Examining global protection gaps

Living through times of uncertainty and change implies higher risks, but individuals and businesses are increasingly living in a world where their wealth, income and health are not adequately protected.

Recently, the Global Federation of Insurance Associations (GFIA) put a US$3 trillion figure on the protection gap covering pensions, cyber, natural catastrophe and health risks.

These gaps are driven by supply-side factors like insufficient insurance or government protection and demand side factors such as lack of adaptation to risks, affordability challenges, spending preferences, or lack of awareness of risk.

For general insurers, the focus is on natural catastrophe and cyber risks. New Zealand has high levels of insurance cover for property so the nat cat gap is small relative to many other countries, but even so there are uninsurable risks making public sector involvement inevitable. The cyber protection gap is huge both here and overseas.

GFIA says insurers alone cannot address all protection gaps. Narrowing protection gaps is a responsibility of both the private and public sector. Insurers bring their risk management, modelling and distribution partnerships, and public stakeholders can bring the appropriate regulatory frameworks, public awareness campaigns and in some instances public-private partnerships to close the gaps.

Four megatrends – technology (connectivity, cyber risks), climate change (more frequent and severe events), demographic and societal change (ageing society) and macroeconomic and political issues (inflation, changes to the world order) – are having a significant impact on the gaps. These give rise to new, rapidly evolving risks and reinforce existing ones.

The cyber gap is estimated as almost US$1 trillion, but it could be a lot more. This figure does not include second order effects such as lost business or reputational damage. It is estimated there were 628 million ransomware attacks globally in 2021.

The nat gap is smaller at not insignificant at US$159 billion in 2021 with wide variability around the world. Nat cat losses are expected to grow driven by climate change and increased urbanisation and asset values.

GFIA makes recommendations for closing the nat cat and cyber protection gaps.

For cyber, these include developing:

• security standards and best practise for users to follow and actively support the private sector through public awareness campaigns and training programmes.
• guidance on good cyber security for IT systems which will help security measures in a cost-effective way and may help reduce premiums.
• with the insurance sector, a cyber-incident reporting framework
• with the insurance sector, work to identify the data that would be most helpful for risk modelling then aggregating that data in a secure and confidential way to support risk modelling.
• bolstered efforts to peruse and prosecute those perpetrating cyberattacks.
   

For nat cat gaps, these include:

• improving consumer and business access to information about natural hazard risks.
• educating and informing people about the benefits of insurance.
• restricting construction in high-risk areas.
• work with the private sector to reduce risks.
• where steps are taken to address insurance affordability, letting insurers price risk on a sustainable basis and aligning steps with risk reduction measures that avoid moral hazard.
• involving the insurance sector to inform local planning, build codes and flood control planning.
• not applying excessive taxes and levies to insurance that affects its affordability therefore widening the protection gap.
• not creating moral hazards after a disaster by providing financial assistance which deters people from insuring their properties.
   

We do some of these things well in New Zealand, but not all.