Insurers Simulate the End of the World: It’s not a Bad Thing

Major disaster simulationOn March 11, 2011, Japan was devastated by a deadly double-blow of a magnitude 9 earthquake, followed by a tsunami of Biblical proportions. The Fukushima nuclear plant, despite stringent safety standards, suffered a level 7 meltdown, adding to the loss of life and property. The triune disaster caused over $360 billion in damages and there are those who argue that the impact was felt globally as the global supply chain (Japanese components are a key part of many industrial and consumer goods) was disrupted. Insurers were hit hard, losing billions of dollars.

While it may seem heartless to be discussing a natural disaster in economic terms, the speed of a country’s recovery, economic or otherwise, from such a disaster is dependent almost entirely on how quickly the country’s infrastructure and businesses can be brought back into action. Insurers play a critical role in this process. It’s not just how much wealth they can pour back into the stricken country that’s important, but also the speed at which they can do so. If they’re unable to take the financial blow, they fold, and their clients find it harder to rebuild.

Hope for the best, prepare for the worst

So it’s a sign of sound financial planning and responsible citizenship, that in November 2016, 17 major insurers in London engaged in a two-week simulation of the disastrous combination of a cyber-attack on US power grids, a category 5 Florida Hurricane, the financial failure of a major insurer and a 16% drop in global stocks. It’s an improbable, but not impossible concatenation of bad luck, and is a good way to test the industry’s resilience.

The simulation included some of the best and brightest in the UK insurance landscape, including Lloyds, Hiscox, Aon and RSA.

Do they know something we don’t?

With some of the best financial technology on the entire planet at their fingertips, we certainly hope they have inside information that enables them to plan for our financial future.

According to NASA, climate change will increase the frequency of certain natural disasters. Increasing urbanisation means that larger and larger populations are concentrated in smaller, more vulnerable areas. The economic and humanitarian impact of natural disasters is therefore increased, simply because more people are hit at once.

So they’re not expecting a zombie apocalypse or any other world-ending events. It would, however, be extremely irresponsible of the insurance sector to not run some war-games from time to time.

The ‘war games’ were observed by the UK finance ministry, various ratings agencies, and the Prudential Regulation Authority. The aims were to find out what was needed to weather mass global disasters, and to find out how ready the UK is for such a scenario.

So how did it go?

Overall, the results were reassuringly positive. The conclusion was that the insurance sector has sufficient resources, liquidity and capital to deal with a series of major disasters and still survive. There were concerns about the effects on the reinsurance industry over the long term, however.

The simulation is good news for the UK insurance market, too, because this projected resilience is reassuring to potential insurers, and is likely to drive more business their way.

On the whole, the fact that insurers are running such simulations is not cause for alarm. After all, they’re not actually increasing the likelihood of such disasters. It’s a sign that they’re becoming better at what they do, and want to prepare for even the most unlikely of conditions, so that our cities, people and economies can bounce back faster. This is the key to recovery, after all.

You can have the best disaster response teams in the world, but if somebody isn’t around to clear the rubble and rebuild transport, medical, agriculture and employment services, then long-term recovery cannot occur. It’s reassuring to know the big boys and girls with the financial muscle to facilitate such recovery are more than capable of doing the job that’s in front of them.