Cost, efficiency, product & unbundling vital to protection gap initiatives

Public and private market efforts and collaboration to narrow or even close the insurance protection gap need to be accelerated and uptake of risk transfer needs to be extended, according to Chairman of AXA Denis Duverne.

Speaking at an Insurance Development Forum (IDF) day held at the International Insurance Society (IIS) conference in Singapore last week, Denis Duverne, IDF Chairman and Chairman of the Board of AXA called for a redoubling of efforts by industry to address the protection gap.

Asia remains the region most affected by climate and natural catastrophes, and the Asian Development Bank (ADB) said that from 2000 to 2018 more than 84% of people affected by natural hazards were living in developing Asia.

The developing Asia region accounted for 55% of the global disaster death toll, and for 26% of global damages, the data shows, losing US $1.5 trillion due to natural disasters between 1970 and 2019.

As economic development continues apace in the region, the estimated costs of damage from these catastrophes as a percentage of GDP is increasing as well, while for now insurance and reinsurance is failing to close the gap between economic losses and those insured at any significant pace.

“The insurance industry and the public sector need to accelerate their collaboration into action,” Duverne explained.

He went on to call for the efforts to expand insurance penetration to increase.

Saying, “We need to drive concrete significant measures to extend the use of insurance and related risk reduction capabilities to help build greater resilience to climate risk and natural catastrophes in countries where it is needed most.”

Extending the use of insurance (as in penetration) is just one angle to this though and while accelerating the market’s efforts and work or collaboration with public sector bodies is vital, we’d suggest that extending the use-case of insurance, and risk transfer more generally, is equally or perhaps even more important here.

Insurance and risk transfer needs to be re-imagined for the 21st Century anyway, that’s becoming clear even in the most advanced economies. But nowhere is this need for a re-imagining more apparent than in the mission to narrow the protection gap.

Mainstream insurance product paradigms are just not always well-suited to delivering the cost-effective, responsive and well-calibrated risk transfer protection that can really encourage and drive significant uptake and penetration in emerging regions of the world.

In addition and in order to deliver this, the cost of the transaction in risk transfer and reinsurance needs to come down, to enable the financial support to flow and back the necessary primary insurance product roll-out in regions where penetration is lower.

That means costs need to drop.

Markets need to embrace exchanges and auctions, delivering on the promise of risk transfer at a much lower margin, while transactions themselves need to seek out the most efficient capacity they can, which combined can deliver a much greater chance of narrowing the protection gap.

Trading in risk, insurance and reinsurance in the way it has always been done, with the transactional costs and expenses that have always been there, and among the incumbents with the largest vested interests, just doesn’t seem destined to work as a way to deliver the rapid results Duverne is referring to.

Market participants need to think agility, speed, responsiveness and transparency when creating their insurance, reinsurance and risk transfer products, while the same can be said of how the transaction itself is effected as well.

There have been numerous cases of innovative emerging market insurance product development being stopped in its tracks by the costs of reinsurance and costs embedded in the traditional value-chain paradigm.

If there was ever a good reason to embrace modernity and re-imagining of the product and processes of insurance and reinsurance risk transfer, the effort to close the protection gap is clearly the best example available.

Of course, any efforts taken to make the risk transfer transaction and market value-chain more efficient specifically for these protection gap initiatives, would also be expected to roll-out and do the same more broadly across the re/insurance market.

Which perhaps explains why we’re not currently seeing a massive rush to reduce the cost of protection and the transaction itself, through any kind of efficiency adding routes so far.

Accelerating activity is but part of the puzzle when it comes to solving, or at least trying to, the issue of the insurance protection gap.

Market participant’s cannot possibly hope to drive the necessary levels of uptake unless they can erase a significant chunk of the cost in the chain and transaction, especially around reinsurance and retrocession which are vital to support the roll-out of innovative, often small and risky primary programs.

Delivering on cheaper reinsurance and retro transaction costs could deliver the necessary capacity to back protection gap initiatives and innovation in insurance more generally, helping to drive a lower-cost product to the ultimate end-user, enabling gaps to be narrowed and the world to become more resilient in the process.

Progress is being made here and technology looks set to assist, although incumbents in the value-chain are gripping tightly onto the margin that has been applied to the transaction itself for now.

This grip will weaken though, as incumbents find that the emerging service layer in reinsurance and risk transfer provides ample opportunity to deliver value to clients and as a result charge for unbundled services.

This great unbundling of the reinsurance risk transfer value-chain needs to happen before efficiency can truly flow through the transaction itself and down the chain, while those actually adding value and demonstrating it will be able to recoup some of their lost margin through the service tier of the marketplace.

For protection gap closure this evolution of risk transfer to something more cost effective, efficient, transparent and liquid, seems essential. Without this it seems difficult to imagine that the gap will be meaningfully closed anytime soon.

Encouragingly, the industry continues to make the right noises about wanting to narrow the gap, but politics, the status-quo, the cost in the value-chain and other legacy issues surrounding the product, technology and incumbent domination are all acting against this goal at the same time.

“The insurance industry has a critical role to play in helping to close this ‘protection gap’,” Achim Steiner, Administrator of the United Nations Development Programme (UNDP) commented at the IDF Day last week.

“The consequence of unmanaged risk is clear. In 2018, there was USD 160 billion of loss from natural hazard, USD 80 billion of which was not insured. The impact of this loss on lives and livelihoods is immense, especially in the most vulnerable countries and communities,” he explained.

While the industry and its stakeholders state their commitment to making a difference here, it’s clear that without fundamental change and this re-imagining of the product, plus reduction in cost and increase in efficiency, it’s hard to see progress being made all that quickly.

Duverne commented at the event, “The insurance industry has vast technical expertise on how to increase climate resilience for infrastructure assets, and risk transfer mechanisms are a critical source of funding for repairing or reconstructing infrastructure when it is damaged or destroyed by a natural disaster. To protect economic gains, enabling greater access to these capabilities should be at the forefront of the policy agenda for the region.”

We absolutely agree. The industry has the potential to close a meaningful amount of the protection gap, to the benefit of people and communities worldwide.

But it’s not just about selling the same product to new people, it’s about changing what you sell and selling it in a way that encourages emerging market protection to increase.

The rate of closure of the protection gap could be much more significant under a re-imagined risk market paradigm, where efficiency is recognised as key and costs much reduced. Which means if incumbents want to achieve something truly radical here they may have to embrace their own disruption in the process.

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