Measuring the protection gap is first step towards innovation

In order to bridge the so-called protection gap between insured and non-insured losses especially in relation to emerging risks and emerging markets, the gap must first be properly measured, Alkis Tsimaratos, managing director and head of Europe West at Willis Re, told Baden-Baden Today.

He said that while many of the risks this protection gap applies to are complex, some are measurable and this often represents the first step towards innovation and finding a solution.

“For innovation on the gap to happen, you first need measurement,” Tsimaratos said.

“We increasingly live in a world where risk takers need to measure the risk they take by quantifying it—not only because it’s good practice, but also because the regulators and ratings agencies ask them to.”

He doesn’t see the gap being filled until risk takers are capable of modelling what the underlying risk is.

By contrast, for mainstream risk Tsimaratos believes innovation has already taken place.

“Innovation for the core, well-known risks has already taken place,” he said. “You can see a lot of multiline and multi-year programmes, and you can see retrospective covers being bought for earnings.”

With regard to bridging the gap, Tsimaratos said there must be innovation around the way the risk is both captured and measured.
Using cyber risk as an example, the gap is linked to the industry’s inability to measure systemic risk.

Tools are being developed that attempt to do this, including Willis Re’s cyber-modelling tool PRISM-Re, which was launched in February 2015.

Using this cyber-modelling tool, an insurer’s exposure to data breaches can be measured and facilities set up to cover the measured gap that is created.

“That’s really powerful, because you step into a client’s environment, you measure that risk—and then transfer that to the market,” Tsimaratos said.

Another example he cites relates to mass lapse risk in relation to life insurance—a key driver of Solvency II requirements for life insurance companies.

“In the past, that wasn’t a driver, it was a risk. But now we have all the numbers on mass lapse, we can engineer structures that will affect that number, and that means we now have covers taking place to try and protect that mass lapse element in the solvency capital requirement,” he said.