The property protection gap around the world has grown wider over the past four decades as underinsurance persists for climate-related events, including floods, windstorms and earthquakes, which make up the largest share of underinsurance. Global economic losses from natural disasters reached US$337 billion (approximately CA$441 billion) in 2017, according to the Swiss Re Institute, leaving an all-peril catastrophe protection gap of US$193 billion (around CA$252 billion) for the year.
While the terms ‘protection gap’ and ‘underinsurance’ are often used interchangeably, it’s worth noting the difference between the two as the insurance industry strives to keep people and businesses protected from major losses following natural catastrophes. The protection gap is the difference between the total loss and what is insured, explained Thomas Holzheu, head of research for the Swiss Re Institute for the Americas.
“Underinsurance, on the other hand, is an economic concept that is based on the question of how much insurance should be purchased and how much actually is purchased,” he said. “There’s a difference because not everything on this planet needs to be insured and wouldn’t be economic to be insured, so companies have self-insurance [and] people have deductibles in their policies. We are all, to different degrees, capable of retaining some parts of the losses and it would be inefficient from the economic point of view to run them through an insurance company.”
If you talk about the protection gap however, a large part of the problem is underinsurance and within that are the reasons that drive people to not purchase insurance or not buy enough of it to cover the extent of their eventual losses.
“There is a lot of analysis of the understanding and the perception of insurance,” said Holzheu. “How product choices are formulated, how choices are presented, and there are concepts of bundling insurance that make the decision easier if certain perils are not sold as a standalone. [If] it’s bundled into a bigger protection package, it is easier to make these decisions.”
The government often plays a role in facilitating insurance take-up by creating regulations and transparencies that make insurance accessible for consumers. People’s perception of risk likewise contributes to the protection gap.
“People are not good at quantifying or realizing the risk of high severity, low frequency catastrophes,” said Holzheu, though he points out that there are also differences between advanced economies and emerging markets in terms of the availability and accessibility of coverage. In growing economies, there is lower financial inclusion since households might not have connections to the financial sector in their country while at the same time, potentially having lower financial literacy rates.
Nonetheless, “There are protection gaps in advanced economies,” he added. “One of the bigger issues is affordability and, on average, there is a big difference between mature economies and emerging economies, but then within a country, you have a big range of wealth and income distribution.”
While brokers can educate their clients on the insurance options available to them and what’s covered under their homeowner’s policy should a fire or a windstorm hit their region, there’s no one answer to why people don’t purchase insurance to protect against catastrophe risks and how the insurance industry more broadly can tackle this problem.
“The industry is working on this question, and there’s not a straight-forward solution found yet,” Holzheu told Insurance Business.