The protection gap – underinsurance in emerging and developing economies and the gap between economic and insurance losses – has been a hot topic for the world’s leading reinsurance companies and brokers at this year’s Monte Carlo Rendez-vous.
It’s the opportunity that is on every reinsurance CEO’s lips, as they seek to find a positive message to present to their shareholders and the watching media in this challenging underwriting and investment environment.
In a market that is faced with abundant and ongoing pressure, from excess capital, new entrants, the capital markets, reductions in buying, consolidation of reinsurer panels and difficult global financial market conditions, the reinsurance industry is trying to sound positive by focusing on the next big opportunity.
Work has been done to identify the opportunity, its size and the amount of risk capital that could be required to help narrow this gap. The capital markets and ILS have a huge role to play, as traditional insurance and reinsurance market capacity is lacking when you see the significant numbers required to begin to bridge the gap.
But to date, despite the fact microinsurance has been a thing for many years and many major reinsurers have been working with governments on catastrophe facilities, pooling and other initiatives, the efforts have been lacking, according to broker Willis Re.
Willis calls the fact that there is a widening protection gap, despite the current excess of re/insurance capital, a “market failure.” Strong words, but perhaps well-aimed, as there have been numerous failures in the re/insurance industry efforts to gain market share in new regions and emerging economies.
Sustainability of these efforts is a real problem so far, with many re/insurers looking to areas such as Asia-Pacific as a way to gain a foothold in a new market. So they set up initiatives, it all goes well for a while, but then losses occur, or they realise it’s not so simple, then either put up prices or pull out altogether.
Insurance or reinsurance initiatives in emerging regions need to be focused on supporting local market development.
That means, while the big European or Bermudian reinsurer may launch the effort, they need to be prepared to allow and support local insurance and reinsurance markets to develop, which could even see them partially sidelined in years to come.
Work to support and provide risk transfer to the capital that supports the development of the local market and economy.
By all means establish your own local and regional units to develop a local market, ensuring that you then have a stake when things take off, but don’t try to dominate and certainly don’t expect to be able to run an emerging market business strategy in the same way as the London, Bermuda, New York or Zurich office.
“The global re/insurance industry has an abundance of capital ready to be allocated,” Willis Re notes, but despite this, “economic losses from natural disasters continue to rise and the protection gap is steadily increasing.”
Currently, climate related insurance is only available to 100 million people, Willis Re explains. The G7 group aims to increase that to 500 million by 2020, which doesn’t leave much time.
This needs a tiered approach, perhaps working from both the top-down, with peak risk transfer and bottom-up, with microinsurance and weather index schemes.
The capital markets and ILS structures such as catastrophe bonds could provide the top-layer peak disaster, catastrophe and weather risk transfer.
This needs to be provided not just to sovereigns or governments and insurance companies in the regions, but also to banks, corporations and other entities which suffer financially after major disasters occur, with ramifications for the local area, their employees and the regional economy.
Protect the capital and investment coming into these countries and regions (top-down), in order to support the continued development of the local insurance markets (which work bottom-up).
Meet in the middle where alternative and traditional capital, hybrid schemes, risk pooling and other initiatives can help to broaden access to insurance and reinsurance and the local re/insurance markets can begin to thrive in a more sustainable manner.
It’s no good selling 1 dollar a day insurance policies to the poorest, if after the first major disaster or weather event the price becomes 2 dollars because there has been a lack of responsive risk financing at the levels above, where the microinsurance companies need support.
Equally, while sovereign catastrophe bonds and risk transfer are required, alone they cannot help the country to truly close the protection gap, as you need people to actually become insurance consumers, not just countries and corporations.
Corporations, perhaps the most difficult link in the chain, need to take responsibility for the disaster exposures they face in emerging regions and developing economies (as well as developed). When disaster strikes, globally active corporations have a habit of moving; leaving employees, locations and regions lacking a major contributor to economic prosperity and local GDP.
With risk transfer in place, corporations should find that not only do they receive financing to recover more rapidly from disasters, but this supports their employees and the GDP of the regions they operate in. It might even encourage corporations to provide their workers with insurance, helping to perpetuate this narrowing of the gap.
The Willis-led initiative to get companies to disclose their 1 in 100 year exposures to catastrophes and weather risks is a great start on this road.
If companies began to disclose potential exposures their shareholders will quickly see that protection is lacking. Join this effort with one that encourages companies to be better employers, to provide their workers in emerging regions with insurance covers and you may find the gap begins to narrow even more.
Of course, the sovereign tier, the peak risk transfer, as well as the microinsurance layer and distribution network to reach real consumers, are all required as well.
Without a tiered approach, each layer alone could struggle and find itself exposed to market forces, the whims of the major re/insurers backing such schemes, competition, political will, major disaster losses and other influences.
All tiers are required and a coordinated approach to risk transfer and insurance needed to make this sustainable.
A concerted effort; bringing together the depth and liquidity of the capital markets, alongside the expertise in risk, underwriting and distribution of the insurance and reinsurance markets, alongside the will of companies to do the right thing and better protect themselves and their employees, plus the micro level initiatives, presents both the biggest opportunity for re/insurers and the ILS space, as well as the biggest opportunity for this protection gap to be narrowed.
Of course the protection gap is also evident in the most mature insurance markets, such as the U.S. where earthquake risk is vastly underinsured, flood risk is in the hands of the government, both at a time when re/insurance and ILS capacity is available to take on those risks.
This and similar opportunities also require concerted efforts from the market in a joined up manner, through which big strides could be made to get these risks better financed and remove the burden from taxpayers.
The views above may be overly simplistic, we recognise that narrowing the protection gap is among the biggest challenges that this industry faces and a complex initiative. But this is a topic we at Artemis are passionate about and it does require a joined-up, re/insurance industry and capital markets-wide approach.
Finally innovation is key. Without it the narrowing of the gap may be a long way off.
New business models and technologies will be required to bring insurance to the masses in emerging regions, while new strategies and structures will also be required to bring the peak risk transfer that is required, to make it cost-effective enough to be widely used and provide the necessary liquidity such a program of disaster risk capital might require.
Willis Re highlights that the re/insurance market is failing on the protection gap.
It’s time insurers, reinsurers, the capital markets and the ILS community stepped up and demonstrated that they can pull together to turn that failure around and make it into a market success.
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