The rallying cry has sounded — to “close the protection gap”, the difference between what is paid out by insurance and the total cost of some incident or disaster. Here is an issue that can unite and promote the insurance industry, extending benefits to those in peril by expanding the insurance sector. Having ex-post access to funding after a loss, we know, can bring important benefits.
Yet in reality, there is not just one, but three distinct insurance “protection gaps”, each with separate causes and each requiring different remedies. These protection gaps are so different to one another that we should stop treating them as a single category. Lumping them together can cause confusion.
In this series of four blogs, I will explore each of these three distinct gaps, together with the role of protection gap analytics, and the actions we can plan to address these protection gaps.
This is the second blog in a series of four blogs examining three potential “protection gaps” and the importance of “protection gap analytics”. To read the first blog post in this series, click here.
Year-by-year, we can check to see if the gap between insured and economic disaster losses in emerging economies is starting to shrink. The gap remains resolutely stuck in the range 80 to 100 percent uninsured. Even a 90 percent average flatters the proportion, as coverage is concentrated in high value hotels, factories and central business districts whereas almost all ordinary houses are without insurance.
We should not be surprised how the emerging markets gap stays so wide.
See what happened in Japan. Unregulated mass rebuilding after the war led to a rising toll of flood disasters. In one single year in the 1950s, more than a million properties were flooded. Then in 1959 there was Typhoon Vera and the Ise Bay storm surge flood catastrophe in which more than 5,000 died. In 1960 the Government declared the level of risk to be intolerable and directed that seven to eight percent of government expenditure should be invested in funding disaster risk reduction. The annual investment proved successful and by the 1980s the annual number of houses flooded had reduced to only three percent of its 1950s level.
For any emerging economy the question can be asked: when did the nation reach the equivalent of Japan in 1960 and start to invest in disaster risk reduction. China passed the point of “intolerable disaster risk” towards the end of the 1990s, while India is undergoing that transition today. This is not just investment in physical disaster risk reduction, but also good risk governance and education.
Insurance is a product of this disaster risk management culture.
This is the final blog in a series of four blogs examining three potential “protection gaps” and the importance of “protection gap analytics”. To read the first blog post in this series, click here.
We are not going to be able to take effective action to reduce any of these three protection gaps unless we can first learn how to consistently measure the difference between insured and total loss. Such measurement means we can know the current situation as well as set appropriate targets and monitor progress in reducing the gap. It can also help to focus investment and action.
At present, the only form of measurement is to acknowledge the difference between insured loss and the estimated total economic loss once the claims have settled, one or two years after a significant disaster.
In the same way that probabilistic catastrophe risk models were developed to enable insurers and reinsurers to look beyond the latest event loss, so the same models are now required to monitor the protection gap. This is the focus of “protection gap analytics”.
This blog was originally published on InsurTech Gateway by Hambro Perks, click here for the original blog.
It is a fascinating time to work in the risk analytics business.
Traditional risks are changing, with much of this change being driven by technology. From the challenges posed by autonomous vehicles to the rapid digitization of the “smart home”, with automatic detection of threats such as fire and theft, systems are getting smarter and risks are changing.
Other types of traditional risk however still offer tremendous opportunities — last year’s storms in the U.S. have shown that even in one of the world’s most established insurance markets, uninsured losses are still a major problem. Barely half of the losses from Harvey, Irma and Maria were insured — the rest lies with the uninsured victims of the disaster, or if they are lucky, with the federal government who will help them rebuild.
This “protection gap” between those who have adequate insurance and those who do not, represents both a huge societal challenge, and a massive opportunity for the insurance market.
This is a reprint of a “Trading Room” interview from Trading Risk magazine, please click here to visit the magazine website.
Opportunities abound for investors willing to embrace the resilience gap, according to RMS global managing director Daniel Stander
How does the Protection Gap offer opportunities for investors?
I’m afraid you’ve pushed one of my buttons with your very first question! I’ve been trying (unsuccessfully it seems) to move the debate away from the “protection gap”. I much prefer to talk about the “resilience gap”. This isn’t me being a pedant. The language we use here is important. Framing the problem in terms of “protection” grounds the debate in risk-transfer solutions.
But we all know that risk capital alone cannot address the fact that communities all over the world are frequently brought to their knees by the impacts of extreme events. Risk financing is no silver bullet. Those at risk — from the individual homeowner to the elected official governing a sovereign state — need much more than just contingent capital to materially increase their resilience to acute shocks. They need to develop a deeper understanding of the risks they face — and how it compares to their desired ability to withstand extremes.
More than that, they need to understand what interventions offer an acceptable ROI — from enforcing building codes to preserving nature-based defenses. And then of course they need to be prepared to respond effectively when the ground shakes or the wind blows, lest the economic impacts escalate. Opportunities abound for investors – but they will only be seized by those who can embrace the totality of the “resilience gap” and position their risk capital in the totality of the need.