As nations come to terms with their own circumstances, difficult choices will have to be made. Many of the challenges facing societies carry with them immense fiscal costs. Much of these costs fall to governments to address. The opportunity for closer collaboration between the private (re)insurance market and governments to address the direct challenges of catastrophe event funding is therefore clear. Increased insurance penetration will also bring the added benefit of improving societies’ understanding of risk and their associated costs.
Many of the hazards and threats listed in Marsh & McLennan Advantage’s new report, Building National Resilience, present significant fiscal and financial risks to nations, businesses, and households. Although broadly recognized, this knowledge doesn’t reliably inform decision-making by these entities, leading to a persistent reliance on disaster recovery financing at the expense of up-front measures that would lessen impacts.
This tendency to rely on emergency government funding can present problems, particularly as the costs of responding to a disaster add up and unanticipated expenses arise.
Government accounting for critical risks is often less than systematic. Many processes often assess the direct losses from historic disasters rather than the longer-term economic impact, and report on payouts for specific incidents or by specific authorities rather than expected longer-term liabilities from those events. At the same time, few countries attempt to quantify future disaster scenarios as economic outcomes, and fewer still use such analyses to inform fiscal risk assessments and financial planning. This can result in inadequate budgeting for contingent liabilities, sometimes resulting in the public purse paying an ever-higher share of the costs of increasingly expensive disasters (as with windstorm events in the United States over the past 30 years) and event impacts that are much more consequential for national stability than anticipated (as with drought and floods in Argentina in 2018). Moreover, the ability of many jurisdictions to cushion fresh crises is constrained by historic high levels of public and private debt.
Either from a legal obligation or an implicit commitment, post-disaster financial assistance is often provided to households (and sometimes businesses) whether or not they have taken steps to protect themselves. Moreover, national governments struggle to control liabilities relating to assets and infrastructure in the hands of subnational authorities – cost-sharing responsibilities are often unclear or else constrained financial capacity at the local level renders them unviable.
Guy Carpenter is working with clients to develop a comprehensive view of the risks governments today face that takes into account the longer-tailed economic repercussions inherent in many crises.