Articles - The Risk and Rewards of Urbanisation


At some point between 2005 and 2010 humanity crossed an important threshold. According to the United Nations population division, this was the first time in history when more people were living in cities than in rural areas. By 2030, the number of people living in cities will grow by another 1.4 billion to 5 billion.

 By Kurt Karl, Chief Economist Swiss Re

 The growth of urbanisation goes hand in hand with economic development, and so it may not be so surprising that 90% of the growth in urban population will come from emerging economies – especially India and China. 

 As these economies grow, the growing numbers of houses, office blocks, bridges, cars, factories will all require insurance. Growing incomes and newly accumulated wealth will increase the opportunities for life insurance products. Changes in social structures will add to the value of health insurance and care solutions.

 But there are also enormous risks for the insurance industry as the concentration of wealth into dense clusters drives up the costs of natural catastrophes and pandemics. For this reason, it is worth taking a closer look at the dynamics of urbanisation, and the impact it will have on our industry.

 Driving urbanisation

 There is no ‘standard’ definition of urbanisation. At its essence, the concept covers the ways in which rural areas develop into towns and cities. Historically this has been driven either by people leaving rural areas and moving to cities or by the organic expansion of cities into the surrounding countryside as the population grows. Urbanisation can also be the result of smaller cities and towns linking up by expanding urban or industrial clusters. The Yangtze River Delta region of China and the planned Delhi-Mumbai Industrial Corridor project in India are both striking examples of this process. Finally, existing cities sometimes develop into ‘megacities’ with a population of least 10 million inhabitants. In 2011 we had 23 such cities; by 2030 there will be 37.

 As cities grow and rural areas transform into towns and cities, there is a fundamental socio-economic change taking place. This leads to a new risk landscape as both large numbers of people and large amounts of economic wealth become concentrated into relatively small regions.

 Urbanisation changes the environmental landscape and issues such as air and water pollution start to become very important. On the human level, there is a much better understanding that migrants from the country need access to basic social services to support them. There is also a better awareness of the risk of social unrest when large numbers of city-dwellers cannot find access to employment, health care, and good housing. 

 Opportunities for insurers

 For insurers in emerging markets, non-life lines present the most obvious growth areas. Motor insurance is particularly attractive, driven by both an increase in personal car ownership and by larger commercial fleets and greater public transport and logistics needs.

 Cities cannot exist without infrastructure and infrastructure cannot be developed without investment. It is estimated that $43 trillion will be invested in urban infrastructure between 2013 and 2030.For insurers, this presents two opportunities. Firstly, the construction of large infrastructure projects requires financial protection for the governments, companies, workers and investors involved. After completion, there are the on-going premiums from conventional property and casualty insurance.

 Urbanisation and industrialisation go hand in hand. Insurance is the cornerstone for managing risks in industrial production. Growth is not limited to the production side, but also to the consumer side. Better informed consumers are more likely to sue companies for faulty or damaged products. Where this is supported by the legal system, insurance is vital.

 The move to a greater urbanised social structure is also an opportunity for a growing life and health insurance markets. Life insurance products become more important as the number of people who are earning reliable incomes increases, and as people become aware of the opportunities to manage their financial situation. 

 Healthcare structures are also likely to be affected by changes in the social fabric. We can expect a growing number of elderly people who need care. We can also expect that those people who traditionally provide care are engaged in formal employment and therefore not able to give the same level of support. As this happens, there will be a greater demand for health insurance products and a greater involvement for insurance in areas such as long term care.

 Challenges and the way forward

 The move to more and larger cities also throws up some challenges for insurers. The high concentration of wealth in relatively compact urban zones can act as an amplifier for loss scenarios from natural catastrophes. As the Thailand Floods in 2011 showed, the interconnectivity in global supply chains can lead to massive damage when industrialised urban areas are hit. Increased population densities mean that health hazards can spread to a large number of people in a relatively short period of time.

 There are a few ways forward for insurers. Firstly, those who can tailor solutions to cater to the diverse needs inside urban centers will have an advantage over those who take a one-size-fits-all approach. This extends beyond the products themselves, but also the way those products are distributed. We will also need strong partnerships between governments and the private sector, with insurers offering their high level of risk management expertise and their financial strength to provide an essential part of any city risk management.

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