The global insurance protection gap is one of the most pressing issues facing our society. It exacerbates exposure to a wide spectrum of risks, from natural disasters, pension savings gaps and healthcare expenses to cyber incidents.
Against this backdrop, The Geneva Association’s research intends to contribute to promoting multi-stakeholder solutions, including risk transfer via insurance, by shedding light on the underlying causes of underinsurance across the board, i.e. in the life and non-life sectors in mature, emerging and frontier markets.
Understanding and Addressing Global Insurance Protection Gaps
The report, published in March 2018 and authored by Kai-Uwe Schanz, Special Advisor to The Geneva Association, offers an updated quantification of protection gaps in the areas of natural catastrophes, cyber risk, health care and pensions. In addition, the report puts forward a comparative taxonomy of root causes, distinguishing between high-, middle- and low-income countries in order to enhance the understanding of insurance protection gaps as a function of economic stages of development. Finally, the study discusses potential remedies and contributions from insurers, governments and private-public partnerships. As capitalised risk absorbers, facilitators of cost-efficient risk transfer and diversification, and enablers of more risk-conscious behaviours, insurers have a vital role to play in this mix of solutions. These are some of the specific findings.
According to Munich Re, the natural catastrophe protection gap (uninsured losses as a share of total losses) has narrowed steadily over the past 30 years, from 78 per cent to 70 per cent. This global trend, however, masks huge differences between the various country income groups. Progress in terms of shrinking the gap was basically limited to high- and upper middle-income countries. Alarmingly, there was hardly any progress in lower middle- and lower-income countries, with protection gaps persisting in excess of 95 per cent.
The least researched protection gap is cyber risk. A comparison of the current aggregate global damage from cyber incidents with today’s cyber premiums generated by the insurance industry suggests that virtually all cyber losses remain uninsured and, from a macro perspective, insurance-based transfer of cyber risk still lacks any real relevance. Lloyd’s recently attempted to quantify the cyber risk protection gap, based on modelled economic loss scenarios of up to USD 53 billion (i.e. equivalent to losses from a major hurricane) and protection gaps of about 90 per cent.
The report reviews a number of empirical studies which show that the reasons for insurance protection gaps lie with both demand and supply side factors. On the demand side, affordability remains a relevant obstacle, primarily in developing and emerging insurance markets. In addition, numerous studies suggest that a lack of awareness, as a result of poor financial literacy or poor general education, plays an important role in explaining underinsurance, also in countries with higher levels of per-capita income. Product appeal and service quality matter, especially in advanced insurance markets. This also includes the ease of buying insurance cover, and rising customer expectations in the wake of digitisation. Policyholder trust in the context of insurance protection gaps is particularly relevant for developing and emerging markets which are frequently characterised by relatively weak legal and regulatory systems for enforcing payment of valid claims. Cultural and social factors can also help understand insurance protection gaps, ranging from differences in risk aversion to factors attributed to religion, as shown by various empirical analyses focusing on low-income countries. Behavioural biases are of a more general relevance. One example is loss aversion, i.e. individuals being more sensitive to small losses than large gains. In insurance, the premium is a certain and near term expense, whereas the claim benefit is uncertain and distant, and, therefore, perceived as a potential loss.
Transaction cost is one of the most prominent examples of supply-side obstacles. In non-life insurance, for example, about 30 cents of each premium dollar are generally absorbed by distribution and general administrative expenses. In addition, imperfect and asymmetric information is a long-standing feature of today’s insurance markets. It can also explain insurance protection gaps as it is set to lead to adverse selection. Furthermore, institutional parameters, such as the legal and regulatory environment, are major determinants of insurance supply. Last but not least, certain risks do not meet the most fundamental criteria of insurability and are considered uninsurable from a commercial viability point of view.
XXVI International Insurance Convention
Deputy Secretary General Antoine Baronnet represented The Geneva Association at the XXVI International Insurance Convention, hosted by the Colombian Insurance Association in Cartagena, Colombia which took place on 4-6 October 2017. He presented the key findings of the 2017 report Harnessing Technology to Narrow the Insurance Protection Gaps.
Antoine Baronnet presents at the XXVI International Insurance Convention