Protection gap in cyber, health more acute than in nat cat

The protection shortfalls in cyber and healthcare risks are more dramatic than for natural catastrophe risk, according to the study “Understanding and Addressing Global Insurance Protection Gaps” released by The Geneva Association.

The report shows that the cyber protection gap (the share of uninsured losses in total losses) under various scenarios is estimated at about 90 percent, representing 0.5 percent of the world’s gross domestic product (GDP). At the same time, the healthcare protection gap, using out-of-pocket expenses (the share of the expenses an insured must pay directly to the healthcare provider, without reimbursement by a third-party) as a proxy, amounts to approximately 2 percent of the world’s GDP. In contrast, the natural catastrophe protection gap, while still massive, represents about 0.2 percent of global GDP.

“Risk exposures tend to outgrow insurance premiums, leaving individuals, households, firms and the public sector alike underinsured,” said Anna Maria D’Hulster, secretary general of The Geneva Association. “It is well documented that on average only one third of natural disaster losses are insured. In other areas too, from agriculture to term life, people buy less insurance than is economically beneficial. In addition, the digital transformation of modern economies creates a major gap between cyber risk exposure and available risk management and transfer options.”

The root causes of insurance protection gaps lie with both demand- and supply-side factors affecting the demand for and the provision of insurance services, the study shows. On the demand side, such factors include affordability, product appeal and service quality, as well as policyholder trust. On the supply side, transaction costs and limits to insurability are cited amongst the market imperfections that hold back insurance supply.

When exploring the scope and root causes of insurance protection gaps as well as potential remedies, it is crucial to carefully distinguish between developing (frontier), emerging and mature markets. As the study shows, for example, progress in narrowing natural catastrophe protection gaps has largely remained confined to advanced economies. In addition, the potential for out-of-pocket healthcare expenses to reach catastrophic dimensions is particularly pronounced in low- and lower middle-income countries.

Kai-Uwe Schanz, senior advisor to The Geneva Association and author of the report, commented: “The configuration of root causes is the basis for designing remedies and determining the most promising ‘split of responsibilities’ between insurers, governments and other stakeholders. As it is imperative to address both demand- and supply side-issues holistically and simultaneously, a joint stakeholder effort in combination with a perspective that cuts across lines of business and geographical silos appears to be a necessary condition for effectively narrowing protection gaps.”

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