Wednesday, 23 September 2015

Supermarket fire in Burundi, insurance, and opportunities for suppliers of fire prevention equipment

On Monday, fire destroyed a supermarket in Bujumbura.  While not on the same scale as the fire last month in Gitega or the catastrophic fire at Burundi's central market a couple of years ago, it does point to a tendency for fires to destroy centres of trade in Burundi.  The fire service does not seem to be able to respond, so surely there are opportunities for suppliers of fire prevention equipment.

My rough calculations of the available profits would be something like this:

Suppose there is a market valued at US$1 million, and it has a 10% chance of being destroyed by fire in any one year.  An insurer sells an annual policy, and would charge for the expected cost of damage (equal to US$1m*10%=US$0.1m) plus a risk cost.  The risk is pretty big and uncertain (10% chance of $1m), so the insurer has to provide a lot of capital to protect against the chance of loss.  They have to put up the full $1m for a year, and would want to earn a good return on it - say 30%.  So the risk cost will be US$1m*30%=US$0.3m.  The total premium would be $US0.1m+$US0.3m=$US0.4m.

Suppose instead that the risk of destruction was much smaller and the amount of damage much more certain (it is expected to be 3%, and never more than 20% of the market's value).  The expected cost would be lower (US$1m*3%=$0.03m).  The insurer would have to put up US$1m*20%=$0.2m to cover the risk, and would charge US$0.2m*30%=US$0.06m.  The cost of insurance would be US$0.03m+US$0.06m=US$0.09m.

The gap between the two insurance prices is $US0.4m-US$0.09m=US$0.31m.  That's a third of a million dollars for sharing between the market owners and the suppliers of the fire prevention equipment.  Although insurance may not be widely used, the risk borne by traders is self-insurance with an equivalent value, so they would be likely to be willing to pay well for prevention equipment.

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