit Nepal in more than 80 years, is a strong testament to the country’s vulnerability.
While the economic losses are yet to be fully assessed, the destruction that we have seen emphasizes an issue that the country urgently needs to address: chronic underinsurance is an underlying driver of risk.
Nepal’s Low Insurance Penetration
A recent report from Nepal’s Pokhara University estimated that the life insurance penetration rate and non-life insurance penetration rate in the country in 2009/2010 was as low as 2.77% and 1.84% respectively. This means that Nepal’s insurance penetration rate is two times lower than in India, and four times lower than in China.
Such levels of underinsurance in areas known for their high catastrophe risk exposures, with the government ultimately footing the bill when a catastrophe strikes, is not sustainable. Increasingly, the insurance industry, wider financial sector, policy practitioners, and the science community are working together to find a practical solution.
The earthquake is estimated to have caused $3.5 billion in economic losses to date. Only a fraction of this cost will be incurred by insurers, with GIC Re bearing the brunt of the insured losses as the largest international insurer in Nepal.
My colleague Julian Roberts, Co-Head of Willis’s Weather Practice, commented that the earthquake demonstrates the fact that preparedness, let alone insurance penetration, is woefully low. He believes that “we’ll probably find that there was more insurance carried by the tourists and expat community out there than all the Nepalese combined.” Surely, the global community needs to act to protect citizens who are so vulnerable to natural disasters.
During last month’s World Conference on Disaster Risk Reduction (WCDRR) in Sendai, Japan, Nepal’s Minister for Foreign Affairs, Mahendra Bahadur Pandey, voiced similar concerns:
We are seriously concerned that Nepal continues to remain one of the most vulnerable countries in the world to disasters such as earthquakes, flooding, landslides, glacial lake outburst floods… It is also estimated that the human loss in Kathmandu Valley alone, should there be a major seismic event, will be catastrophic.
This statement now seems prophetic following the loss of more than 7,000 lives.
Change in Thinking?
The question that now lingers for Nepal’s government is whether this earthquake will trigger a much-needed behavioural and cultural change in the way the country thinks about risk management. According to the 2015 Global Assessment Report on Disaster Risk Reduction, Nepal ranks highly amongst countries whose government does not have the financial reserves or access to contingency financing to allow them to absorb losses, recover and rebuild following a disaster. Put another way, Nepal lacks the financial capacity to absorb the impact of a 1-in-100-year loss, with a gap estimated to be between US$ 928 – 3,300 million.
In order to foot such a staggering bill, and to avoid putting further pressure on the humanitarian system’s capacity to deliver emergency aid, a South Asian catastrophe pool, along the lines of the African Risk Capacity, could offer a practical solution to help member states better prepare and respond to earthquakes and other natural catastrophes in the region.
The WCDRR meeting culminated with the adoption of the Sendai Framework for Disaster Risk Reduction, which was signed by 187 UN member states, and will form the backbone of international disaster resilience policy over the next 15 years.
Hopefully, the focus of the international community and the steps that are being taken to raise risk awareness and equip countries, organizations and citizens to manage their exposure to catastrophe risk, will prevent the next disaster causing such destruction to peoples’ lives and livelihoods.
We can be sure that there will be more earthquakes. Laurent Bollinger of the CEA research agency has been studying the historical patterns of earthquakes in Nepal and told the BBC that “early calculations suggest that [the] magnitude-7.8 earthquake is probably not big enough to rupture all the way to the surface, so there is still likely to be more strain stored, and we should probably expect another big earthquake to the west and south of this one in the coming decades.”
We need to make sure that, next time, we are much, much better prepared.