What is happening in Ukraine is a striking example of the crucial role that insurance can play in rebuilding a private sector in crisis. Of course, in the case of Ukraine it is about rebuilding a business network after a war of international scope, but its experience in this matter, given the obvious differences in degree, It is applicable to other contexts, such as those that occur after a severe recession or years of stagnation.
In all these scenarios, the message is clear: the recovery of A private economy always starts with insurance.
The case of Ukraine
Former US Secretary of Commerce and current US Special Representative for Ukraine, Penny Pritzker, said in early June: “A robust insurance market is essential to attract investment to Ukraine.” The problem is that very few insurers are willing to take the risk of covering volatile events if they themselves cannot cover their own risks. Just look at what is happening with property insurance in areas affected by climate change, such as Florida or the Caribbean islands.
The announcement made in Berlin last June at the Ukraine Recovery Conference by one of the world’s leading insurance brokers (AON) has therefore captured the attention of the global insurance industry, even those insurers not directly involved in the war in that country. This is an unprecedented project, developed jointly by the United States International Development Finance Corporation (DFC) and several Ukrainian public entities.
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The scheme includes reinsurance of 50 million dollars (approximately 80 billion Colombian pesos) to support insurers issuing policies to cover war-related risks to companies operating in Ukraine. In addition, the program allocates an additional $300 million (approximately 1.2 trillion Colombian pesos) in insurance specific to the Ukrainian agriculture and health sectors.
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Multiplier effect of insurance
Although these figures may seem small in comparison With billions of dollars flowing into Ukraine through international cooperation, they are based on the premise that insurance has a tremendous multiplier effect. These sums will play a crucial role in enabling insurers to price risks and issue policies to Ukrainian companies that are restarting their business activities, which in turn will attract capital and investments to the private sector.
Traditionally, through actuarial science, the insurance industry assesses volatilities based on past information; schemes such as this one in Ukraine combine this traditional approach with a look to the future. In this innovative approach, the insurance industry moves from creating products that simply protect the insured against all their risks, and becomes a developer of insurance that promotes the economic viability of its clients, with a more expeditious operation, which provides greater liquidity to each insured.
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Effectiveness of parametric insurance
This Ukrainian project is just the latest example of new approaches in risk analytics, and innovative models where new sources of capital are combined with various insurance products. The main novelty is the rise of so-called parametric insurance. During the aforementioned Berlin conference It was noted how this type of insurance has gone in recent years from being an exotic and exceptional instrument, limited to the agricultural sector, to being a powerful protection tool for all sectors of the economy.
These parametric policies pay the insured a pre-established amount based on the magnitude of a specific event, and not on the losses incurred. For example; a large global technology company purchased a policy that will deposit 50 thousand dollars (approximately 200 million Colombian pesos) into the checking accounts of each of its employees the day after a major earthquake.
(Read here: Peso vs. dollar: where is the Colombian currency headed for the remainder of 2024?)
There is no need to verify, adjust or quantify the damage. If the earthquake occurs at the magnitude pre-agreed in the policy – the parameter – the company will pay the established sum – the insurance. The Jamaican government has just acquired an insurance that will cover the reconstruction of critical infrastructure after a hurricane occurs that has the level agreed with the insurance company. These schemes, incidentally, are aligned with recent OECD recommendations on the development of climate-resilient infrastructure. The expeditious payment process becomes an injection of liquidity for companies and states, very useful in times of reconstruction or reactivation of ruined or stagnant structures.
In Colombia, the current development plan authorizes and promotes the use of these parametric insurances in all branches of insurance and for all sectors of the economy. However, neither local nor national authorities have fully taken advantage of this opportunity, which could be a catalyst for the economic recovery plan.
The example of Ukraine also demonstrates the usefulness of these insurance schemes being financed by authorities, private investment funds, cooperation entities, or the companies themselves. For example, if a municipality, in association with others, purchases parametric insurance against climate risks that affect the public or private infrastructure of its city, This small investment, due to its potential to generate confidence and peace of mind for all economic agents, will multiply investment and transactions in that area.
An economic recovery plan, such as the one currently being discussed in Colombia, could begin by reexamining cHow insurance operates in each sector and explore ways to enhance its multiplier effect.
Gustavo Morales
Executive President of Fasecolda.
