Survey
Tackling the protection gap
Every natural disaster is a tragedy in its own right, but the damage done to uninsured communities is particularly devastating, often affecting the poorest communities and those least able to afford the necessary reconstruction efforts. There is much debate about what the industry can and should do to extend its coverage, so Bermuda:Re+ILS asked readers for their views.
“Nearly six out of 10 respondents admitted more people might buy coverage if it were simpler and easier to understand.”
Whether or not a community has insurance coverage can determine whether a disaster causes prolonged hardship for years to come, or is a catalyst that triggers regeneration and accelerated economic growth.
The protection gap affects lines of business and communities all over the world, but is greatest in emerging markets, where the benefits of having insurance may make the biggest difference.
Bermuda:Re+ILS wanted to understand the problem and the potential solutions better, so we turned to our readers for answers.
Figure 1:
In which lines do you see the most problematic protection gap?*
*Respondents could choose more than one option
Where’s the gap?
More than seven out of 10 respondents to our survey cited catastrophe coverage as the area with the most notable protection gap (Figure 1). It is a result that may be influenced by the importance of this business to the Bermuda market, but is surely justified based on the severity and frequency of cat losses, and the relative lack of re/insurance penetration in some of the markets most affected by natural disasters.
In a very comfortable second place came cyber, the relative new line of coverage on the block. Cyber is a risk that is universally acknowledged to be a widespread and rapidly growing problem, and one to which just about every business in the world is exposed, to some extent.
Unlike the other risks on the list, however, it is also one where the coverage offered by the re/insurance industry is relatively underdeveloped, with carriers investing huge resources to expand in this area.
Property and casualty (P&C) and life cover were relatively far behind on 29 percent and 27 percent, respectively.
Figure 2:
What can re/insurers do to tackle the protection gap?*
*Respondents could choose more than one option
What can be done?
The respondents to our survey made it clear that there is plenty more that re/insurers can do to tackle the protection gap issue. By far the biggest action, they agreed, was to create new, more relevant products, that potential customers would not be able to resist buying (Figure 2).
That is, of course, easier said than done, but given the almost universal acknowledgement that the industry must follow this course of action, there can be little doubt that the product development people must be working very hard on this.
Developing new products cannot be the only answer, however, unless respondents believe products currently on offer are not fit for purpose. While cyber products are new, and have to contend with the relative paucity of historical data on which to base their assumptions, other lines have been around for much longer and have had time to adapt to meet their clients’ needs.
Nearly six out of 10 respondents admitted more people might buy coverage if it were simpler and easier to understand. This is an issue that has been pushed to the top of the agenda by the controversy around business interruption coverage and the confusion over whether pandemics were covered.
The disappointment many policyholders felt when they learned they did not have coverage for pandemics, principally because COVID-19 did not cause property damage, could exacerbate this problem, chipping away at trust in the industry.
The success of insurtechs which offer simple, quick coverage with reduced form-filling, and the hype around parametric coverage, all speak to a considerable appetite for greater clarity around coverage.
At a time of rising prices, 43 percent of respondents said price could be a significant factor in driving the protection gap. While many understand the value of insurance, it is an expense at a time when money is often very tight. Many will see the logic that it is better to spend a little now than a lot later, but the reality is that many priorities are competing for limited cash, and until a problem has manifested itself it is always tempting to put it off and hope for the best.
A relatively modest 27 percent of respondents thought the problem could be resolved by improving the marketing of products.
Figure 3:
How important is investing in digital technology to closing the protection gap?
Digi is the answer
If the answer is to invest in better technology, what was the question? It could be just about anything it seems, including closing the protection gap.
More than half of the respondents to the survey agreed that re/insurers refining their digital strategies would constitute a “big step” towards closing the protection gap, with nearly a quarter claiming it is not one of, but the, answer to the problem (Figure 3).
Taken together that means 79 percent of respondents see re/insurers’ improving their digital strategy as either one of several factors, or the single biggest factor, in closing the protection gap.
Understanding the full implications of this answer warrants further investigation, but clearly investing in technology can help with several of the points raised in the previous question. Technology can help re/insurers develop better products, by giving them more granular understanding of where and how their customers experience losses. It can also help them to simplify their products, as insurtechs have already shown.
Not all of our respondents are such committed technophiles, with 14 percent relegating it to the status of just another factor among many, and 7 percent seeing no connection at all between investing in technology and closing the protection gap.
Figure 4:
Which parts of the industry are most responsible for tackling the protection gap?*
*Respondents could choose more than one option
Who can do the most?
It is clear that many stakeholders have their part to play in helping to close the protection gap, with at least 40 percent of respondents laying the responsibility at the feet of every group on our list (Figure 4).
At the top of the list is governments, with 61 percent of respondents saying they have a responsibility to address the issue. Further investigation might tease out a little more detail about what form this might take, and whether respondents advocate state-mandated coverage—as seen in the auto industry in many parts of the world, for instance—or they envisage a more subtle approach. Either way, there is little evidence of free market dogma among our respondents.
In joint second place, and only marginally behind, were brokers and customers. The point has already been made that products can be too complex for some customers to easily understand—or, perhaps, in some cases to trust.
One important role of brokers must surely be to help demystify these products for their clients and help them to see exactly what is, and is not, covered by the different policies on offer. Where protection gaps emerge as the result of exclusions, brokers can identify these gaps, either recommending different coverage that eliminates them, or additional coverage to plug them.
Insureds themselves have a responsibility for managing their own risk. As the old saying goes “you can lead a horse to water, but you can’t make it drink”.
The final two groups were risk managers and sales, with 43 percent and 41 percent of respondents, respectively, laying the responsibility for closing the protection gap at their feet.
Figure 5:
How confident are you that the protection gap will be reduced in the next five years?
On the right path?
How confident are our readers that the re/insurance industry is on the right track in tackling the protection gap? Where do they expect the industry to be, in five years’ time? Will progress have been made, or will the problem be worse than it is now?
This was another question that elicited a very diverse response, but nearly 40 percent—by far the largest group—predicted the gap will widen considerably, while the second largest group, at 27 percent of respondents, believe it will stay the same (Figure 5). The difference between the other options was too small to draw any significant conclusions from.
