Swiss Re eyes growth in protection gap

The so-called protection gap in Europe (the difference between economic and insured losses), which includes flood insurance in Germany and the Netherlands as well as earthquake protection in Switzerland, offers growth potential for the re/insurance industry, according to executives from Swiss Re.

In an industry in which growth is difficult to come by at the moment, an increasing focus is turning to the potential for the private sector to provide solutions on risks traditionally held by governments or where, for various reasons, insurance penetration is low.

“We still have quite a large gap in flood insurance in the German market, where less than 40 percent of home owners buy flood coverage,” said Frank Reichelt, market executive Germany & Nordics at Swiss Re.

He said efforts are being made by insurance associations and the insurance industry, supported by local governments, to convince people to buy additional flood cover. “If you grow that book it will require more cat cover on the reinsurance side,” Reichelt said.

With around 60 percent of properties not insured against flood in the personal lines, the potential is huge. And even in commercial risk, a significant number have no flood coverage.

“The question is, how quickly can we convince people that we need that cover?” he said.

Germany was hit by a series of flood events caused by heavy rainfall in the first half of the year. “Reality proves the need for protection,” Reichelt said, adding that local governments in Germany are less willing to support homeowners using taxpayers’ money in the aftermath of a loss than in the past. “It’s always running against their budget,” he explained.

In Switzerland, protection gaps exist in earthquake insurance, which is currently not compulsory. This could also offer major growth potential for the re/insurance industry, said Ivo Hux, head of France, Benelux & Switzerland at Swiss Re.

“We have seen quite strong growth in this market in past years and we expect some further growth,” Hux said.

In Switzerland, the public authorities understand this is an important risk and that it poses a problem. But the process of decision-making in a federal state where the cantons have significant influence is cumbersome, Hux explained.

“There is not yet a fully developed understanding of solidarity among the cantons between those who are most exposed and those who are least exposed,” he said.

Flood protection may also become a topic in the Netherlands, where this risk is perceived as non-insurable at the moment and there is an implicit agreement that the state would step in after a large flood event, Hux said.

“We believe it is an insurable risk and that it is actually a protection gap,” he said. “It’s a problem for the banks and for the governments but there could be a global risk-taking community available which could absorb that risk into their balance sheets.”

He suggested it might be a cultural phenomenon in the Netherlands that makes people rely more on loss prevention and prefer to invest in flood defences instead of thinking about post-disaster management.

Many governments are more short-term than long-term oriented and in democracies, where governments change regularly, this does not help close the protection gap, Hux suggested. “Interest in these solutions from policymakers is not stable, it’s usually highest immediately after an event,” he said.

Other considerations could prompt change. “People are starting to listen to the argument reported by S&P that there is potential for sovereign debt ratings in some countries to be hit by the need to finance the rebuilding of the economy after a loss, but it’s not yet present in discussions,” Hux said.

Another opportunity for re/insurers may lie in terrorism protection. Most of the government-backed pools formed since the 9/11 New York terrorist attacks are essentially covering large property—the target of those attacks.

“The character of terrorism has changed—it aims more at creating a lot of individual victims, so the covers are not really adequate,” Hux said. “The insurance industry could definitely reflect on a better protection of the victims.”