Urbanisation in emerging markets presents risks and opportunities

Global urban population to grow by 1.4 million by 2030: Swiss Re

By 2030, the world’s urban population will have grown by roughly 1.4 million people, with 90% of the increase coming in the emerging markets, according to Swiss Re’s latest sigma study, Urbanisation in emerging markets: boon and bane for insurers. 

The report found that Asia and Africa will see the biggest rise in urbanisation rates in the coming decades, as well as in urban populations.

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“It’s estimated that China will account for 20%–that’s 276 million people–and India for 16% or 218 million people, of the increase in the global urban population between 2011 and 2030,” said Amit Kalra, co-author of the sigma report, in a press release.

A prominent feature of the urbanisation will be rapid growth of small and mid-sized cities alongside ongoing development of urban clusters. The number of ‘megacities’ – those with more than 10 million inhabitants – in the world will rise to 37 from 23 in the same period. Nineteen of these will be in emerging markets, with 13 in China and India combined.

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The need to accommodate ever-growing emerging market urban populations will entail huge infrastructure investments, estimated at $43 trillion (USD, in 2012 constant dollars) between 2013 and 2030, and yield a projected $68 billion in construction cover premiums. The development of urban/industrial clusters and expansion of production facilities will likely drive demand for commercial insurance. The aviation, engineering and liability insurance sectors should also benefit, states the report.

Rising levels of income and asset ownership generated by urbanisation should drive strong growth in non-life personal lines, including motor and homeowner insurance. In 2012, motor insurance accounted for 45% of the total non-life premiums written in emerging markets and further growth is forecast, based on an expanding middle class and increased demand for large-scale logistics services.

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The main re/insurance opportunity will likely be in emerging Asia, where the urbanisation rate is lower than in Latin America and in Central and Eastern Europe. China and India are expected to account for around half of emerging-market infrastructure-led commercial insurance opportunities.

Urbanisation brings fundamental socio-economic change and a new risk landscape. With higher population density and concentration of assets, towns and cities are more vulnerable to health hazards and prone to large losses should they be hit by natural disaster events.  Furthermore, there is growing recognition amongst policymakers in emerging markets of the importance of providing migrants adequate access to basic needs such as shelter, healthcare and schools.

Recently, more attention has also been given to environmental issues such as air and water pollution. From an implementation perspective, re/insurers can bring their expertise to partner with governments and local municipalities to manage the challenges facing modern cities. Risk transfer to the private sector can be an integral part of city risk management to help alleviate the financial and personal burden that can strike many in the wake of a catastrophic event.

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“Urbanisation is leading to enormous concentrations of property values – particularly in high growth markets. Given the still very low insurance penetration in those markets, this can result in a massive gap between potential economic losses and insurance payout, if such a metropolitan city is hit by a natural disaster. It is important that insurers work with other stakeholders to improve risk coverage to reduce the potential financial burden to governments and individuals arising from natural catastrophes,” said Gabor Jaimes, head of property product management Asia-Pacific, in a release.

Reinsurance can also support local insurers in emerging markets manage capital and risk exposure. In order to remain solvent, domestic insurers need to have adequate capital or use reinsurance to be able to cope with large-loss events. Risk adjusted pricing is often a challenge for insurers in emerging markets given poor data quality on historic losses and lack of modeling experience on potential risk exposure.

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Transcontinental Media G.P.