Whether for natural catastrophes or man-made perils, the existence of protection gaps is a pressing concern for the re/insurance industry. In a recent podcast, Guy Carpenter Europe’s CEO, Julian Enoizi (pictured left), and CEO of Global Analytics and Advisory, Dan Becker (pictured right), discussed how these protection gaps are manifesting – and pinpointed the key challenges concerning C-suite executives today.
Outlining the variance that exists in protection gaps – which are defined as the difference between economic loss and insured loss – Becker highlighted that these can be a consequence of many different issues beyond just a lack of insurance for individuals. “Without an insurance ecosystem to invest in research, you end up in a situation where the risks are not as well understood or quantified, and resilience measures, things like building codes, which make risks easier to manage, are not as robust.
“But that said, protection gaps can emerge in developed markets where an insurance penetration is strong.” Offering a few examples of this, he noted that it can be difficult to secure full insurance protection if you live in an area with a dense concentration of exposure because insurers can't get diversification.
Another example is in situations where the insurance pricing is higher than consumers are willing to pay, so they end up self-insuring, he said, with flood in the United States proving a very good example of that. “And perhaps the third example would be that insurers struggle to design products that cover systemic risks, things like financial crises or pandemics.”
Enoizi said that the issue comes down to two key factors – affordability and awareness as often the end insured doesn’t know that a particular catastrophe or event is not covered by their policy. Another key element to consider is that the challenge presented by the protection gap is not relevant only to natural catastrophes but in man-made perils as well – with terrorism and cyber standing out as two prominent examples.
Resilience and climate issues are key concerns for the re/insurance market – but are they front-of-mind issues for C-suite executives? Casting his mind back to when he was running insurance and reinsurance companies, Enoizi said, “When you look at the day-to-day issues that the C-suite are dealing with or considering, obviously the price you pay for your reinsurance is extremely important. But there are a whole lot other range of issues that are going on in the world.
“There are geopolitical issues… [there’s] war in Europe, which is the first time we've seen that in over 70 years. And of course, climate change, which, if you look at a survey of risk managers, always comes out as the No. 1 priority for insurance companies. And how you deal with these issues, I think, is an absolute primary concern to the C-suite, not only… as to whether or not they are going to be able to buy insurance for these things, but whether or not they're also going to need to find ways to mitigate the losses that come out of them or adapt as to avoid the losses in the first place.”
Public-private partnerships are instrumental in helping to close protection gaps, and Enoizi noted that there are multiple examples globally of where the government has stepped in to ensure that a risk doesn't only sit on the taxpayer's balance sheet but rather as much of it as possible is pushed back into the private sector. For instance, in New Zealand, there is the earthquake authority; in Australia, the existing terrorism pool has been expanded to cover cyclones.
Meanwhile, South Africa has SASRIA (South Africa Special Risks Insurance Association), he said, which was set up to cover more man-made events in terms of strikes, riot and civil commotion, but also terrorism. “But again, the South African government is looking at whether they can expand that, so that it covers natural events as well, things like drought, in that particular region.
“Morocco was the subject of an earthquake two years ago. There is a Moroccan earthquake fund. Turkey, a subject of an earthquake 18 months ago, has its own Turkish earthquake pool.” Turning his attention to Europe, Enoizi said that governments are looking – in Portugal for earthquakes, in Italy for natural catastrophes.
“And then you go across the ocean to Latin America, and you got things like the Caribbean Risk Insurance Fund,” he said. “So, these things have been set up to deal with a variety of natural and man-made issues to ensure that the government isn't always the insurer of first resort, but actually is the insurer of last resort.”
Becker emphasized the critical role that insurance plays in stimulating recovery after a loss and maintaining economic momentum. “So, any situation you have where there's under-insurance … if the government is left holding the bill, that makes it very challenging to get back the sort of economic momentum that existed before the loss,” he said. “And some places just never recover. I mean, you can look at the challenges that Haiti has experienced after the earthquake many years ago, and it's very, very challenging when only a few percent of GDP is covered by insurance.”
