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Can We Insure against Tsunamis?

Most of the discussion surrounding how to respond to Asia’s tsunami disaster has focused on government relief programs and official schemes to implement early warning systems. Little discussion has focused on the promotion of private risk management institutions, notably insurance.

This is unfortunate. Insurance companies provide professional, finely detailed risk management that respects the complexity of the dangers to be hedged and responds creatively to individual needs. Promoting private insurance may seem an indirect response to the tsunami disaster, but it is a rational – and powerful – response.

Insurance companies have not penetrated many of the regions that suffered the greatest losses. According to a study by the Insurance Information Institute, expenditures on non-life insurance in 2003 amounted to only 0.83% of GDP in Indonesia, 1.19% of GDP in Thailand, and 0.62% of GDP in India, compared with 5.23% of GDP in the United States.

Foreign aid is no substitute for insurance. Charity inspires, reassuring us of our humanity, but it is often capricious. You wouldn’t want to rely on it. Indeed, when deciding how much disaster aid to offer, countries often seem to be influenced mainly by their leaders’ concerns about how others will view them. Charity responds to attention-grabbing events, often neglecting less sensational disasters.