The underinsurance of property risk – particularly natural catastrophe risks – has risen steadily over the past 40 years, even though claims payments have increased significantly during that period, according to Swiss Re’s latest sigma study.
In the last 10 years, cumulative total damage to global property as a result of natural disaster events was $1.8 trillion, with insurance covering only 30 percent of those losses, said the report titled “Underinsurance of property risks: closing the gap.”
In other words, the total shortfall in insurance cover – the protection gap – was $1.3 trillion, the report said. (The main perils are earthquakes, floods and windstorms, particularly in areas of high population and property value concentrations.)
“The greatest extent of underinsurance is in the world’s largest three economies,” said Kurt Karl, chief economist at Swiss Re.
He said that earthquake risk makes up the majority of the gap in the U.S. and Japan, while flood risk comprises nearly half of the expected uninsured loss in China.
There are areas of high property value concentrations in the U.S. and Japan, “a large amount of which is uninsured against earthquake risk, despite the relatively high frequency of quakes,” said Karl, noting that in China, the main threats are floods in major industrial zones with high population and property values.
Current Annual Protection Gap
Swiss Re said it used models – to complement historical data – in order to estimate a figure of $153 billion for the current annual protection gap, assuming an average catastrophe loss year.
In absolute terms, the U.S., Japan and China account for more than half of that amount, with a combined insurance shortfall of $81 billion.
In emerging markets an average of 80 to 100 percent of economic losses are uninsured, “which means that natural hazards could significantly deplete resources of smaller and more vulnerable economies,” the report said.
In its modeling exercise, Swiss Re said the global loss potential was estimated using models of the three main natural catastrophe perils: earthquake, flood, windstorm.
Low-probability events such as major hurricanes or earthquakes may not appear in recent historical data, so loss models provide a more comprehensive view, the report explained. It cited the example of Florida, which has not experienced a severe hurricane in 10 years, but has a very high risk of property damage from hurricanes.
Other Property Risks
The sigma research also revealed significant property underinsurance for perils other than natural disasters.
These “general property risks” include fire, water damage, and burglary, the report said, noting that many countries are underinsured for these risks relative to their peers with similar income levels.
The study explained that many high-growth markets are underinsured relative to the size of their economies because their rapidly growing middle classes have been accumulating wealth but failing to buy adequate insurance protection.
Using these higher insured countries as a benchmark for less insured ones, the study found an additional protection gap of $68 billion for general property risks.
“Among the countries most underinsured are many high-growth economies,” the report said, noting that insurance buying lags among a rapidly growing middle class with its accumulation of new wealth.
“An increase in asset values without a concurrent increase in take-up of insurance could lead to yet further underinsurance.”
The estimated underinsurance for general property risk is conservative as it implies a zero protection gap in highly insured countries, which is not the case, the study emphasized.
There is still plenty of uninsured property arising from incumbent and recently emerging risks such as cyber and contingent business interruption, the report noted.
The property market is estimated to have had global premium volumes of $413 billion in 2014. Adding the general property risk number to the modeled natural catastrophe-related losses suggests a global property protection gap of $221 billion per annum, the report said.
Swiss Re said this is the level of expected claims that could have been pre-funded by a wider risk community, rather than inflicting financial hardship on individual families, corporations and government entities.
And for individuals, factors like perception of risk, insurance knowledge, affordability, reliance on government post-disaster relief, trust in insurers and ease of doing business can hinder adequate take up of cover, especially in new markets.
Closing the Protection Gap
Factors like perception of level of risk, insurance knowledge, affordability, reliance on government post-disaster relief, lack of trust in insurers and ease of doing business “can hinder adequate take up of cover, especially in new markets.”
Undervaluation of assets due to lack of information and awareness is another contributing factor, the report said.
Indeed, some risks, such as large natural catastrophes, terrorism, cyber or contingent business interruption risks “can challenge the bounds of insurability,” Swiss Re said.
“The challenge for the insurance industry is to focus on the needs of those who are totally uninsured or insufficiently insured,” the report continued.
“Closing the underinsurance gap will require specific measures by insurers and the state to change buying behavior and market structures,” the study said.
By focusing on those who are completely un- or insufficiently insured, insurers can play a vital role in strengthening the resilience of households and companies against property risks, the Swiss Re said.
“Product and distribution innovation, and measures to handle accumulation exposure will be critical to help society better manage the risks,” it went on to say. “So too will be developing data and analytical tools to better understand the exposure.”
But, Swiss Re emphasized that insurers cannot act alone – indeed, public-private partnerships can be key to closing the protection gap in cases where there is limited insurability. The report explained that governments need to provide strong regulatory environments, “set and enforce building standards, and promote mitigation to reduce risk exposures.”
Insurers also need government involvement to extend coverage capacity in specific areas such as terrorism or high-risk flood zones, the report noted.
Closing the underinsurance gap requires the continuing development of data and analytical tools to track new risks and exposures of perils that are difficult to quantify such as terrorism, cyber, and supply chain risks, the report added. “Further innovation in products, processes, and distribution are needed to reach previously uninsured consumers and risks.” Property underinsurance will only be addressed when there is “a coordinated effort and innovative thinking by both the public and private sectors.”
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