Politicians have moral duty to plug the protection gap

While the re/insurance industry is correct to see potential for growth in emerging risks such as cyber, a far greater opportunity exists if it can find a way to plug the growing protection gap that exists in relation to a risk it is far better at handling: catastrophe risk.

That is the view of Nick Frankland, chief executive officer of Guy Carpenter’s EMEA operations, speaking in relation to the annual symposium it hosts in Baden-Baden, this year titled ‘Bridging the Gap—Is the industry doing enough to attract risk from the public to the private sector?’.

“Yes, cyber is an opportunity, but we are still working on how to model it, assess it and price it accurately,” Frankland said. “On the other hand, we can price cat risk extremely well. Why not focus on that—something that is right in front of us, rather than maybes. Both are opportunities but we can most easily address the one that we understand. Especially when you consider the large amounts of coverage needed, it is a huge opportunity.”

Frankland believes the theme of Guy Carpenter’s event this year will become an ever-more pervasive issue for the risk transfer sector as it grapples with a lack of growth but also an increase in the frequency and severity of catastrophic events around the world.

In his speech at the symposium yesterday (Sunday October 22), Frankland highlighted just how big the gap between insured and total losses remains. He noted Swiss Re’s headline statistic that only 30 percent of catastrophe losses in the 10 years to 2015 were covered by insurance—a fact that means the balance of $1.3 trillion was borne by individuals, firms and governments.

The burden is increasing, he said, stressing the devastating effects of catastrophic events in different parts of the world.

He noted that in the aftermath of the intense earthquake that struck Ecuador in April this year, which killed some 650 people, the insured portion of the estimated $5 billion loss is estimated at no more than 10 percent. The government was woefully unprepared for the cost of the disaster and has increased taxes across the board to pay for the losses.

Such challenges are not limited to developing countries, he stressed. A catalogue of catastrophes have hit Europe in 2016, including severe floods in Germany and France, damaging hailstorms in Holland, and the devastating earthquake in Italy that struck in August.

Even in Europe, the insured losses can be low. In Italy, only around 10 percent of homes were covered for earthquake; meanwhile Munich Re estimates that the cost of catastrophe losses from hydrological events in Europe in May and June this year at $5.2 billion, but only 46 percent were covered by insurance.

“There is no question that growth is tough for the industry. But we have the capacity available and the skillset to manage these risks. The industry has the expertise so why not pursue this opportunity?

“I also feel we have a duty to help. The devastation in any corner of the world is now flashed on our TV screens constantly. The industry could do something and help a lot of people along the way,” Frankland said.

He believes the key to giving everyone from homeowners to governments more certainty in the aftermath of disasters and to helping the industry rediscover growth is finding ways the risk transfer industry can work with governments to unlock better ways of managing these risks.

He explained that governments can help drive a greater take-up in a number of ways. First, it can mandate that insurance must be in place before certain forms of borrowing can take place, such as mortgages, for example. Second, it can directly subsidise insurance coverage where needed—a technique that is usually far more efficient than simply using taxpayers’ funds in the aftermath of a disaster.

“The true cost of insuring many forms of risk will be too great for the average person to bear in many cases,” Frankland said. “It is simply unaffordable. That is why even in places such as California, take-up of earthquake coverage is so small. So government subsidies can be a crucial part of the solution to this problem.

“Unless governments realise there is a better solution than simply footing the bill after an event, this problem will continue. And that means homeowners sit there hoping their government will step in.”

He is scathing of Ecuador’s reaction of raising taxes to pay for the re-build.

“It is essential that governments have a more equitable response in place than simply raising taxes. There is a duty on them to implement the most effective solution available.”

He stressed in his speech that this protection gap presents a great opportunity for the insurance and reinsurance industry. He said that does extend far beyond the catastrophe segment with challenges of new risks in many other areas including technology, science, medicine, climate change, population growth, food security and urbanisation.

“Some of these risks are very complex or little understood, but today we have a better understanding of risk than at any time in history. We have better science, data and analytics, and tools to understand, measure and price risk. We must take this opportunity,” he said, while adding that he believes the biggest opportunity remains around increasing the take-up on the risks the industry understand best: cat risks.

He expects a change in the way governments perceive such risks—but it could be slow in coming for some. He said a combination of climate change and other factors mean that there are more natural catastrophes of all types occurring—and they are more costly than ever because of growing wealth and GDP.

“We are trying to change perceptions and find ways of addressing the problem,” he said. “Climate change is happening and more events are inevitable. The earth is less stable than it was. But some governments seem to be closing their eyes to the problem.

“Our simple call to action is for governments to fully acknowledge this risk and work with a commercial market very willing to help carry it. We have a moral duty to protect the vulnerable, and industry and governments must work together to fulfil this duty.”

He said Guy Carpenter plans to help drive this initiative for the industry as a whole. It is already in discussions with the relevant bodies within the EU. He notes that its executives recently spoke about the efficiency of insurance to the European Commission’s conference on Insurance, Disaster Risk and Climate Change.

“We have been invited to further meetings with the EU to discuss how member states could be encouraged to transfer some of the public sector risks related to natural disasters,” he said.
Guy Carpenter is keen to communicate with any politician interested in climate change and natural disasters as it looks to rustle up engagement on this topic.

“The effects of these large economic losses are not just economic and financial. They can also put pressure on governments and threaten political stability if recovery is slow and inefficient.

“It will be interesting to see how the voters in Ecuador respond to the government’s emergency taxes in the presidential, national assembly and gubernatorial elections next year,” Frankland concluded.