Protection gap is the industry’s “terrible failure” and “great opportunity”

The global insurance protection gap in both developed and emerging markets, is the industry’s “terrible failure, but at the same time it’s a great opportunity,” according to reinsurance giant Swiss Re’s Chairman of Global Partnerships, Martyn Parker.

During the Economist Insurance Summit 2016 held in London last week, Swiss Re’s Parker and Lloyd’s of London Director, Performance Management, Tom Bolt, discussed the global protection gap in emerging markets, highlighting the benefits insurance and reinsurance protection provides to individuals and communities.

“The global protection gap in a nutshell is two things for the insurance industry,” said Parker, “it’s a terrible failure, but at the same time it’s a great opportunity.”

Over the last 35 years, global economic losses from natural disasters have been on a fairly steep incline explains Parker, while the insurance industry has failed to keep up pace.

As an example, during 2011 approximately $450 billion of economic losses were recorded globally, with the insurance industry response being just 30%, highlighting a huge gap when disaster strikes, but also signalling a vast opportunity for insurers, reinsurers, and insurance-linked securities (ILS) markets to innovate and broaden its reach.

The benefits of insurance penetration in both emerging and more developed markets are plentiful, and Tom Bolt from the Lloyd’s of London specialist insurance and reinsurance marketplace, highlighted this.

Bolt explained that a 1% increase in insurance penetration is associated with roughly a 2.3% reduction in savings, “which would lead us to think that it frees up those savings for other growth in the economy, and not need it to recover from catastrophes.”

Furthermore, Bolt continued to stress that a 1% rise in insurance penetration results in an approximate 13% reduction in uninsured losses from catastrophe events, and a 22% reduction in what the tax-payer contributes, “so it’s a pretty material change if you can just get it up by 1%.”

To some extent Bolt expects penetration levels to rise in line with a growing middle class in many emerging markets, including Africa, Asia, and parts of Latin America, as awareness improves and eventually people start to understand the benefits of protecting what they have.

That being said, the fact that many developed markets still suffer from coverage inadequacy, as seen with flood protection in the majority of the world, it has to go beyond just raising awareness, and be driven by innovative solutions from the re/insurance and ILS landscape, including collaborations between public and private sector entities.

Bolt stressed that typically “when there is a will there is a way,” and if the industry can make protection more efficient and accessible, which is likely to include collaborations, the use of enhanced tech and innovation, then the market really can reach the poorest, most vulnerable people in the world.

The gap is vast, and so collaborations will likely be needed to drive the initial surge in demand across emerging markets, something which also helps more developed economies establish markets for underinsured risks, as seen with Flood Re in the UK.

Building global resilience to the impacts of natural disasters has been a hot topic in the risk transfer landscape in recent times, brought further into light by the recent COP21 climate change meeting, which highlighted the need for insurance and wider risk transfer to protect global economic resilience and sustainability efforts.

The features, capacity, and skill set of the insurance, reinsurance, but also the ILS sector are now seen as vital to building global resilience, but efficiency and demand needs to be increased across the majority of regions and risks.

As an example of utilising the varied features and benefits the re/insurance and ILS sector offers to better protect the vulnerable, raise awareness and highlight the benefits, Parker noted the use of parametric trigger structures as a means of ensuring rapid pay-out post-event, in light of reports of some aid donations taking multiple months to reach the people in desperate need.

Emerging markets contribute about 40% of the global GDP, explains Bolt, yet they only have 16% of the global insurance premiums, so clearly the task won’t be an easy one, but it does highlight just how big the opportunity is for risk transfer to have a meaningful, and important influence on people’s lives.

At the same it would open up new risks and regions to the sector, which at times of market volatility and uncertainty offers insurers, reinsurers, and ILS players with much-needed diversification and the potential for new revenue streams.

“If all we are is a reflection of the economies we serve, if we are going to reflect those economies then we need to find ways to move forward,” said Bolt.

It’s a valid and poignant notion, and further highlights the need for the industry to innovate and provide efficient, affordable protection for those in the world most in need of it, something that requires improved education, awareness, and again, innovation and a willingness to create solutions from the entire risk transfer world.