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 Many countries at risk because of $168 billion annual gap in insurance

There is a USD 168 billion annual shortfall between levels of insurance and actual economic losses caused by natural disasters across the world, according to research recently published for Lloyd's. With 17 out of the 42 countries analysed considered to be significantly at risk, Lloyd's is urging governments, insurers and businesses to do more to close the gap, according to a Lloyd's press release.  

There are many countries at risk because of this gap, and the 7.3 magnitude earthquake in Japan this month could serve as a reminder of the 2011 earthquake and tsunami, where only USD 35 billion of the estimated USD 210 billion in total damages had been insured.  

To ensure long-term viability of their business, the advice that Sindhu Srivastava, Portfolio Manager, Quant Solutions at Aviva Investors North America would like to give to insurance asset managers is that assets be managed versus liabilities in such a way that there is almost no risk to the viability of their firm. With the economic crisis, insurance companies are finding themselves with less room to maneuver today, as they had not prepared for that scenario. They need to position themselves to be ready for severe prolonged downdrafts, adequate reserving is of utmost importance, Srivastava added.  

A speaker at the upcoming GFMI Best Practice in Managing Insurance Assets Conference Srivastava said: "Liability streams need to be matched in a risk framework that considers riskiness of investments over the full cycle. This requires a multifaceted approach to investing that generates superior total return accounting for both short term and long term risks, but also meets cash flow needs with high confidence over long horizons. Investors need to think outside the box. They do not necessarily always need to match their liability stream with mostly high grade bond investments, as is the usual approach. Consider, for example, a small allocation into non-fixed income assets that produce high cash flows. Real estate and high quality high dividend equities could produce cash flow streams that are quite stable over time and might also be able to protect against a high inflationary environment. The key is to either develop these capabilities or be ready to outsource, before the actual need arises. These can add the value, the margin that insurance companies typically need."  

The underlying problem for insurance companies is essentially the regulations that are coming into play, especially in Europe, and the new economic environment.  

"More investors are now aware of the need to have enough liquidity reserves to survive a crisis with adequate margin of safety, so it is a legitimate concern that asset management in the insurance industry is changing. The more confident insurance companies are of their asset management capabilities, the better and more types of products they will be able to offer to customers," Srivastava concluded.  

Global Financial Markets Intelligence (GFMI) is a marcus evans company. The GFMI Best Practice in Managing Insurance Assets Conference will take place in New York City, January 28-30, 2013.

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