4D: What can be done to bridge the global insurance protection gap?

The gap between insured and uninsured or economic losses – currently a ratio of approximately 1:4 – presents a key opportunity for property and casualty carriers. Innovation is critical to

The gap between insured and uninsured or economic losses – currently a ratio of approximately 1:4 – presents a key opportunity for property and casualty carriers.

Innovation is critical to bridging this gap. Markets must innovate, offering risk managers products that fully cater to their needs as these emerge, grow and evolve – products that they will buy at a given rate and deliver a successful return on R&D investment.

A good example is disease risk. Recently, Munich Re revealed it was developing epidemic-related property and casualty products, in partnership with Metabiota. Who might be interested in such products? Well, if I were an international hotel group or airline I would be very interested.

In order to innovate, you need to truly understand what the risk looks like. Previously, insurers have not sought to provide cover for areas such as cyber, pandemic, brand and reputation, for instance. This is primarily because of a lack of available data against a risk landscape that is forever shifting.

In the case of cyber, historically markets have struggled to provide insurable solutions for what is a key corporate risk, much of which is intangible. In the last 18 months, however, we have seen a significant increase in understanding and, with that, the creation of more innovative products with higher limits attaching, to the point where some now insure nonphysical damage business interruption. These coverages are becoming available as loss data builds, allowing the industry to better understand the risk and encouraging necessary innovation i.e. moving the uninsured to an insured risk.

Data and analytics are critical to continued innovation. They allow insurers to measure and monitor their portfolio exposure to these risks, as well as their potential return on capital.

Benedict Burke Chief client officer, International, Crawford


Insurance plays a vital role in protecting economies when disasters occur. In addition to indemnifying losses, the purchasing process often helps prevent losses and raise awareness of mitigation measures.

tombolt_MThe Lloyd’s City Risk Index presents the first ever analysis of economic output at risk in 301 major cities from 18 manmade and natural threats over a ten-year period. It shows that, over the next ten years, emerging economies will shoulder two-thirds of riskrelated financial losses due to accelerating economic growth, with cities often highly exposed to natural catastrophes.

Economies across Latin America, Africa, and Asia currently contribute 40% to global GDP, yet represent only 16% of global insurance premiums, suggesting largescale underinsurance. Lloyd’s estimates there is a global insurance gap of around $170bn premiums – which are vital to protecting economies from catastrophe exposures. This supports the case for more resilient infrastructure and institutions, and increased global access to insurance.

Insurance is a key source of capital after a catastrophe and supports the recovery and reduction of catastrophe impacts. Investment in risk management measures, including increasing insurance take up, could mitigate associated economic losses.

There are innovative measures insurers can develop to increase insurance penetration rates. A group of syndicates recently came together to offer specialist expertise and new insurance capacity to help developing economies build resilience against natural catastrophes, committing capacity of $400m. Key to its effective deployment will be well designed risk sharing initiatives and risk diversification.

This type of approach is key to helping developing economies tackle underinsurance and improve their resilience against the economic impact of natural catastrophes, and will help close the underinsurance gap.

Tom Bolt Outgoing director of Performance Management, Lloyd’s


On the supply side, one issue causing the protection gap is catastrophe risk modeling. More models are becoming available, but for developing markets it remains a problem. Also, if catastrophe risk business is poorly regulated, and insurers are not required to reinsure properly for catastrophe risk, then the opportunity cost of writing this business is very low which leads to risk under-pricing and makes the business of catastrophe insurance unsustainable and unattractive.

EGurenkoMOn the demand side, there is considerable moral hazard in the system where governments and international donors find themselves in the business of acting as insurers of last resort, at no cost at all for those sustaining disaster losses. That supports public expectations that governments will offer disaster insurance compensation every time there is a disaster and as a result, few people are willing to buy catastrophe insurance.

Public private catastrophe pools, such as those in Turkey and Romania, are good examples of how we can close the protection gap. However, the creation of such pools must go hand-in-hand with compulsory insurance requirements introduced through national legislation. If such compulsion does not exist, experience shows the public simply will not take out insurance.

However, for me the main challenge lies on the primary side. How can we develop distribution channels, products and mechanisms which will enable us – through public private market solutions – to reach out to millions, possibly billions, of people who would never have considered buying insurance, unless it is made compulsory?

There are good examples out there of programmes where the cover has been added on to something that millions of people buy anyway, such as telecom services, water or other utility services. There are examples now for agriculture and weather risk related insurance covers, where such insurance products are automatically granted to people who spend a few dollars more on their telecom plans, for instance.

This is where the effort should really be in the next five to ten years: finding commercially viable, creative market solutions that reach out to tens of millions of people using new informational technologies. And this is the area of huge growth potential that should be promoted by the international development community, governments and the global insurance and reinsurance industries.

Eugene Gurenko Lead insurance specialist at the joint World Bank/ IFC Finance and Markets Global Practice


Guy Carpenter has been calling upon the industry as a whole to help close the ‘insurance gap’ for a number of years. We estimate that in the past decade approximately 70% of catastrophe losses globally have not been covered which equates to some $2.7trn.

Charles WhitmoreThe gap is most marked when considering catastrophe losses caused by natural perils, because these events are indiscriminate in terms of which sectors of the population and economy they effect. While the gap exists in both emerging and developing economies, it is most acute in the emerging markets where insurance penetration is still low.

Unfortunately, the gap continues to widen, primarily due to insurance penetration not keeping up with rapid asset growth and squeezed public budgets being unable to maintain funding for effective risk mitigation schemes.

At present, much of the financial burden this creates is absorbed by the balance sheets of governments, which are already stretched due to spiralling health costs and increasing social welfare needs in uncertain economic times. As a result, there is a chronic need for them to forego their role as the insurer of last resort. There must also be a change in mind-set by policymakers as current efforts focus on post-loss recovery and funding, whereas an effective strategy would include prioritising risk management and risk mitigation before the event.

Truly sustainable solutions for transferring risk from the public sector into the private re/insurance markets can only be created when there is a true meeting of minds between government and industry stakeholders. The private re/insurance market is much better equipped to price risk and therefore accept it at terms which it can assume for a longer period of time. This will enable government entities to de-leverage their balance sheets and ensure that adequate financial resource is aimed at areas where they have a specific responsibility.

Pool Re (UK Terror pool) and Flood Re (UK Flood pool) are excellent examples of ways in which the UK re/insurance industry is actively addressing the need to reduce the government’s role, and instead utilise the industry’s significant appetite to assume new sources of risk. We would hope that moving forward, such facilities will become increasingly common structures to help to bridge the insurance gap.

Charles Whitmore Managing director and head of Guy Carpenter’s Property Solutions Group

April 2016