Risk appetite should not blind us without companies risk map and seated by the gear shift of the institute boards. Amount and type of risk that an organisation is willing to pursue or retain is an obvious risk appetite. A particular risk, if could not be managed, can and should be transferred to an insurer. Insurers’ capital strength determines the size and the type of their appetites. They can retain risks transferred to them from individuals and organisation. That is be it profitable or not and should re-insure all risk beyond their retention capacity. The re-insurers in turn, insures those risks beyond their capacity to another re-insurer.
In the secondary market, the most common one is of the financial market where we find equity market that multinational companies float their share prices to the general public. This is in order to finance more in service industries like insurance and banks. These two aspects constitutes the modern financial system and benefits many via secondary markets. It’s worthwhile to note both primary insurers and re-insurers are operated through technical reserves and floating of shares in line with adequate capital structures. They can invest in the short term and long-term in the secondary market which usually brings in better results.
Insurance can be considered as secondary market for primary insurers, more specifically as a mechanism to transfer mega risk and re-insurers a share and have a particular mega risk through “retrocession” in the secondary market.
The question should be, is there any risk beyond re-insurers? If so where should be a good arena to insure? If not, who will have the appetite? Should the government be the final stop? From practical vantage points of view, catastrophic loss significantly affects them more. They are not the final point or appetite edges of risk. Following 9/11, the capacity of re-insurers and their profitability and natural happenings the like of the Japanese nuclear disaster, no capital is enough to re-insure.
No reinsurer or government has the capacity alone to cover all types of big risks.
The burden is shared and split among participants in the risk management frame work. This implies that the function of reinsurers, primary insurers and individuals and private organisations, will take part in splitting the risk and develop their tolerance. When mega risk is shared among a large number of re-insurers and the primary insurers take off their appetite, what is left then can be managed by government financial framework. This includes uninsured risks and that is because, the economy has to be regulated via effecting indemnity and compensation.
Catastrophic type of losses affect a country’s economy in two ways. According to the sigma report, almost 80% of the loss sustained by catastrophic risk, is in fact’ MEGA’, is found uninsurable.
So what could be the remedy for insuring ‘mega ‘ risks? Creating the common pool for indemnifying the victims requires integration between the potential insured, the insurer and the third party either the re-insurer and or the government through a disaster recovery program
I would argue that the creation of this common pool can serve as financing the general public suffering from catastrophic loss and give chances the insured to come back the system. The rationale behind financing risk is not only sharing risks which creates magnitude and becoming beyond the insurer’s appetite as it provides a better return, in terms of values added in economic transaction than indemnifying from either the re-insures or primary insurers. This can even be stretched to trans-national companies involvement with world class re-insurers and is the very good way to control the impact from becoming catastrophic.
As aviation industry becomes more complex it becomes highly exposed for catastrophic, political and terrorism risks. The impact of them, will go to beyond the burden of government and the general public or taxpayers. Possible remedy will not only sharing the “mega” risk but other alternatives that help create a common pool by the public, the private sector and the third parties that can form government. These days, PPP’s (Private, public & partnerships) are becoming the norm and make way for insurance services that help curb mega risks.
The PPP method can share catastrophic risks including that can be a mega, for particular insurer and reinsurers and provide efficacy, in addition to saved currencies. This is due to holding the risk at home, in case those can be fully retained by insurers like ETHIO-RE, (which will play a significant role in sucking mega risks as it can have a room to design adequate mechanism for uninsured parts).
PPP’s, more so from commercial users are attractive for insurers. A company can share the irregularities by taking the venture risk by investing in the risk management of its partners. How about the kind of risk we are facing in Ethiopia? Who will take the first step to develop and adequate program for indemnifying loss of life and resources? Should it be the government, the philanthropies or the insurance companies? Or, should it perhaps be the combination of all?
The government can provide compensation in its national program via its disaster recovery program but when the loss is huge and when it is not caused by natural disasters, such us what happened in Dire Dawa, the rampant risk and associated peril become uninsured. The sector in fact is challenged by insuring some exceptional cases such as natural causes and political unrest. Not only these types of coverage are now an issue when insured, risk of terrorism and cyber attacks are also an issue of concern by insurers.
What is the moral aspect, legal requirement, and economic activity and the system overriding one? The psychological makeup of the general public and its acceptance are the underlining concern.
Whether we like it or not, we need to shift our focus to the loss of life and property exhibited nationwide. The Ethiopian financial sector role may not be seriously affected due to such peril but do we really have the same appetite like so far?
Insurance companies should expand their scope by measuring every risk and develop products already sought by the penitential insured. Therefore, that maybe why, we need partnership between the private and public is paramount. As any risk beyond insurers can be mitigated, it’s through partnership via such institutions as Ethio-Re.
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